Explaining Cold Storage, Hardware and Paper Wallets
As the prices of cryptocurrencies are rising day by day, various investors are investing in these digital currencies.
The cryptocurrencies are fetching huge returns as compared to any other investment options such as Real Estate, Stock Markets, Bonds and Debentures, etc.
World’s first decentralized cryptocurrency i.e, Bitcoin got almost tripled from October 2016 to May 2017.
Fetching huge returns, crtyptocurrencies are getting popular worldwide and are receiving huge amount of investments . With so much of money involved in cryptocurrencies, there are threats of online thefts and hacks. Afterall, cryptocurrencies are online and is always exposed to hackers.
This guide by KryptoMoney.com will help you to protect your cryptocurrencies with offline, cold storage and paper wallets.
First of all, understand that cryptocurrencies are stored in wallets with the help of Public keys and Private Keys.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a digital wallet which is used to store,send and receive various cryptocurrencies.
These wallets does not exactly stores our money in the form of cryptocurrencies, but they store our public and private keys.
What are Public Keys and Private Keys?
The Public and Private Keys are used to send and receive cryptocurrencies in the cryptocurrency wallet
What is Public Key?
A public key is a wallet address which the wallet holder shares with other person in order to receive cryptocurrencies.
For example, if we want to get the payment in our bank account, we need to send the “Bank Account Number” to the person making payment. Here the account number is like public key.
Take another example. If a person wants to send another person a whatsapp message or an SMS, the sender must know the “Mobile Number” of the receiver before sending the message. Here mobile number is the public key.
One more example of sending e-mail. In order to send an e-mail, the sender must know the e-mail address of the receiver. Here the e-mail address is like the public key.
Similarly, in order to receive cryptocurrencies, wallet address/public key is shared to receive cryptocurrencies.
What is Private Key?
A private key is a key which is used to send cryptocurrency from your wallet to another wallet. Private keys gives the wallet holder, the right to access the wallet and send cryptocurrencies to another wallet address.
For example, while making payment via online banking, after filling all the details, the payee at last is required to enter his password/OTP to make the payment. The password/OTP is giving the right to access the funds in accounts. Similarly, private keys gives the wallet holder, the access to cryptocurrencies and the right to send it.
The wallet holder must protect his private key similarly as a person saves his password for online banking/ ATM card.
ONLY you should know or ther person on whom you can trust upon, what your private key is .Otherwise anyone can use your wallet to send your money(cryptocurrency) to any other addresses.
To conclude, the public key is the address that anyone can use to send you the money, while the private key is what you will use to send money to anyone else
Now, after understanding what are public keys and private keys, let us understand different types of cryptocurrency wallets.
Types of Cryptocurreny Wallets
Hot Storage Wallets and Cold Storage Wallets
To understand the above, let us take a real life example. Suppose you to go to a bar and order a drink . Now when you pay for your drink you take out your wallet, take cash out of it and pay it to the waiter.
You don’t take cash out which is stored in the safe locker in your home/bank. That’s why you carry a wallet to keep some cash in it for meeting daily expenses. The amount saved for emergencies, future is stored in safe/lockers.
Similarly, the amount of cryptocurrencies that you think you need to keep for meeting daily requirements, you keep that in Hot Storage Wallets.
The amount of cryptocurrencies that you save for future as an investment should be stored in Cold Storage Wallets.
What is a Hot Storage Wallet?
A Hot storage wallet is a wallet in which you keep your cryptocurrency in a device which is directly connected to the internet.
The connection of device to the internet makes it a “Hot Wallet”.
Any Wallet such as Exchange Wallet, Mobile Wallets, Desktop Wallets or any other wallet in any device which can connect to internet is considered as a Hot Wallet.
Accessing funds (cryptocurrencies) and making transaction is very easy and fast on Hot wallets.
But Hot wallets are also hackable as it is connected to internet, which makes it a little bit of unsafe. As cryptocurrencies are gaining in terms of value, various incidents are appearing where personal wallets, exchange wallets, mobile wallets, etc are getting hacked.
People are losing their wealth stored in cryptoucurrencies due to hack of their wallets. It’s a modern crime now. Instead of robbing some one at a gunpoint or breaking in anybody’s home, hackers (thieves) are breaking into the cryptocurrency wallets. This is a huge drawback for Hot Wallets.
That is why it is recommended to store only that much amount of cryptocurrencies in Hot Wallets which you need for daily/regular transactions.
Although some of the Hot Storage Wallet proivders have the facility to restore the wallet in case of any physical damage to the device. For example, the most common solution is a “Twelve Word Phrase option”.
Here the service provider asks the user to create a phrase of random Twelve words. These twelve word phrase is like a backup password in case the device gets damagesd or a user forgets his password.
Types of Hot Storage Wallets
Following are the types of Hot Storage Wallets:
- Online Wallet/ Exchange Wallets/ Cloud Wallets
- Desktop Mobile Wallets
- Multi-Signature Wallets
Online Wallet/ Exchange Wallets/ Cloud Wallets
These kinds of wallets are most easy to use among any other kind of wallets. These are basically the wallets created on any “Exchange Paltform/ Service”.
Exchange wallets can be created simply just by creating an account on any exchange and generating the wallet address thereafter.
