What is a cold wallet? A complete guide to choosing hardware wallets and using them securely

Why Are More and More People Choosing Cold Wallets to Store Assets?

As on-chain activity demands surge, many investors have become accustomed to using hot wallets for interactions. However, the associated risks cannot be ignored—issues like private key loss, mnemonic theft, malware infiltration, and more frequently occur, leading to the unexplained disappearance of crypto assets. In response to these threats, cold wallets have emerged as an offline storage solution, with demand experiencing explosive growth in recent years.

According to Blockchain.com statistics, by 2022, the number of crypto wallet users reached 80 million. The hardware wallet market prospects are broad—Research And Markets predicts that the hardware wallet market size will reach $3.6 billion by 2032. Facing fierce market competition, major developers continuously enhance security certification levels, support more cryptocurrencies, and improve user experience, forming a diverse product landscape.

What Is a Cold Wallet? A Detailed Explanation of Core Mechanisms

Cold Wallet vs Hot Wallet: The Fundamental Difference

Crypto wallets are digital tools for storing and managing virtual currencies, divided into two main types:

Cold Wallet refers to cryptocurrency wallets stored on offline devices, mainly including hardware wallets, paper wallets, USB wallets, etc. They are disconnected from the internet and use physical isolation to protect assets.

Hot Wallet also called software wallets, are stored on online devices such as computers and smartphones, including app wallets and PC wallets. They are convenient but pose risks of hacking or malware attacks.

How Cold Wallets Work

The security of cold wallets stems from their unique operational mechanisms, mainly involving two steps:

Step 1: Generating Public and Private Key Pair

When setting up a cold wallet, the system generates a public key and a private key using encryption algorithms. The public key (also called address) is akin to a bank account number, which can be shared publicly to receive Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), Litecoin (LTC), and other cryptocurrencies.

The private key is equivalent to an account password, granting permission to use all assets within the wallet. Additionally, a mnemonic phrase (Seed Phrase) is a derived form of the private key, usually consisting of 12 or 24 English words, mainly used for easy memorization and backup.

Step 2: Offline Storage of Private Keys

Cold wallets store private keys through physical isolation, disconnected from the internet, effectively preventing hacking and malware intrusion. It’s important to note that cold wallets can store private keys generated locally or imported from other devices or hot wallets, but typically, a cold wallet stores only one private key.

Mainstream Cold Wallet Products in the Market Comparison

imKey: Lightweight Hardware Wallet

• Manufacturer Background: Produced by the company behind the highly-rated global wallet imToken
• Security Certification: Uses Infineon chips, achieving CC EAL 6+ security level, validated over 4+ years in the market
• Hardware Specs: Weighs only 8.1g, dimensions 64mm×38mm×2.3mm, supports USB connection
• Compatibility: Supports 12 blockchains, 100+ cryptocurrencies, ERC-721 and ERC-1155 NFT standards
• Price: About $130

Ledger Nano: Comprehensive Hardware Solution

• Manufacturer Background: Made by French company Ledger, an industry veteran
• Security Certification: CC EAL 5+ security certification
• Hardware Specs: Dimensions 72mm×18.6mm×11.75mm, weight 32g
• Compatibility: Supports over 5000 cryptocurrencies, industry-leading compatibility
• Connection Methods: Supports USB and Bluetooth, offering flexible connectivity
• Price: $150–$300

Trezor: Touch Screen Interactive Experience

• Manufacturer Background: Designed and manufactured by SatoshiLabs in the Czech Republic
• Hardware Specs: Uses STM32F427 chip, dimensions 60mm×30mm×6mm, weight 12g
• Special Features: Equipped with a touchscreen, supports over 1400 cryptocurrencies
• Price: $70–$219

How to Choose the Right Cold Wallet for Yourself?

Choosing a cold wallet requires a comprehensive assessment based on personal needs, mainly considering the following four dimensions:

Security Is the Top Priority

The core value of a cold wallet lies in secure offline storage. Different manufacturers adopt various encryption technologies. Before purchasing, verify whether it has robust encryption algorithms, multi-factor authentication, hardware protections, and other security features to prevent mnemonic and private key theft. Checking official security certification levels (such as CC EAL series) is an effective preliminary filter.

