Updated April 2024 – Crypto provides us with more control over financial assets than the banking system provides for traditional fiat currency.
With crypto, we don’t have to trust a bank or brokerage to act as the custodian of our hard earned money.
Corporate bankruptcy or fraud, government default, bank failures, theft and hacking can wreak havoc on the tradfi banking system. Government over-regulation is also a major threat to crypto assets especially when you trust a third party company to hold your crypto in their custody.
In 2023, we saw the Securities & Exchange Commission (SEC) Chairman and MIT Crypto Course Instructor, Garly Gensler take a position against crypto stating that “We already have digital currency. It’s called the U.S. dollar.” The SEC took two major legal actions against Binance and Coinbase. Coinbase has been deemed non compliant in running an unregistered exchange selling securities and acting as a clearing house & broker.
Fast forward to 2024, and the SEC changed their stance and approved Bitcoin Spot ETFs. Wall Street’s blessing fueled a new wave of Bitcoin Adoption, All Time Highs, and BlackRock setting the record for fastest ETF to $10 Billion.
If you keep Bitcoin on an exchange (CEX), you accept the inevitable fear, uncertainty, and doubt (FUD) about your ability to access and withdraw our crypto.
If your coins are on an exchange you DO NOT own the cryptocurrency. The exchange, which is at the whim or big government’s regulations, acts as the custodian on your behalf.
One of the fundamental principles of cryptocurrencies is the concept of self-custody, where crypto holders have complete control over their funds without the need for intermediaries, like banks, to act as a trusted custodian.
While this decentralization empowers individuals, it also places the responsibility squarely on YOUR shoulders to protect YOUR assets.
What is a crypto wallet?
Crypto wallets are software or physical devices that store your Bitcoin public and PRIVATE KEYS. Your coins are stored on the blockchain and are accessible by the Private Key which is protected and stored by your wallet.
Pro Tip – Never share your private keys with anyone. EVER! If someone had your private keys they could easily steal your crypto.
Your public keys act more like your bank account and routing number. These are important for identifying your account but the fact that these numbers are printed on all of your physical checks, their secrecy isn’t that important.
Public keys allow you to make transactions (buying or selling).
Private keys actually ‘sign’ and authenticate the transaction on the backend.
If you buy Bitcoin on Coinbase, the transaction occurs off-chain and nothing will be recorded on the Bitcoin Network. Your account is basically ‘credited’ with an IOU indicating your holdings.
They provide a receiving address for the transaction, but Coinbase manages the private keys controlling the Bitcoin until you transfer to an external non-custodial wallet.
Some crypto wallets can only send and receive specific coins or they may be compatible with one blockchain but not the other. It’s common to have multiple wallets storing your keys to your coins.
Here’s an example of how and when exchanges create wallets on your behalf:
Let’s say you’re new to crypto and decide to set up a Coinbase Exchange account. Once you complete the KYC (Know Your Customer) authentication process, your next step will be to add funds to your account (usually direct deposit from your bank).
These funds (ie- USD, Euro, CHF) are called ‘fiat’ and can be converted into crypto.
Let’s say you transferred $500 from your bank to your Coinbase account. You could make a one time ‘spot’ purchase of BTC and Coinbase would create a BUY order which would get filled automatically at the current market price.
Pro Tip: You can also set up a Dollar Cost Average bot on Coinbase with Stratus to create a Bitcoin recurring buy for the same $500 over a time period to take advantage of price movements.
Back to the example with a tweak…
- You have $500 USD fiat sitting in a Coinbase account ready to invest.
- Use a crypto calculator to backtest your strategy.
- You create a Buy Order for $250 USD of BTC and Buy Order for $250 of ETH
- Coinbase will fill your orders with liquidity from people on the exchange selling BTC and ETH.
- Coinbase will automatically create TWO (2) HOT CUSTODIAL WALLETS for you. One wallet will store your keys for BTC and the other will store the keys for ETH. BTC and ETH run on separate blockchains and require separate wallets to enable sending/receiving for each.
- Coinbase acts as the Custodian of your private keys in this HOT wallet that is always connected to the internet (insert FUD*).
