Complete guide on cold wallets for Cryptocurrencies
Level of Technical Knowledge: Low; Reading Time: 10 min.; Hashtags: #anonymous #crypto #coldwallet #s3cures3cret
Disclaimer: The information provided in this article is solely for educational purposes and should not be considered as financial or investment advice. While efforts have been made to provide accurate and up-to-date information, we do not guarantee the accuracy or timeliness of the data. Decisions related to cryptocurrency management and storage should be made cautiously, and if necessary, professional advice should be sought. We are not responsible for any loss or damage that may arise as a result of relying on the information contained in this text.
The term “cold wallet” for cryptocurrencies refers to any type of cryptocurrency storage that keeps the user’s private key offline. This means it is not connected to the Internet, protecting it from hacking, malicious software attacks, and other cyber threats.
There are several types of cold wallets:
- Paper wallets: These are sheets of paper where the public and private keys are printed. They are often represented in QR code form to facilitate transactions. They are safe as long as the paper is not lost, destroyed, or seen by an unauthorized person. Here’s a link that explains them quite well: https://academy.bit2me.com/monedero-papel-bitcoin-paper-wallet/
- Hardware wallets: They are physical devices, similar to a USB drive, specifically designed to store cryptocurrencies. Popular examples include the “Ledger Nano S” and the “Trezor”. These devices only connect to the Internet when making transactions, and the private key is kept inside the device at all times.
- Software wallets on devices: Some people choose to have a dedicated computer or smartphone that connects to the Internet at the user’s request and is used only to store a cryptocurrency wallet. While this is an effective form of cold wallet, it may be less convenient for those who transact regularly.
The main advantage of a cold wallet is security. Without an Internet connection, private keys are safe from most online threats. Furthermore, cold wallets are entirely disconnected, protecting them from online attacks and giving the wallet owner full control over it. On the other hand, it is essential to protect cold wallets against physical threats, such as theft or loss.
In contrast, “hot wallets” are those connected to the Internet, like wallets on exchanges. These are more convenient for regular transactions but are also more vulnerable to cyberattacks and leave all matters related to applicable laws in the hands of third parties.
Next, we will provide a detailed explanation of wallets based on their medium, specifically, hardware wallets and software wallets installed on computer devices.
2. Hardware wallets.
As explained at the beginning of this article, these are physical devices specifically designed to store various types of cryptocurrencies. Devices like Ledger or Trezor allow you to generate and store your own private keys, which is a secure way to store and manage your cryptocurrencies. These devices keep your private keys separate from devices connected to the Internet, protecting your funds from online attacks.
Below, we provide the pros and cons of this type of wallet, as well as a basic guide to getting started with a hardware wallet.
2.1 Pros and Cons of using hardware wallets.
- Among the most notable advantages, we find the following:
- Enhanced Security:
- Private keys never leave the device, meaning even if you plug the hardware wallet into a compromised computer, your private keys aren’t exposed.
- Malware Resistance:
- Unlike software wallets that might be vulnerable to malware, hardware wallets are designed to resist such attacks.
- Secure Transactions:
- To send funds, hardware wallets require manual confirmation, like pressing a button on the device, adding an extra layer of security.
- Many hardware wallets allow storing multiple cryptocurrencies on a single device.
- In case of loss, theft, or damage to the device, you can retrieve your funds using a recovery phrase, typically a series of words given to you when setting up the device for the first time.
- Among the most notable disadvantages, besides the cost, we find the following:
- Physical Wear and Tear:
- Like any physical device, a hardware wallet can get damaged or wear out over time. In its favor, it’s worth noting that the same can be said for devices where a software wallet is installed.
- Risk of Physical Loss:
- While you can retrieve your funds with the recovery phrase if you lose the device, losing the device itself can be VERY stressful.
- Firmware Updates:
- Occasionally, you might need to update the device’s firmware, a process some users might find technical or intimidating.
In summary, while hardware wallets provide superior security compared to software wallets, they also come with some drawbacks. It’s crucial to weigh these considerations and determine which type of wallet best suits your needs and comfort level.
2.2 Installation and usage guide.
- Purchase an authentic hardware wallet:
- Unbox and connect your device:
- Once you receive your device, connect it to your computer using the supplied USB cable.
- Set up the device:
- Upon first connection, the device will guide you through the initial setup.
