A cyberattack and the newly acquired wealth is gone – this can be avoided with a cold wallet. But how does it work and what should investors be aware of? t-online clarifies the most important questions.
In recent years, cryptocurrencies such as Bitcoin, Ether and Co. have received increasing attention. The incredible price increases of different cryptocurrencies have often made the headlines.
At the same time, spectacular cases of fraud have caught the attention of investors and interested parties – and raised fears. Some investors fear that the sudden increase in value will be destroyed by fraudsters.
Major crypto exchanges have partially responded to the issue. Coinbase has taken out insurance against cybercrime, writes the American exchange, which is also active in Germany, on its website. However, as the value of different cryptocurrencies increases rapidly, insurance only covers part of the value of cryptocurrencies. Even if your crypto exchange has insurance, you can only rely on it to a limited extent.
If you want to protect yourself from hacker attacks, you should therefore switch from a so-called hot wallet to a cold wallet. t-online tells you why your coins are much more secure with this variant and what you should pay attention to when switching wallets.
What is the difference between a hot wallet and a cold wallet?
The most important difference between a hot wallet and a cold wallet is that a hot wallet has a connection to the Internet, while a cold wallet stores your bitcoins and the like on a physical medium without access to the Internet.
So if you get a cold wallet, you usually have both: a “hot” wallet and a “cold” wallet. The hot wallet is, for example, your account with central exchanges, such as Coinbase, Bison or Kraken. They usually set up a wallet for you at the same time, but the keys to those wallets are held by your provider. So, if the exchange is hacked, your keys and therefore your coins could also be lost.
Alternatively, you can use various software providers, such as Exodus, to manage your own hot wallets on your computer or smartphone. Here you have the keys yourself, but you can still fall victim to cyberattacks and lose your coins.
Crypto exchanges are not legally protected
Most private investors use central exchanges such as Coinbase, Kraken, Binance or Bison to buy cryptocurrencies such as Bitcoin or Ether (You can find instructions on how to do this here). Beyond a certain amount, however, it is interesting for investors to secure their investments with a cold wallet and not just to store them on the stock exchange.
Because: while with other forms of investment such as ETFs, deposit insurance applies up to a certain amount, you run the risk of total loss if your crypto exchange – often foreign – becomes insolvent. If you keep your coins yourself, you can avoid this.
In the past, exchanges have taken many security measures and turned into big business. Nevertheless, investors should be aware that their investments are not protected in the worst case.
What is a cold wallet and how does it work?
A cold wallet is an offline storage medium for your bitcoins, ether or other cryptocurrencies. The most important difference with a hot wallet: they are less susceptible to cyberattacks.
Because it doesn’t matter whether you use a cold wallet or a hot wallet: your bitcoins are always stored on the blockchain. This is due to the decentralized nature of cryptocurrencies. Strictly speaking, you only store in your wallet the code that identifies you as the owner of the corresponding coins, not the coins themselves.
There are several ways to create a cold wallet:
- a hardware wallet,
- an external storage medium, for example a USB key,
- a paper wallet.
The hardware wallet as a compromise of two worlds
Hardware wallets are special storage media that can produce their own wallet address. Thus, you can deposit cryptocurrencies directly into the hardware wallet and make payments from it. It therefore combines the security of a cold wallet with the convenience of a hot wallet. Some hardware wallets are connected to the PC or smartphone via Bluetooth, others with a cable to make transactions.
Popular hardware wallets include Ledger Nano X, Trezor Model T, and Elipal Titan. However, users have to spend money for this storage feature. The Ledger Nano X costs 149 euros, the Elipal Titan hardware wallet is still a bit expensive at 169 euros and the Trezor Model T even asks investors for almost 189 euros. With the Nano S, Legder offers at least a hard wallet that offers investors a cheaper entry with slightly fewer functions at a price of just under 59 euros.
Only one wallet is really “cold”. The Elipal Titan only performs transactions with QR codes, other wallets must connect to the Internet at least for the transaction and thus offer a certain target for hackers.
Even the classic USB key is not obsolete
If you are not buying your coins for trading, but as a longer investment, you can also choose a very classic storage mode: a physical storage medium such as a USB key or an external hard drive. All you have to do is ask your hot wallet to issue the boot code i.e. recovery code and save this key to the external storage media. Then delete the wallet from your computer.
What is a seed code?
A seed code is a collection of words generated by your wallet. You can use this code to restore your wallet if, for example, you had to reset your computer or if the hard drive where your wallet is stored was destroyed. If your seed code falls into the hands of a stranger, they can also restore your wallet.
You can also print the code on a sheet of paper and then laminate it. However, since everyone with this code has access to your Bitcoins and Co., you should keep both the USB drive and the paper in a safe place, such as a safe or bank locker.
What are the risks of a cold wallet?
The biggest risk with a cold wallet is losing it. If you have a third-party wallet like a crypto exchange, you can access your assets even if you forget your password. To do this, you must prove your identity with an official document.
If you store your wallet key yourself, you also need to be extra careful. Because once the seed phrase is lost, you no longer have access to your assets.
Forgetting can cost millions
This is what happened to some unfortunate people who had invested very early in cryptocurrencies and, by the time they succeeded, had already forgotten their passwords or lost or disposed of the storage medium on which the code was stored. of their new wealth.
According to an analysis by the forensic company Chainanalysis, between 2.78 and 3.79 million of the 19 million bitcoins currently in existence are considered lost. They are stored on forgotten hard drives, lost USB keys or on wallets whose owners no longer remember the passwords that were assigned to protect their wallets. As a result, some have lost access to a fortune worth millions.
So, the biggest risk with cold wallets is your own forgetfulness.
Which wallet is the safest?
All types of wallets have their strengths and weaknesses. Hardware wallets combine security and user-friendliness, a USB key or a paper wallet are protected against hacker attacks because there is no connection to the Internet. You cannot trade for this.
Also, if someone gets your seed phrase, they can restore your wallet and steal your cryptocurrencies. Additionally, storage media can become more error-prone over time, so you may no longer be able to access content. If you store a laminated paper wallet in a safe, this risk is eliminated.
Either way, if you decide to switch from your wallet to a hardware wallet, you don’t have to transfer the entire amount at once. Instead, test the transfer with a small amount first. If it works perfectly, you can transfer other amounts to your new wallet.