*If you’ve ever heard, ‘‘Not your keys, not your coins’ it means that if you don’t own (custody) your keys, then you don’t actually own your coins! So the only way to own your keys is to transfer some/all of your crypto from your Hot Wallet on Coinbase into a secure Hardware Wallet that is stored OFFLINE.
What is the difference between Hot and Cold Wallets in Crypto?
The basic difference between hot and cold wallets is that Hot Wallets are hot because they are always connected to the internet and Cold Wallets are cold because they are never connected to the internet.
Hot wallets and cold wallets are NOT mutually exclusive. Most exchanges will create and host your (custodial) hot wallet to store crypto private keys and you should also set up (‘non-custodial’ aka – ‘self-custodial) cold wallets for offline storage of your keys.
Pro tip: Hot and cold wallets serve the common purpose of storing your public and private keys. Opt for a 100% open source Bitcoin-only wallet!
Different Types of Mobile, Desktop and Browser Hot Wallets:
I often get asked offline wallet questions. Which Bitcoin wallets are the best? What wallet do you use?
- Exchange-based custodial wallets: KYC wallets are automatically created by your custodial exchange (ie – Coinbase) to display account balances, generate public addresses and provide send/receive functionality.
- Browser-based Wallets: hot wallets are convenient but the most vulnerable and least secure option.
- MetaMask is the most popular NON open-sourced Chrome extension Web3 wallet.
- Brave Wallet is an open-source browser native Web3 wallet. No Chrome extension.
- Exodus is a Chrome browser extension Web3 wallet supporting 50+ networks
- Ambire is an alternative to Metamask for DeFi and NFTs.
- Mobile (phone) Wallets: Easy to use and considered more secure than desktop wallets because mobile OS doesn’t load unsigned potentially malicious code and store your seed in KeyChain and on the secure element chip. Your wallet is still vulnerable to being compromised.
- Green: Bitcoin Wallet by Blockstream pairs well with Jade for custodial hot and cold storage.
- BlueWallet has Bitcoin, Lightning (L2), and a Desktop wallet option. Some folks ONLY use Blue Wallet’s ‘watch only’ feature to monitor their other wallets and reduce physical threats.
- Coinbase Wallet is a non-custodial wallet from Coinbase.
- Trust Wallet is popular for Web3 which makes it more vulnerable than a Bitcoin only wallet.
- Desktop Wallets: Download and run the wallet app using your computer’s operating system.
- Electrum has been around since 2011 and is an OG fan favorite open source desktop wallet.
- Wasabi Wallet is open-source, non-custodial Bitcoin Wallet for desktop with built-in coinjoin
- Sparrow Bitcoin Wallet has a simple interface with a ton of features and is free to use.
- Bitcoin Core is “full-node” software for validating the blockchain with a native Bitcoin wallet.
- Blue Wallet gets an honorable mention here and a solid option for beginners.
Using a combination of different wallets is a popular tactic. Cold Card + Sparrow or Electrum desktop + Blue Wallet ‘watch only’ is an example of an advanced cold storage strategy.
Pro Tip: Do NOT download or install phone or desktop software wallets from any source other than the wallet creator’s main website and verify the GPG signatures.
Examples of Secure Cold Wallets include:
Hardware Wallets are the most popular form of offline cold storage. These physical devices often resemble a USB drive and are designed to protect your private keys from being exposed online.
- ColdCard is considered the safest and most recommended cold storage hardware device.
- Blockstream Jade is a non-custodial open-source Bitcoin hardware wallet with a camera that integrates with other desktop and mobile wallets and has Seed Signer.
- Trezor was the FIRST open source hardware wallet that’s easy to use and newbie friendly.
- BiBox has a dedicated Bitcoin-only device which inherently makes it more secure.
- Foundation Passport is a non-custodial open source Bitcoin hardware device that looks like a phone, has a camera and does not connect to the outside world.
- Keystone is a cold wallet that supports multiple cryptocurrencies and compatible with hot wallets (like MetaMask) which introduces security risk compared with Bitcoin-only wallets.
- Ledger is NOT 100% open source and boasts an easy to use app Ledger Live.
- USB cold storage is often combined with an encrypted partition with TAILS OS installed. Tails is a portable, privacy focused operating system with Electrum wallet built in.