- Create a PIN. This PIN allows you to access your device. Do not forget it or share it with anyone. We advise saving it in a password manager like Keepass or writing it down and storing it in a safe.
- Note down recovery words. The device will provide you with a set of words (usually 12, 18, or 24) in a specific order. These words will help recover your wallet in case of device loss or damage. It’s crucial to write them in the correct order and store them safely. Never digitize or store them online. We recommend writing them on a separate paper from the PIN and storing it securely.
- Install associated software:
- Update the Firmware:
- Ensure your device has the latest firmware version for maximum security before transferring funds to your wallet.
- Set Up and/or add wallets:
- Through the associated software, you can configure and add different wallets for various cryptocurrencies, like Bitcoin, Ethereum, Monero, etc.
- Transfer your cryptocurrencies:
- After configuring your wallets, you can start trading cryptocurrencies (sending, receiving).
- To send cryptocurrencies, follow the software instructions and confirm the transaction on the hardware device.
- To receive cryptocurrencies, provide the address your wallet presents for the respective cryptocurrency.
- Verify Transactions and Addresses:
- Always check the physical device for addresses and amounts before confirming any transaction.
- Disconnect and Store Safely:
- When not using your hardware wallet, disconnect it and store it safely. It’s recommended to store it securely, like in a safe.
- Stay Informed:
- As with any technology, it’s essential to stay updated about new releases, known vulnerabilities, and security best practices.
With these basic steps, you’ll be on your way to using your hardware wallet effectively and securely. Remember, safety is a priority, so always be cautious and follow the manufacturer’s guidelines.
2.3 Frequently Asked Questions.
What happens if I lose my hardware wallet?
The recovery phrase (often referred to as “seed phrase” or “recovery seed”) is a fundamental feature of most cryptocurrency wallets, including hardware wallets like Ledger and Trezor. This phrase is essentially your wallet’s private key, presented in a human-readable format.
When you initially set up your hardware wallet, it provides you with this phrase, usually consisting of 12, 18, or 24 words in a specific order. It’s vital to jot down this phrase and store it in a secure, offline location to protect it from digital and physical threats.
If you ever lose your hardware wallet or it gets damaged, you can retrieve your cryptocurrencies by following these steps:
- Buy a new device (optional): If your original device has been lost or damaged, you can buy a new one of the same model or even a different brand compatible with the BIP39 standard, which is the method used for generating recovery phrases.
- Initialize the device as a recovered wallet: When setting up the new device, instead of setting it up as a new wallet, choose the option to recover an existing wallet.
- Enter the recovery phrase: You’ll be prompted to enter the recovery phrase, word by word, in the correct order. It’s essential that the words are entered in the exact order they were originally given to you.
- Restored access: Once you’ve correctly entered the phrase, your wallet will be restored on the device, and you’ll have access to your funds once again.
It’s essential to remember that anyone who gets access to your recovery phrase will potentially have access to your cryptocurrencies. Therefore, it’s crucial to keep this phrase in an extremely safe place and never share it or store it digitally on a device connected to the Internet.
What would happen if I have a Ledger hardware wallet and the Ledger company disappears?
If you have a Ledger hardware wallet (used here as an example, but applicable to any hardware wallet) and the Ledger company disappears, you will still be able to access and manage your cryptocurrencies. This is due to the following reasons:
- Your private keys are safe on the device: The primary purpose of a hardware wallet like the Ledger is to securely store your private keys offline, on the device itself. These keys do not depend on the existence of Ledger as a company.
- Access to your funds: Although the Ledger Live application (the main interface that most users use to interact with their Ledger wallets) might stop receiving updates or support, your cryptocurrencies would still be accessible. There are other software wallets and services compatible with Ledger hardware wallets, meaning you could use those services to access and manage your funds.
- Recovery phrase: When you set up your Ledger for the first time, you are given a recovery phrase (usually a list of 24 words). This phrase is an industry standard and can be used to recover your funds on a variety of other wallets if your Ledger is ever lost, damaged, or if you simply want to move your funds to another type of wallet.
- Updates and security: One potential drawback of Ledger disappearing as a company is the lack of future firmware updates for the device. Over time, this could make your hardware wallet less secure if new vulnerabilities emerge and no updates are available to address them.
- Support and documentation: If the company disappears, the official support and documentation for Ledger products might become inaccessible. However, due to Ledger’s popularity, it’s likely that the user community will continue providing guides, tutorials, and solutions to common issues through forums and other platforms.
