When Should You Use a Cold Wallet for Your Crypto?
by Lyle Daly | Updated July 17, 2021 - First published on July 15, 2021
Once you're serious about investing in crypto, get a cold wallet.
An important part of owning cryptocurrency is having a secure place to store it. Crypto is a popular target for scammers and thieves, and if you don't protect yours, you could lose it.
There are two types of crypto wallets you can use for this: Hot wallets and cold wallets.
The main difference is that hot wallets connect to the internet, whereas cold wallets stay offline. This makes hot wallets more convenient to use, but not as secure. There's far less risk of a cold wallet being hacked compared to a hot wallet.
Another difference is the price. Most hot wallets are free to use. Cold wallets typically cost anywhere from $50 to $150. Because of that, crypto investors often wonder at what point the security of a cold wallet makes it worth the price tag. First, let's look at exactly what makes a cold wallet the best option.
Why a cold wallet is the best crypto storage
When you buy crypto, you have a few different storage options:
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- Keep it wherever you bought it. Some of the best cryptocurrency exchanges keep coins in their own cold storage for security. However, this still isn't recommended. The exchange will technically have control of your crypto, and there's also the risk of your account being hacked.
- Move it to a hot wallet, which is a digital wallet on the internet, a computer, or a smartphone.
- Move it to a cold wallet, which is any type of storage not connected to the internet. The most popular types of cold wallets are hardware wallets (devices made for storing crypto).
Both hot and cold wallets store your private keys, which are what give you access to your crypto. If someone else obtains your private keys, they can steal your crypto.
Although plenty of people use hot wallets with no issue, there are risks involved. The company behind the hot wallet stores your private keys on its web servers. If it gets hacked, your private keys could be at risk. There's also the possibility of malware infecting the device holding your hot wallet.
A cold wallet eliminates those risks. Your private keys are stored offline in the wallet. Even when you connect a hardware wallet to your computer, your private keys never have contact with the computer. You could connect a cold wallet to a computer infected with malware without putting your crypto at risk.
When should you use a cold wallet?
A rule of thumb is that you should use a cold wallet when you have more crypto than you'd be comfortable losing.
For small amounts of crypto, a cold wallet isn't necessary. If you have $100 worth of crypto or less, the cost of a wallet would be similar to your crypto's value. It doesn't make much sense to pay $50 to protect crypto that's worth $50.
Taking the normal price range for cold wallets into account, you could consider getting one when you have about $250 or more of crypto. Everyone's risk tolerance is different, and there's no one-size-fits-all answer. But considering how much crypto prices can go up, it's good to be cautious. A one-time $50 or $100 purchase isn't much considering how valuable crypto can be.
A cold wallet is also a good idea if you're planning to make crypto a part of your investment portfolio. If you know you'll be putting money into crypto regularly, buy a cold wallet early on to have safe storage.
Cold wallet options
When you've decided to get a cold wallet, the next question is which cold wallet you should pick. There are quite a few options out there, but the two most popular brands are Ledger and Trezor.
It's worth noting that Ledger's reputation took a hit after a data breach in July 2020. Its hardware wallets weren't affected, and nobody lost any crypto. But over 250,000 customer records were leaked, and many of those customers have been targets of threats and phishing scams. Despite the breach, plenty of crypto enthusiasts still vouch for the quality of Ledger's two wallets:
- Ledger Nano S for $59
- Ledger Nano X for $119
Trezor hasn't had any security issues. Its wallets are also open source, which is good from a transparency perspective. There are some complaints about the design of its wallets, particularly that they aren't user friendly. Despite the occasional criticism, Trezor's wallets usually get high marks. It offers two, as well:
- Trezor One for $60
- Trezor Model T for $194
Before buying a cold wallet, spend some time shopping around and reading reviews. Each cold wallet has a different design and features. The types of cryptocurrencies you can store also depend on the wallet you choose. Compare your options so you can find a cold wallet that works for you.
For serious crypto investors, a cold wallet is a smart choice. Affordable options are available, so you don't need to spend much to get one. You're probably buying crypto hoping it will be worth much more in the future. A cold wallet ensures you have a safe place to store it for years to come.
Lyle Daly owns Bitcoin.
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