Cold wallet

Anyone who owns cryptocurrencies faces an important question: how can Bitcoin, Ethereum and other digital assets be stored securely? While hot wallets allow for fast transactions, they don’t offer the best protection against hacks and online threats. This is where cold wallets come into play.

A cold wallet keeps your coins and tokens offline – far from potential cyberattacks. But what options are there? And which cold wallet is the best for you? In this guide, you’ll find out why an offline wallet is considered particularly secure for crypto and how a cold wallet works.

• By definition, cold wallets are offline crypto wallets that protect cryptocurrencies like Bitcoin and Ethereum from cyberattacks and may be especially suitable for the long-term storage of large amounts of coins and tokens.

• With cold wallets, private keys remain disconnected from the internet, transactions are signed in isolation and only then sent to the network, which minimises the risk of hacks.

• There are different types of cold wallets, including hardware wallets, paper wallets and air-gapped devices.

• Hardware wallets like Ledger and Trezor are popular cold wallets as they securely store private keys on the device and offer strong security features.

Definition: what is a cold wallet?

The purpose of a cold wallet lies in its role as an offline wallet for the secure storage of crypto assets. It stores private keys without an internet connection, thereby protecting against cyberattacks. This method may be especially suitable for the long-term storage of large amounts of Bitcoin, Ethereum and other cryptocurrencies.

Cold wallets come in various forms, including hardware devices, paper wallets and other offline solutions. They offer high security and are often used by investors who value protection and independence.

A cold wallet is one possible type of Bitcoin wallet that places a strong emphasis on security. However, there are also other Bitcoin wallets that offer greater user-friendliness and give you quicker access to your cryptocurrencies. 

What does cold storage mean?

The term cold storage refers to the practice of storing digital assets offline. Private keys are secured on a physical medium such as a USB device, a hardware wallet or an isolated computer to prevent unauthorised access.

Cold storage is a core principle of cold wallets as they keep private keys offline, thereby reducing the risk of cyberattacks. This method is especially used in the professional sector, such as by exchanges or institutional investors who must adhere to high security standards.

Types of cold wallets

Cold wallets differ in terms of security, usability and use cases. Each type has specific pros and cons. Comparing the different cold wallets can help you find the right crypto wallet for transactions and storage.

• Hardware wallets: physical devices with moderate user-friendliness that store private keys offline, offer strong security features and may be ideal for the long-term storage of large crypto holdings.

• Paper wallets: printed or handwritten keys with low user-friendliness that offer high security but must be stored carefully to avoid loss.

• Air-gapped devices: computers or USB sticks with low user-friendliness that offer maximum security as they’re never connected to the internet and are suited to institutional storage or large assets.

Which cold wallet is best for you depends on whether you prioritise ease of use or maximum control over your crypto assets. The choice of the right solution depends on your security needs and usage habits.

How does a cold wallet work?

Cold wallets operate offline: transactions are signed locally on a device disconnected from the internet and only then sent to the network. But how exactly does that work?

Private keys remain offline

The core security principle of a cold wallet is the complete offline storage of Bitcoin, Ethereum and other assets. Private keys are not stored on any internet-connected device. This means they are not vulnerable to hackers, malware or phishing attempts.

Sign transactions and send to the blockchain

Even though a cold wallet is offline, you can still carry out transactions. First, the transaction is prepared on an online device, such as a computer or smartphone. It is then transferred to the cold wallet, where it is signed offline. After signing, the transaction is loaded back onto the online device and sent to the network to be included in the blockchain. Because the private keys never leave the offline device, security can be ensured at all times.

Security and backup

Since cold wallets are not connected to the internet, there’s no easy way to regain access if the wallet is lost or damaged. That’s why it’s essential to create a secure backup. For hardware wallets, the recovery phrase (seed phrase) is the key to reinitialisation. It should be stored offline and never saved digitally. Paper wallets should be backed up multiple times and stored securely in different locations, as paper can be damaged or lost. If you use an air-gapped device, you should make sure it is stored securely and regularly check that it is still functional.