From all the above, it’s concluded that although the disappearance of Ledger as a company would not be ideal, owners of Ledger wallets (used here as an example) would still be able to access and manage their cryptocurrencies. As always, it is crucial to keep a safe copy of your recovery phrase and be informed about how to use it in case of an emergency.
3. Software wallets on computer devices.
Installing your own cryptocurrency wallet on your own device allows you to have full control over your private keys and your funds. However, it also means you are entirely responsible for its security.
3.1 Pros and cons of using a software wallet.
Using a cryptocurrency software wallet on your own computer or smartphone has its advantages and disadvantages. Here are some of them:
- Pros of using a cryptocurrency software wallet:
- Immediate access and convenience: You can access and use your funds quickly, especially if you need to make frequent or immediate transactions.
- Direct control: Software wallets give you full control over your funds and private keys, without relying on a third party.
- No physical cost: Unlike hardware wallets, a software wallet is generally free to download and install.
- Compatibility and functionality: Software wallets tend to be compatible with a wide variety of operating systems and often offer a range of features such as integration with exchanges, managing multiple currencies, etc.
- Regular updates: Software wallets often receive frequent updates that add new features and improve security.
- Cons of using a cryptocurrency software wallet:
- Vulnerability to malware: If your computer or smartphone gets infected with malware, ransomware, or any other type of virus, your funds could be at risk.
- Phishing risk: There’s always a risk of scammers trying to trick you into downloading a fake wallet or redirecting you to a fake site.
- Device dependence: If your device breaks or gets lost, and you haven’t properly backed up your wallet, you could lose your funds.
- Resource consumption: Some wallets, especially those that download the entire blockchain, can be resource-intensive in terms of storage, RAM, and CPU usage.
- User responsibility: While this can be seen as a pro or a con, the responsibility for security lies with the user. You have to be very aware of good security practices, such as using strong passwords, backing up regularly, and keeping the software updated.
3.2 Installation and usage guide.
Here are some guidelines for installing a wallet on your own computer device:
- Choose a wallet software:
- There are several wallet softwares available depending on the cryptocurrency you wish to store. Some popular choices include:
- Download and install:
- Download the wallet software from the official website.
- Install the software on your computer following the appropriate instructions.
- Initial setup:
- Upon opening the wallet for the first time, you’ll typically have the option to create a new wallet or restore an existing one.
- If you’re creating a new one, you’ll be asked to write down and securely store a series of words known as the “seed” or “recovery phrase”. This phrase will allow you to recover your wallet if something happens to your computer. It’s essential to store it in a safe place and not share it with anyone.
- Set a Password:
- It’s highly recommended (and sometimes mandatory) to set a strong password for your wallet. Make sure to remember this password as losing it could mean losing access to your funds. It’s advisable to store passwords in a secure manager, such as Keepass, and the database file generated by Keepass where it stores the encrypted passwords, keep it on a USB drive in a safe.
- Backup Regularly:
- In addition to the recovery phrase, regularly backup the wallet file (typically with a .dat extension or similar). Store these backups on external devices, like USB drives or external hard drives.
- Receive and Send Cryptocurrencies:
- Use the address provided by your wallet to receive funds.
- To send funds to another address, follow the instructions of the wallet software.
- Updates and Maintenance:
- Make sure to keep your wallet software updated to benefit from the latest security improvements and features.
- Security Considerations:
- If your computer gets compromised by malware or ransomware, your funds are at risk. Consider using antivirus and antimalware software, and keep your operating system and applications updated.
- Avoid accessing your wallet on public WiFi networks.
- Consider the possibility of using a dedicated machine or a separate operating system partition just to manage your cryptocurrencies.
Remember, the primary advantage of having a wallet on your own computer device is the complete control over your private keys, but on the flip side, you have a significant responsibility to ensure the security and integrity of those funds.
3.3 Frequently Asked Questions.
If I lose my device, do I lose my cryptocurrencies?
Not necessarily. If you have a backup of the keys or the recovery phrase, you can restore your wallet on another device. However, it’s crucial to keep this information in a safe place and separate from the device.
How do I backup my software wallet?
Most wallets offer the option to generate a recovery phrase, usually a series of words in a specific order. It is essential to write down this phrase and keep it in a safe place. This phrase will allow you to recover the wallet in case of device loss or failure.
Can I store different types of cryptocurrencies in a software wallet?
