A Guide To Cold Wallets, And Why They Are Better Than Current Hardware Wallets

Updated on: July 27th, 2021
This content has been Fact-Checked.

Today, several cryptocurrency exchanges allow you to invest in cryptocurrencies. These exchanges also allow you to store your cryptocurrencies in digital wallets already present on the exchange. However, exchange wallets are not considered safe as they are hot wallets that are always connected to the internet, leaving them prone to being hacked. Now there are several pros of hot wallets, and one of the biggest is user-friendliness. However, experienced hands will always tell you to move your crypto assets into a cold wallet. 

There are several types of crypto wallets, and while we will primarily focus on cold wallets, it is essential to learn about the other types of crypto wallets and how they function. Let’s quickly glance over the different types of wallets before circling back to the topic at hand. 

What Are Cryptocurrency Wallets And How Do They Work? 

While millions of users use cryptocurrency wallets, there is still some confusion about how they function. A cryptocurrency wallet is essentially a software program that can store your public keys and private keys. The keys interact with blockchains, allowing users to send or receive funds, check their balance, and other operations. So what happens when someone sends you cryptocurrency? When someone sends a digital currency to your wallet, they are signing off their ownership of the coins to your wallet. 

Your wallet’s private key should match the public address that the coins have been assigned to access the new funds and spend them. Once the private and public keys match, the balance in the sender’s wallet will decrease, and the balance in the wallet receiving the funds will increase. 

Cryptocurrency wallets can be divided into two broad categories. Hot wallets and cold wallets. Let’s briefly go over the two, 

  • Hot wallets – Hot wallets are wallets that are always connected to the internet. These wallets allow users to access their funds quickly and easily and are extremely easy to set up and use. Mobile wallets, exchange wallets, and online wallets are examples of hot wallets. While easy to set up and easy to transact with, hot wallets are susceptible to hacking attempts because they are constantly connected to the internet, making them a target for hackers and other malicious hackers. 
  • Cold wallets – Cold wallets are considered more secure than hot wallets because they are not connected to the internet, making them almost impossible to hack. Cold wallets allow users to store their cryptocurrency offline, keeping them safe from hackers. Hardware wallets and paper wallets are an example of cold wallets that can store your assets offline. Hardware wallets combine the convenience of hot wallets with the security of cold wallets. 

Understanding Hardware Wallets 

Hardware wallets are offline wallets that can store your private keys in a secure environment. These are generally considered safer than other types of wallets because they are not connected to the internet. Since the wallet is offline, it significantly reduces any risk of your funds being compromised from any attempt to steal them or hack the wallet. 

When you want to access your funds, you simply plug the wallet into a desktop or laptop. Once you have plugged in your wallet, you can initiate a transaction, send or receive funds or simply view your balance. While not 100% secure, hardware wallets offer far greater security than most other types of wallets. 

If your private keys are stored on a hot wallet connected to the internet, it can potentially put your funds at risk of being stolen and be the target of hacking attempts or malware. A hardware wallet ensures the safety and security of your private keys. These wallets can also be used to initiate transactions. The wallet secures the private key through a pin, using a passphrase providing additional security. This ensures that even if your wallet is compromised, the contents of the wallet cannot be accessed. You can also use the seed phrase to re-generate the private key if you lose access to your wallet. 

Currently, the most popular hardware wallet in the market is the Ledger wallet. It comes in two models, the Ledger Nano S and the Ledger Nano X. You can simply connect the wallet to a laptop or desktop to access funds. 

Are Hardware Wallets Better Than Hot Wallets? 

While choosing the type of wallet boils down to personal preference and how you decide to trade; for example, hot wallets are excellent for those who trade frequently, and cold wallets are better suited for those who like to hold their cryptocurrency for a long time. However, it is generally accepted that hardware wallets are better when compared to hot wallets. 

Hardware wallets offer significantly better security than hot wallets as they store your security keys online. This leaves your keys vulnerable to attacks by hackers who could try and steal your private keys. Hardware wallets lay heavy emphasis on security, with your private keys stored safely on them. Even if you plug in your hardware wallet in a machine that has been compromised, your private keys will still not be at risk. 

Advantages Of Hardware Wallets

Hardware wallets have several advantages, some of which are 

  • Convenience – Hardware wallets enable you to access your cryptocurrencies at any time and from any place. They are portable and can be carried around easily and safely plugged into any device to access your funds. 
  • Security – This is the most significant advantage of hardware wallets, as they are more secure than online wallets. A hardware wallet ensures asset security even if the computer it is connected to is not secured. Security is one of the reasons why cold wallets are preferred by individuals who hold their cryptocurrencies for a long time. 
  • Encryption – The hardware wallet is protected by an encrypted pin that you have to generate. You have to ensure that the pin is known only to you. Suppose your wallet is compromised and anyone tries to access the contents of the wallet by trying different combinations of pins. In that case, the wallet will lock and delete all data after three incorrect attempts. The wallet will also delete the public and private keys on the wallet to ensure the total safety of your funds. 
  • Immune To viruses – Viruses attack software, which means that your hardware wallet is practically immune to them. Hardware wallets are the safest option when it comes to 
  • Private Key Security – Hardware wallets give you complete control over your private keys. The private keys are entirely secure, and the only place where you need to use them is on the hardware wallet. Since the key does not reach any connected device like a computer or laptop, it is secured from hacking. The private key consists of 24 unique words which gives you access to your cryptocurrencies. It is essential to write down your private key and store it in a safe but accessible place. 