The Exchange wallet can be accessed from any device as long as it is connected to internet.
The online hot storage wallets stores your public as well as your private keys. This is the biggest threat to online hot storage wallets.
Keeping your private keys, i.e, the right to access the funds on another’s server is like inviting hackers to hack your wallet. Any hacker may hack the server of exchange provider, use the private keys of various users and steal their cryptocurrencies. There has been incidences where cryptocurrency exchanges got hacked and million dollars worth of cryptocurrencies were stolen. It happened in the case of Coinbase as well as Bitfinex.
NOTE: Never store huge amount of cryptocurrencies on exchange/online wallets. Keep only that much amount which is required for exchanging/trading purposes.
Desktop/mobile wallets are simply the wallets created on Desktop/mobile. These wallets are basically a software/app which needs to be downloaded from the wallet service provider’s website in case of desktop and from the app store/play store in case of IOS/Android mobile phones respectively.
The software once downloaded will then be installed, create a cryptocurrency wallet on that particular desktop/mobile.
This kind of cryptocurrey wallet can be accessed only from the device on which it has been installed.
While Desktop/ Mobile wallets are safer than online wallets, still there is a chance of getting hacked. If a hacker knows you have cryptocurrencies stored in the wallet, the hacker can corrupt your device through viruses/trojans , get into the wallet and steal the cryptocurrencies.
Also the device getting damaged is also a headache . Although recovery options are still there.
A Multi-Signature wallets is similar to a Joint-Holder bank account which requires the sign of all the account holders to access the funds.
As there are multi- signatures in case of joint-holder bank account, in case of multi-signature cryptocurrcency wallets, there are more than one private key.
Only the private keys can give access to funds (cryptocurrencies) stored in wallet.
So a couple may create a multi-signature cryptocurrency wallet where both the individuals have their own private keys.
If both the Private keys are entered together, only then it will be possible to operate the cryptocurrency wallet.
This is like an added layer of security to a normal hot storage wallet, where the hacker will have to find more than one private key in order to hack the cryptocurrency wallet.
A multi-signature wallet is great for 2 purposes:
- To create more security for your wallet and save yourself from human error.
- To create a cryptocurrency wallet which can be used by more than one person.
Advantages of Hot Storage Wallets:
- Fast access to funds (cryptocurrencies)
- Easy to use, send and receive cryptocurrencies.
- Can be operated from a range of electronic devices.
Disadvantages of Hot Storage Wallets:
- Vulnerable of getting hacked.
- Difficulties arising in case of wallet lost due to damage to device, device stolen, etc. If the backup phrase or any other backup option is not maintained, the user may loose all of his/her cryptocurrencies stored in the wallet forever.
After understanding hot storage wallets in detail, let us now discuss cold storage wallet.
What is a Cold Storage Wallet?
A Cold storage wallet is simply the opposite of Hot storage wallet. A cryptocurrency wallet which is created on a device which is completely offline is known as Cold Storage Wallet.
Cold storage wallets are suited for those who are seeking long term investments and does not require to transact cryptocurrencies on a regular basis.
Cold Storage wallets are better than hot storage wallets when it comes to storing cryptocurrencies for a longer period.
Some Exchange wallets stores a percentage of the cryptocurrencies of the users in cold storage wallets in order to minimize the risk of loss in case of any hacking attack on the exchange.
Types of Cold Storage Wallets
Following are the types of Cold Storage Wallets:
- Hardware Wallets
- Paper Wallets
Hardware wallets are basically hardware devices which can be used to store cryptocurrencies.
Hardware wallets are generally like USB Pendrives. A user plugs in the hardware wallet to a desktop/pc, creates public key and private key and then the wallet gets created.
Also there are some kind of hardware wallets which can be connected to your mobile wallets via blueooth and store cryptcourrencies which are already stored in mobile wallets.
The private key has to be kept safely as it is like a key to your locker.
The public key is to be shared in order to receive cryptocurrencies.
The access to cryptocurrencies can only be made via these hardware wallets.
Note : Never buy any used/second hand hardware wallet, as the first owner might still have the private key.
Any loss or damage to the hardware wallet can result in a permanent loss of cryptocurrencies unless the backup option is maintained , same as in the online hot wallets.
The restoration details as well as the private key should be kept safely in a place that only you know or the person on whom you trust knows.
Paper wallets are the safest option to store your cryptocurrencies. It like printing your wallet on a paper and then storing that paper in a safe place.
What is a paper Wallet?
Paper wallets are basically an offline cold storage method of storing cryptocurrency. It involves printing out your public and private keys on a paper which you then store and save it in a secure place.
The keys are printed in the form of QR codes which you can scan in the future for all your transactions. The reason why it is so safe is that it gives complete control to you, the user. You do not need to worry about the well-being of a piece of hardware, nor do you have to worry about hackers or any piece of malware. You just need to take care of a piece of paper.
KryptoMoney.com publishes latest news and updates about Bitcoin, Blockchain Technology ,Cryptocurrencies and upcoming ICO’s.
Rohit Kukreja is a Commerce graduate with Financial Markets expertise involving Stocks, Forex, Futures & Options Market and now Bitcoins & Cryptocurrency Markets. Blockchain Enthusiast but not a techie, Rohit is an active member of various Blockchain & Crypto communities all over India.