It depends on the wallet, as some are specific to one cryptocurrency, while others, known as multi-crypto wallets, allow storing several different cryptocurrencies.
What happens if the wallet software stops updating or its development ceases?
It’s always advisable to use wallets with active development and a strong community. If the development stops, it’s recommended to transfer the funds to another trustworthy wallet.
4. Anonymity in cryptocurrency transactions.
As cryptocurrencies gain attention from regulators and the general public, the privacy and anonymity of transactions with these digital assets have become topics of increasing interest. It’s essential always to operate within the legal bounds of your jurisdiction and not to use the following information for prohibited activities. However, for those interested in maintaining discretion in their cryptocurrency operations, here are some tips:
- Use private wallets: Use wallets that prioritize privacy, such as Samourai or Wasabi Wallet. These wallets implement techniques like CoinJoin to mix transactions and make tracking harder.
- Use non-custodial wallets: Opt for wallets where you control the private keys, thus preventing third parties from having access or transaction records.
- Coin Mixing: There are services that mix your cryptocurrencies with those of other users to make tracking more difficult. However, these services often come at a cost and can pose security risks.
- Create multiple addresses: Do not use a single address for all your transactions. By creating multiple addresses, you complicate the tracking of your operations.
- Peer-to-Peer (P2P) transactions: Conduct transactions directly with other users instead of using centralized exchanges. Platforms like LocalBitcoins or Bisq can be helpful.
- Use VPNs and/or Tor: When connecting to the internet or your wallet, use VPNs and/or the Tor network to hide your IP and add an extra layer of privacy. Some wallets are designed to channel their traffic through TOR, which is highly advisable.
- Beware of meta-information: When sending or receiving cryptocurrencies, be aware that the information you provide (such as notes or identifiers) can be stored on the blockchain and be publicly accessible through a blockchain explorer: https://www.blockchain.com
Regarding privacy-focused cryptocurrencies:
- Monero (XMR): It’s the most well-known privacy cryptocurrency. It uses ring signatures and stealth addresses to hide the sender, the recipient, and the amount sent.
- Zcash (ZEC): Although it has transparent transactions, it also offers the option for shielded transactions to hide details.
- Dash: Though less private than Monero or Zcash, Dash offers the “PrivateSend” feature that mixes funds to enhance anonymity.
- Verge (XVG): Uses Tor and I2P to hide users’ IPs and make transactions anonymous.
Keep in mind that while these tools and cryptocurrencies can enhance anonymity, none offer total privacy.
Regarding Bitcoin, the most known and widely used cryptocurrency, it’s important to understand that it isn’t inherently anonymous; it’s pseudonymous. This means that while transactions aren’t directly linked to real-world identities, they are linked to specific addresses on the Bitcoin blockchain. Once an address is associated with an identity (e.g., through an exchange that follows “Know Your Customer” or KYC procedures), all transactions related to that address become transparent concerning that identity.
That said, there are ways to increase anonymity when using Bitcoin:
- New addresses for each transaction: To make tracking harder, you can generate a new Bitcoin address for each incoming transaction.
- Coin Mixing or CoinJoin: Services that mix transactions to obfuscate the origin and destination of funds.
- Use Privacy-Focused Wallets: As mentioned earlier, there are wallets like Samourai or Wasabi that implement techniques to enhance anonymity.
However, even using these techniques, Bitcoin does not offer the same level of privacy as cryptocurrencies specifically designed with anonymity in mind, like Monero or Zcash.
In the case of Monero, for instance, the amounts, senders, and recipients are hidden by default. Therefore, while with the right techniques anonymity can be enhanced in Bitcoin, compared to other cryptocurrencies that were specifically designed with privacy in mind, Bitcoin might not be the most anonymous option.
In this article, we have explored how to set up a personal cryptocurrency wallet, granting us a high degree of privacy and control over our digital assets. We also briefly discussed the significance of anonymity in cryptocurrency transactions, a vital aspect for those wishing to maximize their privacy for whatever reasons they deem appropriate.
With the aim of providing you with the utmost privacy and anonymity, we have introduced the “S3cureS3cret USB“, a hardware device that allows for anonymous operations on networks. Among other features, it includes a cryptocurrency software wallet under military-grade security hardware, resulting in a security combination of both hardware and software wallets simultaneously. If you’re interested in acquiring it, or seeking guidance on how to execute the actions outlined in this article with more rigor and professionalism, please contact us.
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