Cold wallets for Bitcoin, Ethereum and altcoins – what’s possible?

Cold wallets can be used for many different cryptocurrencies – not just Bitcoin or Ethereum. Most hardware wallets, like models from Ledger or Trezor, support hundreds of coins and tokens, including many altcoins. It’s important to check before purchasing whether your preferred cryptocurrency is supported by the device.

Paper wallets, on the other hand, are mainly suitable for cryptocurrencies with stable, native wallet support like Bitcoin. For more complex networks or tokens, such as in the Ethereum or Solana ecosystem, creating and using a paper wallet can be significantly more complicated.

Air-gapped devices offer maximum flexibility but require technical know-how. They’re especially useful if you want to manually generate your own wallets and manage multiple assets independently.

How do I create a cold wallet?

Creating a cold wallet can be done in various ways, depending on whether you choose a hardware wallet, a paper wallet or an air-gapped device. From the outset, you should plan a secure backup and recovery strategy to avoid losing access to your coins and tokens.

Setting up a hardware wallet

To create an offline wallet, a hardware wallet is a secure and user-friendly method. The setup involves several steps:

1. Initialise device: connect the hardware wallet to a computer or smartphone and set it up using the official software.

2. Set a PIN code: protect the wallet with a PIN to prevent unauthorised access.

3. Secure recovery phrase: generate a seed phrase (usually 12 or 24 words).

4. Backup strategy: back up the seed phrase in multiple copies and store them in different locations.

Creating a paper wallet

A paper wallet is a simple and entirely offline method for storing private keys. The wallet is created using a secure offline device:

1. Generate key pair: create a paper wallet using specialised tools like BitAddress (for Bitcoin) or MyEtherWallet (for Ethereum), which are not connected to the internet.

2. Print or note data securely: never store the private key digitally; instead, write it by hand or print it to protect against online risks.

3. Secure storage: protect the document from fire, water and physical loss and don’t share it with others.

4. Backup strategy: back up paper wallets in multiple copies in different locations and further protect them through lamination or storage in a fireproof safe.

Storing private keys on an air-gapped device

An air-gapped device can be used to securely store private keys. This method requires technical know-how but offers maximum security:

1. Prepare device: use a laptop or special USB stick that is fully offline and disconnected from any networks, and set up the device with secure software.

2. Generate private keys: create and store wallet keys exclusively on this device.

3. Secure access: store the air-gapped device securely and use it only to sign transactions.

4. Backup strategy: physically protect the device and create an additional encrypted backup copy on a separate storage medium.

The pros and cons of cold wallets

Because cold wallets function without internet access and keep sensitive data isolated from the web, they are barely vulnerable to cyberattacks and offer a high level of security for cryptocurrencies. At the same time, this offline storage means they’re less practical for frequent transactions, as accessing the stored coins and tokens requires several steps.

The biggest advantage of a cold wallet is protection against online threats. Since private keys aren’t connected to the internet, they remain safe from phishing attacks, hacks and malware. This makes them especially appealing to investors wanting to hold large assets long-term. Additionally, hardware wallets and other offline wallets offer strong control over your crypto assets without relying on third-party providers. If you don’t actively trade Bitcoin, Ethereum or other cryptocurrencies but want to store them securely for the long term, you’ll benefit from the high security of a cold wallet.

Despite their security features, there are disadvantages, primarily regarding usability. Access with cold wallets requires multiple steps, as transaction signing happens offline before being sent to the network. Another drawback is the risk of loss or damage to the cold wallet, as there’s no central recovery option. Paper wallets are vulnerable to fire, water or wear, while hardware wallets can become unusable due to technical defects. If you lose your seed phrase or damage the physical medium, you may permanently lose access to your coins and tokens.

The difference between hot and cold wallets

The key difference between a hot wallet and a cold wallet lies in internet connectivity. While a hot wallet is always online and allows quick access to crypto assets, a cold wallet remains offline and thereby offers a significantly higher level of security.

