One effective way to safeguard your digital crypto assets is by using a cold wallet, also known as an offline wallet. Unlike hot wallets, which are connected to the Internet, cold wallets store your cryptocurrencies offline, minimizing the risk of online threats and hacking attempts. They aren't perfect, but they work a lot better than online; cold wallets can still be compromised if someone knows your secret keys. Interestingly, a cold wallet can be set up with a lot of devices, including old phones.
Understand the Types of Cold Wallets
Generally, there are two types of cold wallets: hardware wallets and paper wallets. Hardware wallets are physical devices designed specifically for storing cryptocurrencies securely, again the old phone, iPod or Ledger device is an example. Paper wallets, on the other hand, involve generating and printing out the private and public keys on a physical medium, i.e. paper. The key commonality is that neither have an ongoing connection to the Internet.
Choosing a Cold Hardware Wallet Device
Commercial hardware wallets are highly recommended due to their robust security features. Popular options include Ledger Nano S, Trezor, and KeepKey. That said, any digital device that can be programmed with software can function as a cold wallet as well.
Set up the Hardware Wallet
Once you have a hardware wallet it still has to be set up. If you obtained a commercial one, instructions are already provided with the device to get started. This typically involves connecting the device to your computer or mobile device and initializing it by creating a new wallet. However, watch out with the latest ones. They actually offer to backup your security access info to their cloud storage. This is a huge mistake, and it defeats the point of having a cold wallet. Never use this option. If using your own re-used device, it has to be capable of holding and running wallet software. You may have to do a bit of programming to get it to work right, depending on the device. People typically practice with Rasberry Pi devices first to get the hang of it.
Generate and Backup Your Seed Phrase
With the wallet now functioning, you will be prompted to generate a seed phrase, also known as a recovery phrase or mnemonic phrase. This phrase consists of a series of random words (usually 12-24) that serve as a backup for your wallet. Write down the seed phrase on a piece of paper and store it securely in multiple physical locations separate from the cold wallet device. Do not store it online, to a device that connects to online or share it with anyone.
Create a Secure Password/PIN
Set a strong password or PIN for accessing your hardware wallet. Again, this depends on the software running. Make sure the credentials are unique, complex, and not easily guessable. Avoid using personal information or common passwords. The credentials will be needed for access your wallet or make transactions, so don't lose it.
Test Receive and Send Cryptocurrency
After completing the setup, your cold wallet will generate a unique public address. This address is where you can receive cryptocurrencies. Provide this address to individuals or exchanges from whom you expect to receive crypto. To send cryptocurrency, use the wallet's interface to enter the recipient's address and the amount you wish to send. Confirm the function of the wallet with a few small transactions on the device, and the hardware wallet will sign it securely offline. Then connect to online to send or receive the small amounts to confirm the wallet works as expected. Do this a few times to make sure it's reliable and before you move your big amount of funds to the wallet address.
On an ongoing basis, regularly update the firmware of your hardware wallet to benefit from the latest security patches. If you have a commercial cold wallet, then only use the official wallet software provided by the manufacturer, and even then watch out about what is added (see above about online storage of credentials). Finally, avoid connecting your hardware wallet to devices that may be compromised or infected with malware. This is almost always public computers in hotel guest areas, universities, common PCs for work and similar.
