In this article, we go dig deeper into the reasons why dealing with Cold Wallets can cause trouble for cryptocurrency traders. In the previous article, we discussed the cons and pros of using Hot Wallets and Cold Wallets. We addressed the fact that Cold Wallets are generally regarded as safer options for storing cryptocurrencies. Storing information this way can come in many forms. One of these is a paper wallet, a physical document on which private and public keys are recorded, with a QR code on it that can be scanned and signed to validate a transaction. The online bitcoin paper wallet tool enables users to print such documents with offline printers. Now the major flaws of this method are obvious: the document can be lost, be recognized as destroyed, unclear, or illegible. If anything happens to this piece of paper, the funds associated with it will be irretrievable.
A hardware wallet is another form of Cold Wallet. Hardware wallets either use smart cards to generate private keys offline or store private keys on offline devices. Smart cards look like USB devices that can be connected to a computer for storing the private keys offline. Usually, Chrome-based apps are required for fulfilling this task. Again, this device should be safeguarded with utmost care because if it gets damaged the data stored on it cannot be retrieved and access to the data will be impossible.
For those traders who are more familiar with technical issues, an offline software wallet can be a decent choice among the available Cold Wallets. Offline software wallets give the traders the choice to split their cryptocurrencies into i) an offline wallet that store private keys, and ii) an online wallet that contain public keys. The online wallet can generate unsigned transactions, send it to another client, move it to the offline wallet in which the transaction will be closed via a private key. The online wallet takes this signed transaction and distributes its information online. This is perhaps the safest way in the world of cryptocurrency trading for storing their valuable data. The private keys never go online, thus they are safe from the dangers of theft and hacks.
Inspired by the offline software wallet providers, traders can also store their private keys on Cold Wallets and store a small amount of their capital in Hot Wallets. This can be beneficial in cases when traders are planning to complete a transaction pretty soon, so they transfer a small amount of their holding to a Hot Wallet only for that specific reason. Also, some investors assocaite their cryptocurencies with some exchanges. These exchanges store the investors’ data in their infrastructure, thus, in case of theft they will be suffering from the loss and not the investors directly.
We remind the reader that not all the wallets providing the services discussed above deal with all sorts of cryptocurrencies. Therefore, the traders should carefully choose the companies that offer wallets tailored to their needs. It is also wise to break your holdings into smaller amounts of different cryptocurrencies. This will reduce the risk of your capital being stolen on the internet as hackers would less likely target small capitals. Many cryptocurrency exchanges allow their clients to transfer various types of cryptocurrencies.