Hot wallets can be especially suitable for users who regularly perform transactions or actively trade Bitcoin, Ethereum and other cryptocurrencies. Due to their constant internet connection, they can be used anytime and from anywhere. There are different types of hot wallets, including desktop wallets, mobile wallets and web wallets. Hot wallets can be custodial or non-custodial.

A custodial wallet is managed by a third-party provider that stores the private keys and handles security. This is the case for most web wallets, particularly those provided by crypto exchanges. In that case, you don’t have direct access to your private keys and must rely on the provider to keep your assets secure. In contrast, a non-custodial wallet gives the user full control over their private keys. A cold wallet is fundamentally always a non-custodial wallet.

Comparing the pros and cons of cold and hot wallets can help you decide which wallet suits you best. If you need high flexibility and instant access to your cryptocurrencies, a hot wallet may be better. If you prefer to store your crypto assets long-term, a cold wallet is the way to go. For optimal balance, many investors use a combination of both wallet types.

Frequently asked questions about cold wallets

Since there are various offline wallets, people often ask which cold wallet offers the best protection for crypto owners and which solution is suitable for long-term storage. Below are some of the most common questions about cold wallets.

What’s the difference between offline and online wallets?

The main difference between an offline wallet and an online wallet lies in how private keys are stored and managed. An online wallet, also known as a hot wallet, is permanently connected to the internet and allows quick access to crypto assets. It’s ideal for daily use but comes with higher security risks due to its vulnerability to hacks and phishing attacks.

An offline wallet, often referred to as a cold wallet, stores private keys entirely without an internet connection. This protects against cyberattacks and makes it the preferred choice for long-term storage of Bitcoin, Ethereum and other cryptocurrencies. While an online wallet is convenient and instantly accessible, an offline crypto wallet offers greater security, as it can’t be compromised directly via the internet.

Are offline and hardware wallets the same?

Not every offline wallet is automatically a hardware wallet, but every hardware wallet is a form of cold wallet. A hardware wallet is a physical device designed specifically for the secure storage of private keys. It stores keys offline and enables transaction signing without ever exposing sensitive data to an online device. Well-known providers of hardware wallets include Ledger and Trezor, which offer various models for secure crypto asset storage.

However, there are also other types of offline wallets, such as paper wallets or air-gapped devices. A paper wallet is simply a private key printed on paper, while an air-gapped device, like an isolated computer or USB stick, can also be used to store private keys.

What storage methods are available for offline wallets?

When choosing a cold wallet as your crypto solution, there are several ways to securely store your private keys. The three most common methods are:

• Hardware wallets: specialised devices with high security that keep private keys offline, available from providers like Ledger and Trezor in various models to suit different security needs.

• Paper wallets: physical printouts or handwritten private keys that should be protected from fire, water and wear.

• Air-gapped devices: USB sticks, isolated computers or encrypted storage media that are never connected to the internet and offer maximum security.

Each of these offline wallets protects against cyberattacks, but they differ in usability and handling. While a hardware wallet is the easiest and most secure solution for many users, paper wallets or air-gapped devices are alternatives for tech-savvy investors. Whether you want to create a wallet for offline use or actively work with cryptocurrencies, choosing the right method is essential.

Which cold wallet is the best?

The best cold wallet for you depends on your security needs and storage preferences. A hardware wallet, like the models from Ledger or Trezor, offers a good balance between security and usability. Your access keys stay solely on the device and are further protected by a PIN and recovery options.

If you prefer a particularly minimalist solution, a paper wallet may be suitable. It’s completely offline but requires very secure storage, as loss or damage to the paper would make access to the stored crypto assets impossible. A technical solution is an air-gapped device, which offers maximum security but is more complex to set up and use.

Further topics related to cryptocurrency

Would you like to expand your knowledge of cryptocurrencies? Then take a look at our detailed articles in the Bitpanda Academy for a deeper insight into the world of digital currencies.

• Can Bitcoin be hacked?

• Storing cryptocurrencies securely

• How to start trading cryptocurrencies