- If you’re technically proficient enough to run TAILS on an air-gapped machine, you can sign Bitcoin transactions by scanning the QR code generated from the Electrum wallet. Phew.
- This is overkill for most when comparing TAILS to using a hardware wallet or setting up a Bitcoin Core node on a dedicated, factory reset machine.
- Paper Wallets are a less popular form of cold storage that literally means storing your public and private keys on a piece of paper.
Pro Tip: Do your own research to find the wallet that best suits your security and usability preferences. Not all claims of being ‘open source’ are 100% accurate. If a wallet uses a secure chip, then is not 100% FOSS. A closed source chip must NOT have access to your private key or backup recovery seed.
What are hot wallets and are they safe?
Hot wallets, also called online wallets, are connected to the internet and used to store your crypto. Most exchanges, like Coinbase, automatically provide hot wallets to their customers when you buy crypto.
The biggest risk of using a Hot Wallet is that your Public Keys AND Private Keys are stored on the internet.
Crypto Hot Wallet Risks:
- Vulnerable to cyber attacks, unauthorized access, and hackers. Phishing and malware are common exploits hackers use to access your private keys and steal your crypto.
- Access to your hot wallets may be disallowed by the wallet provider. Remember FTX ?
- The exchange that hosts your wallet is also susceptible to vulnerability exploits and security breaches which can compromise your crypto.
- Human error is the most common risk with hot wallets accidentally exposing your private keys through social engineering attacks and other crypto risks like phishing emails, using a hacked website or accidentally installing fraudulent software (malware).
- Companies that store large amounts of cryptocurrency act as a custodian on behalf of their customers and are most at risk of malicious attacks.
Hot Wallet Benefits:
- Easier to set up than cold wallets
- No cost to set up cloud wallets that run on a mobile device, desktop app, or web based software.
- Convenient as most exchanges provide hot wallets by default
- Quick access to send and receive crypto
- Best for small transactions and trading but not for HODLing or using the Stratus bot to accumulate Bitcoin with a dollar cost average strategy.
The debate between hot and cold wallets will never end. There are pros and cons to deciding between hot wallets vs. cold wallets.
Most crypto veterans will agree that cold wallets are better than hot wallets.
Why are Cold Wallets better than Hot wallets?
A cold wallet = offline crypto storage and self custody of your keys.
A cold wallet does not need to be connected to the internet to store your crypto and comes in three variations: 1) hardware wallets, 2) paper wallets and 3) sound wallets.
Your hardware wallet is like your savings account for the bulk of your Bitcoin. You can send crypto from cold storage to a hot wallet which acts more like your checking account for transactions. Just make sure you have a strategy for UTXO management to protect your privacy.
Cold wallets come with an extra kicker of having the option to go DEEP storage where you further protect the cold wallet by adding an extra layer of protection like burying a safe with your metal seed phrase or storing half of your seed on separate continents requiring serious air travel to recovery your crypto if your hardware wallet is comprised or you forget your pin code.
Enhanced Security: Winner: Cold Wallets ✅
- Hot wallets are always connected to the internet and store your private keys online.
- Cold wallets store your private keys offline which eliminates the risk of hackers stealing your crypto. The primary benefit of cold wallet storage is greater control and enhanced security of your crypto assets.
Control and Ownership: Winner: Cold Wallets ✅
- Hot wallets rely on third party services, applications, websites, and/or exchanges to keep your crypto safe.
- Cold wallet storage enables self-custody which provides a decentralized process to access, manage and safeguard your crypto without an intermediary. Eliminating counterparty risk is a key principle of cryptocurrency and a core tenet of financial sovereignty.
Tech Risk Isolation: Winner: Cold Wallets ✅
- Hot Wallets: Software bugs are unavoidable for the tech companies you trust to store your keys and create vulnerabilities for exploit of your crypto even if the provider has no malicious intent.
- Cold wallets protect you from technical risk accidentally introduced by your hot wallet provider. With cold wallets, even if the device you use breaks, becomes defective or gets lost…you can easily purchase a new cold wallet and restore the new device with your original backup recovery seed.
