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How a cold wallet works: the complete guide 

The security of your crypto-currencies (crypto-assets or digital assets as the ACPR officially calls them) is a crucial concern. Cold wallets are a key crypto wallet solution helping you to better protect your valuable crypto-assets from cyber threats or computer bugs.

In this article, we’ll look at how they work, detailing what they are, their benefits, how to use them and some practical advice on how to get the most out of them.

Comment fonctionne un cold wallet ?

Summary

What is a crypto cold wallet?

A cold wallet is an offline storage device designed to store cryptocurrencies securely. It works by keeping private keys out of the reach of the Internet, offering maximum protection against cyberthreats. Unlike a cold wallet, a hot wallet is connected to the Internet. Using this type of storage is essential if you want to keep your cryptocurrencies safe over the long term.

Why would you use a cold wallet? Its advantages 

When storing cryptocurrencies for long periods of time, it is essential to minimise the risks associated with potential security breaches. Cold wallets offer enhanced security for storing cryptocurrencies, ensuring total control over digital assets and protecting against malware, hackers, cyber threats and online attacks. Investors who do not plan to make frequent transactions can choose this storage solution to protect their digital assets from the risks associated with hacking.

What are the disadvantages of a cold wallet?

The disadvantages of cold wallets include the need to physically store the device, which can be uncomfortable for some users, as well as the potentially higher cost compared to online wallets. In addition, if lost, you could lose access to your cryptocurrencies. Finally, for certain types of wallet, which we’ll list in the next section, managing private keys, configuring and understanding how the cold wallet works may require a certain level of technical skill.

The different types of cold wallet and how they work 

There are several types of cold wallet, each with its own characteristics and advantages. In this section, we take a look at the various types of cold wallet, from hardware to paper and stand-alone software.

Cold Wallets materials

Physical cold wallets are hardware devices specially designed to store your private keys offline. They generally take the form of small devices, often similar to a memory key or external hard drive, equipped with a screen to display the information.

Cold Wallets paper

Paper cold wallets are one of the most basic methods of cold storage. They consist of a physical document on which you write or print your private keys. Although simple, they have unique advantages and disadvantages. 

Like hardware cold wallets, paper cold wallets are completely disconnected from an Internet connection, making them invulnerable to online attacks. However, like all material assets, they need to be treated with the utmost care to avoid damage, loss or theft.

Isolated software Cold Wallets

Some software wallets allow you to create cold wallets using a computer disconnected from the Internet. They are easier to use than hardware cold wallets, but require particular attention to security.

Cold wallet, how does it work? 

  1. The first step in using a cold wallet is to generate private keys. This procedure is carried out offline, ensuring that your private keys are never exposed to the Internet. Private keys are the secret codes needed to access your funds (a password of sorts).
  2. Once you have generated your private keys, you can transfer your cryptocurrencies from your hot wallet to the cold wallet. This is usually done using an offline transaction. After transferring your funds, the cold wallet stores your private keys offline. This means that your private keys (allowing access to your funds) are not accessible via the Internet, making your digital assets inaccessible to hackers.
  3. When you need to access your funds, you will need to carry out a transfer operation from the cold wallet to a hot wallet in order to use them. This step minimises the risk of theft.

3 tips for using your cold wallet 

  1. It is essential to keep a backup copy of your private keys in a safe place, preferably away from fires and natural disasters. The loss of these keys means the permanent loss of your cryptocurrencies.
  2. Make sure you keep your crypto wallet up to date, by installing the latest security updates and following best practice for protecting your keys.
  3. Carefully choose a secure storage location for your cold wallet. Ideally, it should be kept in a fireproof safe. Such a safe offers double protection, against both theft and the elements. If a safe is not available, opt for a place that is discreet and not easily accessible to reduce the risk of theft.

The essentials of how a cold wallet works 

Where opportunities for profit coexist with threats of loss, security is a top priority. This is where cold wallets come in as the guardians of your cryptocurrencies. You now have a thorough understanding of how a cold wallet works, but it’s essential to highlight a few crucial points to conclude.

A cold wallet is not just a storage device, it’s an additional bulwark against cyber threats. Understanding how it works will enable you to make the most of this protection for your crypto-assets.

Using a cold wallet is an essential first step in improving the security of your digital assets. Stay vigilant, stay informed, and keep your cold wallet handy.

What are the best cold wallets recommended for securing cryptocurrencies?

Among the most popular and recommended cold wallets are Ledger Nano X, Trezor, and other hardware wallets that offer enhanced security for cryptocurrency investors.

What are the risks of using a cold wallet to store cryptocurrencies?

The risks associated with cold wallets include loss or damage to the hardware device, as well as the need to carefully safeguard passwords and private keys to avoid any permanent loss of funds.

Why is it important to separate your cryptocurrencies into a cold wallet and a hot wallet?

Separating a cold wallet from a hot wallet optimises the security of cryptocurrencies, offering additional protection against the risks associated with a single type of storage.

How do you choose the best cold wallet for your cryptocurrency needs?

To choose the best cold wallet, it’s important to consider ease of use, compatibility with specific cryptocurrencies, as well as the security features offered by the hardware device.

Back to crypto files

Investing in digital assets involves risks and is not suitable for all investors. 

Investors should inform themselves about the risks associated with the various digital assets. In particular, it is emphasised that digital assets can be highly volatile and that investments in digital assets present a risk of capital loss. In this respect, investors are reminded that past performance of digital assets, which may be indicated on the Banque Delubac & Cie website or in documents made available to investors, is not representative of future performance. In addition, investors should inform themselves about the technologies related to each digital asset and their risks, like flaws, defects, piracy, errors, protocol failures or attacks thereon. Banque Delubac & Cie cannot be held responsible for any misunderstanding of the risks associated with digital assets or for any losses that the investor may incur in the event of an error in the address of the portfolio attributable to the investor.

Banque Delubac was the subject of a “simple” registration subject to the provisions of article L. 54-10-3 of the Monetary and Financial Code in force before 1 January 2024 and was not subject to the provisions relating to the “enhanced” registration introduced by the law of 9 March 2023. 

During this registration procedure, the Autorité des marchés financiers (Financial Markets Authority) verified:

  • The integrity and competence of the managers and beneficial owners, 
  • The ability of the Service Provider to comply with its obligations in terms of the fight against money laundering and terrorist financing, the freezing of assets and the prohibition on making assets available, by putting in place an organisation and procedures.