Without going into the Cold Wallet issue in detail, let’s first better understand how Cryptocurrency transactions take place and the background processes. 

Cryptocurrencies are a record that is completely digitally stored and has no physical counterpart. Since it is stored in a digital environment, it raises the possibility and concern of cyber attacks more. So how do these cryptocurrencies work in the background?

After logging in to your account, you came to the paymentsection and made your payment via EFT, money order or credit card. Upon completion of these processes, the money is transferred to the account that the exchange has associated with you, and the exchange is now the manager of your account. The exchange can perform various operations on the account, for example: As a result of a cyber attack, it may leak your password (or private key) and cause you to lose money.

You have a public and a private key linked to your Bitcoin wallets. The private key is a key consisting of alphanumeric characters necessary for the user to access the Bitcoins they own and perform their transactions.

The public key, on the other hand, is useful in determining which account the money sent to accounts, such as the account name, goes to. After the payment is made, the person can only access the Bitcoins in the account with their private key. If these keys are stolen, people’s accounts linked to these keys can be accessed without any authentication.

In this case, the first thing that comes to mind as security solutions is wallets. Wallets, on the other hand, are divided into hot and cold under two headings. Now let’s move on to examining the differences between hot and cold wallets in terms of security.

Cold Wallets are a type of wallet without an internet connection where Bitcoin or other cryptocurrencies can be stored digitally.

Advantages:

• In addition to the fact that most crypto wallets are digital, the difference of cold wallets is that they store cryptocurrencies offline. 
• The main purpose here is to increase security against possible attacks and to minimize access.

How Does Cold Storage Work?

Cold storage solves this problem by signing the transaction with the private key in an offline environment. Any transaction initiated online is temporarily transferred to an offline wallet held on a device such as a USB, CD, hard drive, paper or offline computer, and then digitally signed before being transmitted to the online network. Since the private key does not come into contact with a server connecting online during the signing process, even if an online hacker encounters the transaction, they cannot access the private key used for it.

Bitcoin Kağıt Cüzdan

Cold Wallet: Paper Wallet, Hardware Wallet Disadvantages?

Paper wallets are more suitable for keeping long-term cryptocurrencies, because when cryptocurrencies are constantly transferred to other accounts, you need to import your private key to your Bitcoin wallet, and In this case, since the private key is transferred to the desktop or mobile application connected to the Internet, it loses its “cold wallet” feature.

Hardware Wallets, on the other hand, have the ability to perform offline transfers, which paper wallets cannot do. As the name suggests, it is a device that contains a special chip and stores the private key on this chip. Since the private key is generated in a completely offline environment, you do not leave any traces on your internet-connected devices (phones, computers, etc.).

On hardware devices, such as the Ledger wallet, only at the installation stage a recovery key of 24 words is shown to you. It is necessary to keep this key on a piece of paper, making sure it is safe. When you install any cryptocurrency in your hardware wallet, your private key is derived from this 24-word key.

In addition to increasing reliability, being offline offers disadvantages to users as it is a physical device.

Hot Wallets, on the other hand, are classified separately from the cold wallet class, as they carry out transactions with an internet connection through mobile applications, web and desktop applications.

All the necessary steps to complete a transaction are made from online devices, due to this feature, you can perform your crypto money management and payment transactions almost anywhere. Although it is more selfless to use than a cold wallet, the wallet generates and stores the private key online. At this point, security suspicion begins to appear, because an attacker scanning the networks can obtain the private key used for the transaction signature.

As in most cyber attacks, users must consciously and consciously implement security measures in order to minimize human errors, which are the most important factor of attacks. The weak password here or the lack of using MFA (multi-factor authentication) can put your assets inside the wallet at risk.

As a result, considering this use and reliability, you are expected to use it for your needs. If you have a long-term use, if you do not perform a continuous transaction, you can take advantage of cold wallet usage alternatives.