*When I was considering a cold wallet for the first time, this feature alone sealed the deal in making the switch to move almost all of my crypto from hot to cold wallets.
Trading and HODLing: Winner: TIED ✅
- Hot Wallets: I keep some crypto in hot wallets on exchanges for trading but when a position is settled I move whatever I’m not trading next into cold storage.
- Cold Wallets are Built for HODLers: If you’re not actively trading and favor accumulating your bitcoin with a recurring buy or dollar cost averaging strategy then cold wallets are a great choice. Make sure you have a plan in place to routinely send your crypto from your exchange hot wallet to cold wallet storage.
Long-Term Storage: Winner: Cold Wallets ✅
- Hot Wallets: Relying on a third party to act as custodian and provide access to a hot wallet requires that third party to continue operation indefinitely. In 2022, we witnessed the FTX exchange crumble and users were unable to access their crypto.
- Cold wallets are an ideal choice for long-term storage of cryptocurrencies. The offline nature of cold wallets protects against technological failures, such as hardware malfunctions, data corruption, or obsolescence. By keeping the private keys offline, you can confidently store your digital assets for extended periods without worrying about potential vulnerabilities associated with online storage solutions.
Let’s assume for now that you already have a hot wallet that is created automatically by the exchange where you bought your first crypto.
It’s not recommended that you keep all of your crypto online in your hot wallet.
Even though each crypto investor’s use case is different, the general rule of thumb is to diversify your crypto holdings across multiple hot and cold wallets.
Pro Tip: Only keep what you need to actively trade in a hot wallet. Coins that you HODL should be moved from hot to cold storage on a regular basis.
Set up a schedule to regularly transfer your coins from hot wallets to offline cold wallet crypto storage. An example strategy could be setting up a reminder to move crypto to cold storage once a month or whenever you hold more than a certain dollar amount of any single cryptocurrency.
Three Main Types of Cold Wallets for Crypto
There are three different types of cold wallets to choose from: hardware wallets, paper wallets and sound wallets. Crypto cold storage hardware wallets, sound wallets and paper wallets store your keys offline which makes them a secure and decentralized option to self-custody your crypto.
Hardware Wallets: Hardware wallets, like the Ledger and Trezor, are easy to use devices that look like USB drives and are designed to safely store your private keys OFFLINE. They can connect to your computer with USB or bluetooth and have built-in encryption features like PIN codes, seed phrases, and verification workflows. Here’s how to set up a Ledger hardware wallet.
Paper Wallets: Paper wallets are the OG cold wallet. You literally print out your private and public keys. The public key can be used to receive crypto. The private key must be kept secret but it doesn’t need to literally be written on a piece of paper.
Other options like metal stamping fall into the category of paper wallets and are usually stored in fireproof and/or waterproof containers. If you lose your keys you lose your crypto.
Crypto Sound Wallets: Encrypting your private keys as audio files (mp3) then storing on CDs which can be decrypted via spectroscope is a cold wallet albeit less popular than Paper Wallets.
Hardware wallets: Explanation, features, and benefits
Hardware wallets are secure and easy to use options for crypto self custody.
The Ledger looks like a regular USB drive, has an intuitive interface and supporting software applications to make managing and accessing your crypto easy and secure. Here’s what it looks like….
All cryptographic functions to review, confirm and sign a transaction occur within the hardware wallet.
Here’s a guide for setting up a cold crypto hardware wallet. It’s pretty easy and only takes a few minutes to complete.
After you set up your cold wallet, the most important next step is safely storing the Recovery Seed. These 12-24 words act like a backup in case your cold wallet is ever lost or damaged.
Hardware wallets provide extra security via dedicated device with cryptographic features to keep your private keys offline and safer than hot wallets (software wallets). The device may require regular firmware updates and it’s always a good idea to have a backup.
Remember, the private keys never actually leave the device which, in my opinion, is the key feature protecting your crypto from attacks.
No matter what cold wallet brand you use, your recovery seed phrase can be typed to restore ALL of your addresses (ie – public and private account numbers).
Cold Wallet Backup and Hardware Device Recovery Plan
Having a backup and recovery plan can help you regain access to your crypto in case of physical damage, loss, or theft. Here are some key strategies to consider:
- Get a Secondary Hardware Device: You can enter your seed phrase into a second cold storage device secured by a pin as a backup in case you lose or damage your primary cold storage device.