Compatibility Directly Affects Usage Scope

Before buying, confirm whether the wallet supports all the cryptocurrencies you hold. While most hardware wallets support thousands of coins, some products have limitations on mainstream currencies. Refer to official support lists to ensure you can manage all your assets without compatibility issues.

Cost and Value Balance

Hardware wallet prices vary widely—from $50 to several hundred dollars. Avoid blindly pursuing high-end products; instead, evaluate whether the cost aligns with the product’s features, security level, and user experience. For smaller asset holdings, cost-effective entry-level options are perfectly suitable.

User Experience Should Not Be Overlooked

Although the basic operation processes are similar across wallets, interface design and ease of use vary significantly. Friendly interaction design can reduce operational errors and facilitate asset management. Check official demos and user reviews to find a product whose operation logic matches your habits.

Proper Usage Process of Cold Wallets

Initial Setup and Backup of Private Keys

If you do not yet have a public or private key pair, you can generate one via a cold or hot wallet. If your private key is already stored in the cold wallet, you can skip this step and proceed directly to transactions.

Transaction Signing and Authorization

When making transactions with a cold wallet, connect it to mobile or PC software. After connection, enter the PIN or password to unlock the device, then initiate the transaction command.

Transaction Verification

After initiating a transaction, confirm on the cold wallet device (or via connected software). Once verified, submit the transaction. After completion, disconnect immediately. The private key and mnemonic will return to offline status, ensuring security.

Important Tip: Avoid connecting the cold wallet to untrusted DApps or phishing sites, as this can significantly reduce its security advantage and expose it to risks similar to hot wallets.

Physical Device Daily Protection

Although hardware wallets typically feature drop-proof, waterproof, and fireproof characteristics, proper storage is still necessary to prevent damage from shocks or falls. It’s also recommended to back up private keys and mnemonic phrases on paper, USB drives, or other physical media to ensure asset recovery even if the hardware fails.

Cold Wallet vs Hot Wallet: A Complete Comparison

Because hot wallets are connected to the internet, they face constant hacking risks. For long-term investors or large asset holders, storing crypto assets in cold wallets significantly reduces theft risk. However, cold wallets also have their own risks—requiring physical storage, complex operation procedures, and potential loss or damage.

Common Cold Wallet Issues and Solutions

What to Do If a Cold Wallet Is Lost or Damaged?

As long as you have properly backed up your private key and mnemonic, there’s no need to worry. Purchase a new cold wallet and restore control over your assets using the backed-up private key or mnemonic.

Risks of Forgetting Private Keys and Mnemonic Phrases

Mnemonic phrases can help restore wallet access if you forget the private key. However, if you forget both, you cannot recover your assets. Therefore, offline backups are essential—write down the mnemonic phrase and store it securely in a safe or concealed location, ensuring it is not lost or discovered by others.

How to Prevent Hacking and Scams?

• Always use cold wallets offline
• Never store or share private keys and mnemonics online
• Be cautious with airdrops or transfers from unknown sources
• Avoid clicking unfamiliar links or connecting to unknown DApps
• Regularly check your cold wallet device for abnormalities

Summary

What is a cold wallet? Essentially, it is a storage solution that isolates crypto asset private keys in an offline environment, protecting user assets through physical separation and multiple layers of encryption. Compared to hot wallets, cold wallets sacrifice convenience for security, making them especially suitable for long-term holders or investors with larger assets.

Choosing the right cold wallet involves considering security certifications, supported cryptocurrencies, cost, and user experience. Mainstream products like imKey, Ledger Nano, and Trezor offer different solutions emphasizing various features. Regardless of the product chosen, mastering proper usage—backing up mnemonic phrases, securely storing devices, and avoiding untrusted applications—is crucial to fully leverage the security advantages of cold wallets.