Disadvantages Of Hardware Wallets 

Hardware wallets are safer than other wallet options. However, no technology is 100% secure, and hardware wallets have their fair share of issues that could potentially leave them vulnerable.

  • Potential Vulnerabilities – Most hardware wallets need you to physically plug them into your phone or computer in order to use them and access your funds. This may not seem like a big deal, but with the advancements in technology, this simple act could expose your wallet to vulnerabilities. There could be unnoticed or undiscovered vulnerabilities in the hardware that could compromise your desktop. 
  • Supply chain attacks – Cold wallets are also prone to supply chain attacks. A supply chain attack occurs when the wallet is acquired before it is delivered to its intended recipient. If this happens, then the wallet’s security could be compromised. 
  • No recourse – Cold wallets also put the onus of security on the user. While this is considered an advantage, it also means that you have no recourse left if your wallet is stolen or funds compromised. This is why it is crucial to store and remember your seed phrase, as it is the only way you can access your funds if your wallet is compromised or stolen. 
  • Spoofing – Hardware wallets can also be susceptible to spoofing techniques through which malware can interrupt your wallet and computer and display an invalid receiving address that the attacker owns. The user then ends up sending funds to the attacker instead of the intended address. 

Cold Storage Wallets – The New Generation Hardware Wallet 

A better approach reduces risks that arise from using hardware wallets, and that is a cold storage wallet. A cold storage wallet does not need to be connected to a mobile or desktop. Instead, it uses a QR code to initiate and complete transactions. This ensures that the wallet is secured from any threat, making it less vulnerable to hardware and software level attacks. 

Cold wallets are 100% offline at all points of time; in fact, they don’t even need to be connected online during transactions, instead of using cameras and QR codes to initiate, process, and finalize transactions. The ability to use QR codes is what makes cold wallets more secure than hardware wallets when it comes to protecting your funds. 

Currently, there are very few cold wallets in the market. One of the top cold wallets currently in the market is the ELLIPAL Titan. The Titan is completely air-gapped, with its circuit board is completely disconnected from any external connection such as WiFi or Bluetooth. The Titan is also tamperproof, with its anti-tamper features. When a physical breach is detected, the wallet automatically deletes all the data stored on it, ensuring complete security for your funds. 

Hardware Wallets vs. Cold Storage Wallets 

As mentioned earlier, there are several different types of wallets that you can choose from, and we will be focusing on hardware wallets and cold storage wallets. A cold storage wallet allows you to keep your cryptocurrencies encrypted in a completely air-gapped device. Since these devices are entirely offline, users need to utilize a camera or QR code to initiate a transaction. Cold storage wallets are preferred to hardware wallets when users want to store their cryptocurrencies for a long time in a completely secure environment. 

Hardware wallets are offline wallets that store your private keys. Like a cold storage wallet, these also give users unparalleled security when compared to exchange wallets or mobile/desktop wallets. While hardware wallets need to be connected online via USB, cold storage wallets are entirely air-gapped, which means they do not need to be connected online to initiate a transaction; instead, utilizing a QR code to carry out transactions. While both hardware wallets and cold-storage wallets offer significantly more protection than online wallet options, a cold storage wallet is ideal for those who want to make long-term investments and hold their cryptocurrency as an asset. Cold storage wallets can potentially hold millions of dollars in a single wallet. Let’s take a look at some of the different cold storage wallets in the market today. 

Examples Of Cold Wallets And Hardware Wallets

Currently, there are very few cold wallets in the market. Some examples of cold wallets are the ELLIPAL Titan, Ledger X, and SafePal. Let’s understand how cold storage wallets are different from regular hardware wallets and compare them with each other. 

ELLIPAL Titan 

ELLIPAL Titan is a fully air-gapped wallet, completely disconnected from any network or device. The wallet’s chipset does not support any connection (WiFi, Cellular, or USB), leaving the device completely isolated. The wallet’s casing is made out of metal and is completely sealed. Any attempt to break the casing permanently incapacitates the device. The ELLIPAL Titan also has an in-built tamperproof function. If it detects a breach or an attempt to breach the device, it will automatically delete all information on the wallet. 