- Multiple Copies of Recovery Seed: The recovery seed is a series of words that can be used to restore access to your cold wallet. Having multiple copies stored in separate locations, safes, safe deposit boxes could make the difference when you’re trying to recover your private keys.
- Don’t do these things with your backup seed. The first rule of cold storage is that you do NOT talk about your cold wallet.
- Don’t email yourself the seed.
- Don’t store the seed phrase in the cloud or on your computer.
- Don’t take a picture of your recovery phrase.
- Don’t text the seed or communicate it to anyone over the phone, slack, etc.
- Don’t give the seed to anyone else.
- Don’t rely on paper only. Consider fireproofing and waterproofing with a steel plate.
- Don’t outsmart yourself by hiding your seed phrase.
- Test the Recovery Process: When you set up a wallet for the first time, write down the seed then reset the wallet immediately. Restore the wallet with the seed to confirm that you have the correct words in the correct order.
- Consider Cryptographic Passphrases: Some cold wallets offer the option to use an additional cryptographic passphrase as an extra layer of security. This passphrase is separate from the recovery seed and adds an extra factor of authentication. If you choose to use a passphrase, ensure that it is unique and not easily guessable. Remember to back up this passphrase securely along with your recovery seed.
- Keep Backup Devices Secure: If you use hardware wallets as cold storage, it’s important to keep your backup devices secure by storing crypto recovery seed in a safe place, protected from physical damage, loss, or theft. Remember to keep the firmware on the backup device up to date to ensure compatibility and security enhancements.
- Regularly Update Backups: As you make changes to your wallet, such as adding new addresses or generating new private keys, it’s essential to update your backups accordingly. Regularly create new backup copies of your recovery seed or any other relevant data. This ensures that your backup remains up to date and includes all the necessary information to recover your wallet.
By implementing these backup and recovery strategies, you can enhance the security and peace of mind associated with your cold wallet storage.
Tips for Storing your Hardware Wallet and Seed Phrases
Now that you have your cold wallet set up and maybe some extra encryption with passphrases, it’s time to figure out where to store your hardware device and cold wallet seed phrases.
Protecting against physical damage, loss, and theft to your Cold Wallet
Being your own bank means that you need to step up your physical and operational security plan.
Maintain Physical Security: If you need to transport your cold wallet, consider using discreet and secure methods, such as a concealed bag or a personal item that remains under your direct control.
Maintain Operational Security: Stay alert and error on the side of caution especially NOT clicking links that look phishy and never providing your seed phrase or recovery seed to any person, app or company.
Hardware Wallet Security Best Practices:
- Discretion: Don’t talk about your crypto. Don’t carry your hardware wallet out in the open. Basic self security 101 here.
- Choose Secure Storage Locations: Select secure locations to store your cold wallet like fireproof safe, safety deposit box at a bank, or a dedicated physical safe in a secure location.
- Tamper Evident Sealing: If you want to know if your kid’s friend was digging around your office looking for your crypto, you can store your hardware wallet in tamper proof seals.
- Low Profile: Hiding in plain sight like in a book or bag of rice.
- Access Controls: Physical keys to lockboxes, combination locks, biometric authentication takes cold storage to another level. If you have more than $250k in crypto assets, you can speak with our Private Client team to learn more about setting up a legal entity and recovery process for your crypto here. (email ryan@stratus.io)
- Backup and Redundancy: Create multiple copies of the wallets and storing them in different locations can provide assurance in recovering your crypto assets.
- Concealing Recovery Seeds: Recovery seeds and backup phrases are more important than the actual hardware wallet.
Regularly Updating Firmware and Software
Manufacturers of cold wallets often release updates that address vulnerabilities, new features, and enhance overall performance. Here are some key reasons why regularly updating firmware and software is important:
- Security: Software and firmware updates help to keep your wallet secure as potential vulnerabilities and exploits evolve over time.
- Bug Fixes: Updates improve the stability and usability of your cold wallet.
- Compatibility: New features and Blockchain updates, like access to new coins and token standards, are available when you update your wallet firmware.