To initiate transactions, users have to manually scan a QR code on the device and the app. The QR code is another security feature on the ELLIPAL Titan because the code has to be scanned manually. The codes are verifiable, and users can scan the code using another app to double-check the code. The ELLIPAL Titan works only with its mobile app. Users can scan the QR code between the ELLIPAL Titan and the ELLIPAL App, pair the devices, and complete transactions in a quick and secure environment. Users can also open multiple accounts, import private keys from other wallets, with the wallet also supporting the storage of various coins under one account. 

ELLIPAL also supports decentralized applications such as PancakeSwap, SushiSwap, Opensea and more to allow users to invest easily. It has also partnered with Simplex and Changelly to exchange currencies. 

Pros of ELLIPAL Titan 

  • Completely air-gapped from any network or device – The ELLIPAL Titan is completely devoid of any ports. The chipset does not support any type of connections (WiFi, Bluetooth), which means that the device is completely air-gapped. 
  • The device cannot be accessed remotely. It also has a temper-proof feature where if the wallet detects a physical breach (physically trying to access the main board), it initiates a self-destruct and deletes all data stored on the device. This is a huge advantage in trying to combat supply-chain attacks. 
  • Users can open multiple accounts, import private keys, and store multiple coins under one account. 
  • ELLIPAL allows users to import their account into the ELLIPAL wallet, once the account is imported there is no way that the account can be compromised or your coins stolen because the ELLIPAL is air-gapped. 
  • ELLIPAL Titan does not need any extra software for individual cryptocurrencies as it comes with pre-installed cryptocurrencies. It also allows users to keep all supported currencies in one account. 

Ledger Nano X 

The Ledger Nano X eliminates several security threats thanks to its double security layer, thanks to its use of two chips. The Ledger Nano X uses Bluetooth to allow users to access their cryptocurrencies without needing a physical connection. The Nano X is capable of holding multiple cryptocurrencies, allowing users to store multiple cryptos at once. Users can also log in to decentralized exchanges such as Binance. It also supports multiple cryptocurrencies such as Bitcoin, Ethereum, Bitcoin Cash, Litecoin Ripple, etc. 

The Ledger Nano X looks like a USB drive and can connect to your device using a USB or Bluetooth. Bluetooth allows you to access your wallet using iOS or Android devices. The wallet supports over 1500 cryptocurrencies, and the list is continuously growing. The Ledger Live platform provides users with a convenient and intuitive interface to access their assets. Users can add different wallets for different cryptocurrencies and manage their portfolios with ease. Ledger Nano X is among the most popular wallets in the crypto space. 

Pros of Ledger Nano X 

  • Can store up to 100 apps.
  • An easy and intuitive user interface 
  • Bluetooth connectivity 
  • Open-source software and extensive community support

SafePal S1 

SafePal is a quick and portable option for users to manage their cryptocurrencies. Users can connect to the SafePal application through a QR code. The hardware wallet currently supports 19 blockchains, over 10,000 tokens, including NFTs. SafePal is backed by Binance Labs, which is the venture arm of Binance, with the company gaining significant ground in the crypto space thanks to its SafePal S1 wallet. 

SafePal S1 Pros 

  • At $39.99, SafePal is one of the cheapest hardware wallets around. 
  • The SafePal hardware wallet is completely air-gapped and does not need any connectivity at all to function. The USB interface is used only for firmware updates. 

Conclusion 

Each wallet has its own advantage and is suitable for users depending on their needs. The Ledger Nano X is portable and is ideal for users who prefer using a desktop or laptop. At the same time, the ELLIPAL Titan is entirely air-gapped and is also supported on mobile. The ELLIPAL app has an easy-to-use interface, allowing users to initiate transactions using QR codes, which is much safer compared to Bluetooth or USB. 

While Ledger Nano X supports more cryptocurrencies, it can be rather tricky to set up. The Nano X is the way to go if you are a tech-savvy user who trades in several cryptocurrencies. ELLIPAL, on the other hand, is easy to set up and is perfect for beginners.  

Cold wallets are comparable to hardware wallets but are completely air-gapped and do not require any connections to function, giving them complete security from any potential attack. ELLIPAL adds another layer of security over this thanks to its anti-tamper feature which protects the device from being compromised and from supply chain attacks. 

Rajarshi Mitra
Rajarshi started writing in the blockchain space after listening to Andreas Antonopoulos’ podcast with Joe Rogan. A content generating machine, Rajarshi has been consistently producing high-quality guides and articles for us since late 2016. His articles have been shared extensively in social media and several start-ups have used his guide as learning material for their staff. He is continuously invited all over his country to give talks in various crypto seminars and conferences. He has gained a solid reputation as a speaker/educator on top of being one of the most promising writers in the crypto space. When he is not busy nerding out over the latest in the blockchain/crypto space, he is usually busy watching re-runs of top gear and MMA.

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