By staying up to date, you can maintain the highest level of security and functionality for your cold wallet, providing peace of mind when managing your crypto.
Advanced Cold Storage Examples:
- Segregating Your Crypto Accounts – I could and probably will create a separate post just on this topic. Let me know if you’d be interested in that. For all of you degens out there messing with smart contracts in defi and NFTs, make sure you segregate your cold wallet. In Ledger Live, you’re creating multiple accounts for the coin (most commonly ETH). Keep one account to receive ETH and ETH compatible assets. The other ETH account should be as skinny as possible and used for minting or signing smart contracts.
- Offline and air-gapped – using devices that have never been connected to the internet and thereby completely disconnected from any network. If you’re investing this heavily in security, contact our private client team at ryan@stratus.io
- Passphrases – Passphrases add an extra layer of security. In the situation where someone was able to crack your 24 word recovery seed (1 in 2,048^24 odds), a passphrase would require one (1) additional alphanumeric code to get access.
- Multi-sig wallets require multiple signatures from different parties to validate and execute transactions.
How to move your crypto to a cold storage wallet
It’s important to buy your cold storage wallet directly from the manufacturer. Here’s a link to Ledger . The last thing you’d want to do is end up with a device that has been set up with a known password, designed to defraud you.
- Plug your hardware wallet into your computer and follow the instructions to update firmware. Here’s a step by step walkthrough for setting up your crypto cold hardware wallet.
- Follow the instructions provided by the manufacturer to set your Pin code. This is like the password to unlock the hardware device.
- Follow the prompts to Write down your seed recovery phrase on a piece of paper then check out article about the best places to hide your hardware wallet and passphrase. If you lose your cold wallet, you can always purchase a new hardware device and restore your wallet with the backup seed phrase.
- Create a new wallet on the hardware device for each cryptocurrency you will transfer to the wallet.
- Confirm the pin on your device and select ‘receive’ which will display your cold wallet’s address or public key.
- Log into your exchange account and select the hot wallet for the crypto you want to transfer to cold storage. Select the option to ‘send’ or ‘withdraw’ then enter your public address for the cold wallet.
Pro Tip: Send a small amount of crypto from your hot wallet to your cold wallet after setting up your cold storage device. Verify then transfer the rest of your crypto. #selfcustody #notyourkeys #hodl #coldstorage
The transaction may take up to 30 minutes for the blockchain validators to confirm. Your transaction will appear as ‘Pending’, then switch to ‘Complete’.
Verify that the small test transaction was posted correctly and the funds moved according to your plan. Then, and only then, should you move everything else.
- Verify Your Crypto Transaction(s): Utilize Blockchain Explorers to independently verify the transaction history and confirm its validity on the blockchain.
- Maintain a Transaction Record: Keep a record of your transactions for future reference and reconciliation. This can be in the form of a spreadsheet, a dedicated transaction tracking tool, or even screenshots or printouts of the transaction details to monitor your transaction history, track the flow of funds, and reconcile any discrepancies if they arise.
- Use a Watch-only Wallet: Setting up a watch-only wallet to monitor the balance and transactions of your cold wallet in real-time without exposing the private keys. Follow the wallet’s instructions which typically involve adding or importing the extended public key (xPub) from your funded wallet.
Verifying transactions and addresses is an essential practice to maintain the integrity and security of your cryptocurrency transactions. By double-checking transaction details, using QR codes for address verification, cross-referencing multiple sources, validating address formats, utilizing blockchain explorers, and staying vigilant against phishing attacks, you can mitigate the risk of errors, fraud, or loss of funds.
Best Practices for Sending Crypto from a Cold Wallet to an Exchange
Here are some key considerations to ensure the secure transfer of cryptocurrencies to minimize the risk of unauthorized access or loss of funds:
Now that you have your cold wallet setup and secured it’s time to transfer some crypto.
The two primary actions you’ll take with a crypto hardware wallet are 1) moving crypto from a hot wallet to your cold wallet and 2) preparing/signing offline transactions which is a more advanced use case.
Here are some best practices for sending crypto to and from your hardware wallet:
- Prepare Crypto Transactions: Before initiating any transaction, carefully verify the wallet addresses involved, amount to be sent/received, and notes or memos required. Make sure that you are a) sending funds to the correct recipient address and b) that the destination address belongs to your intended recipient. QR codes are commonly used in crypto to help users to avoid any typographical errors that could lead to the loss of funds.
- Pre-transaction Verification: Before confirming any transaction, review the transaction details for accuracy, including the amount, recipient address, and transaction fees. Some cold wallets may have a built-in display for transaction verification, allowing you to review and approve transactions directly on the device itself.
- Validate Crypto Address: Different cryptos have specific address formats. For example, Bitcoin addresses typically start with “1” or “3,” while Ethereum addresses start with “0x.” You can’t send Bitcoin to an Ethereum wallet but you can potentially lose your crypto if you accidentally make a mistake by not validating the address.
- Use Two-Factor Authentication (2FA): Enable two-factor authentication whenever possible, both for the cold wallet and any exchange or platform you’re using to send or receive crypto. 2FA apps like Authy and Google Authenticator are more secure than a simple SMS based authentication.
- Secure Internet Connection: Ensure that you are using a secure internet connection when sending cryptocurrencies from your cold wallet. Avoid using public Wi-Fi networks (man-in-the-middle attacks) and stick with your home network or VPN service to ensure your privacy and transaction integrity. NEVER visit an insecure http (non-https) website.
- Offline Signing: Cold wallets often support offline signing which adds an extra layer of security by keeping your private keys offline. Once the transaction is signed offline, transfer it to an online device or computer to broadcast it to the network. Check out your cold wallet provider’s help section for wallet specific detailed instructions.
- Firmware and Software Updates: Wallet providers regularly update the firmware and software of your cold wallet to ensure you have the latest security patches and features to mitigate the risk of potential exploits or weaknesses that could compromise the security of your transactions.
- Test Small Transactions: When sending a significant amount of cryptocurrency from your cold wallet for the first time, it’s a good practice to start with a smaller test transaction. This allows you to verify that the transaction process is working correctly and that funds are being sent to the intended recipient. Once you have confirmed the successful completion of the test transaction, you can proceed with larger transactions with confidence.
Advancements in crypto wallet technology and security
Advancements in hardware wallet functionality, usability and security is critical for crypto mass adoption.
Here are a few examples of what researchers and developers are working on:
- Secure Element Chips: These chips are dedicated hardware components that store private keys and execute cryptographic functions. Secure Element chips are designed to resist tampering and physical attacks to prevent unauthorized access.
- Biometric Authentication: Fingerprint, ocular, and facial recognition authentication adds another layer of security as it’s very difficult to replicate biometric data.
- Multi-signature Support: Multi-signature (multisig) wallet transactions enhance security by distributing control over funds among multiple key holders adding an extra layer of protection against single points of failure. Ledger is even offering a solution.
- QR Code Technology: QR codes can simplify the process of transferring funds securely by encoding transaction details, addresses, or keys, which can be scanned by compatible applications or devices to reduce the risk of human error.
- User-Friendly Interfaces: Intuitive interfaces with clear instructions have made cold wallets more accessible to a wider range of users, even those who are less technically inclined.
- Ongoing Security Audits: Cold wallet manufacturers are increasingly engaging in third-party security audits to identify vulnerabilities and ensure the robustness of their devices. Independent security firms conduct comprehensive assessments to test the resilience of cold wallets against various attack vectors. These audits provide users with greater confidence in the security of the devices and foster transparency within the cryptocurrency community.
Government regulations impact on cold wallets
Regulatory frameworks globally are seeking to establish guidelines and standards for the use and storage of crypto.
Here are some key points to consider regarding the evolving regulations and their impact on cold wallet usage:
- Know Your Customer (KYC) and Anti-Money Laundering (AML) Compliance: Depending on location, government regulation requires crypto exchanges and service providers to implement KYC and AML procedures to prevent illicit activities. If you’re uneasy about uploading your passport and driver’s license to verify your identity, ask yourself why you are so comfortable allowing a bank to provide an IOU of your life savings. Bleep bloop, really?
- Custody and Asset Management Regulations: Some jurisdictions require crypto custodians (ie – exchanges) to meet certain auditable security standards to ensure the safeguarding of assets. What happens in the case that an exchange ceases operations, goes bankrupt or is shut down by the government? There’s no guarantee that you’ll ever recover your crypto.
Pro Tip: Ask yourself which is more likely to happen…losing your crypto to exchange bankruptcy or someone stealing or guessing your recovery seed? #selfcustody
- Taxation and Reporting Requirements: Crypto tax law and reporting requirements are constantly evolving. There may be a time in the future when simply moving your crypto from hot to cold storage becomes a taxable event.
- Cross-Border Regulatory Challenges: International transactions involving cold wallets may require compliance with multiple regulatory frameworks, including reporting obligations and potential restrictions on fund transfers.
- Enhanced Security and Consumer Protection: Regulatory frameworks will evolve over time to enhance security and consumer protection in the crypto putting pressure on wallet manufacturers to comply with regulations.
Predictions for the future of cryptocurrency storage
Cryptocurrency storage solutions will evolve over time. Here are a few predictions for the future of crypto cold wallet storage:
- Enhanced Security Features: In the future, we can expect to see multiple layers of authentication, including biometrics, advanced encryption algorithms, and decentralized identity protocols.
- Interoperability and Standardization: Interoperability and Standardization will simplify the user experience and enable users to manage and transfer their digital assets across different wallets and platforms, regardless of the underlying blockchain network.
- Decentralized Finance (DeFi) Integration: Cold Wallets will expand to fully integrate with DeFi protocols, allowing users to securely interact with decentralized lending, borrowing, and trading platforms.
- Institutional-Grade Cold Storage Solutions: Institutional-grade cold storage custody solutions will provide the necessary infrastructure to facilitate the broader adoption of cryptocurrencies by institutional players paving the way for an eventual digital gold standard and mass adoption.
- Artificial Intelligence (AI) and Machine Learning (ML): AI and ML advancements will help identify patterns or anomalies in transaction behavior, detect potential security threats, and enhance fraud prevention measures.
Final Thoughts on Cold Storage
Crypto firms holding customer deposits that are NOT in cold storage include:
- Bankruptcies: Bittrex, FTX, Voyager Digital, Celsius, Three Arrows Capital, Prime Trust
- US Government Lawsuits: Binance and Coinbase
If you have (or had) crypto at any of the firms listed above, you may not ever recover 100% of your assets as a result of bankruptcy or regulation.
Imagine your dollar cost averaged a position over the last 2 years and managed to accumulate 1 Bitcoin ($BTC). I’ll give you two scenarios to consider.
Scenario 1: You have 1 BTC in a Binance hot wallet. The US SEC takes action against Binance preventing them from doing business in the US and freezing or seizing their US bank accounts. Binance closes their Binance.us entity and because their assets are frozen, they decline to enable withdrawals. In this scenario, you’re too late and lost your bitcoin.
Scenario 2: You read this post and buy your first crypto hardware wallet from Ledger here. (link to ledger affiliate). Before assets are seized or bank accounts frozen, you transfer 90% of your crypto from your exchange hot wallet into cold storage.
The peace of mind that comes with adopting a crypto strategy where you regularly move your crypto from hot to cold wallet storage is, in my opinion, the most pressing and proactive step you can take to securing your digital assets.
Companies like Ledger and Trezor are great examples of legitimate cold wallet manufacturing companies that offer excellent customer support and are known for their commitment to security. Visit the official websites of these cold wallet providers to learn more about their offerings and compare the features that align with your security needs.
Make an informed decision and take control of your digital assets. Your future financial security is worth the investment of time and effort in securing your cryptocurrencies.
Don’t wait until it’s too late.
We’d love to hear from you especially if you read this crypto cold wallet guide and set up your cold storage.
Note: Stratus does NOT provide investment, legal or tax advice. All information in this article is for educational purposes and should not be interpreted as investment, legal or tax advice. The opinions expressed are those of the author for informational purposes and neither Stratus nor the author are liable for any errors, inaccuracies or omissions. Digital assets, such as cryptocurrencies or decentralized finance, present unique risks for investors. For investment, legal, tax, or other financial guidance you should consult your own advisor.