According to Chainalysis, the total volume of funds stolen through crypto platform hacks exceeded $1.58 billion by July 31, 2024. This represents an 84.4% increase compared to the same period in 2023. On July 18, 2024, the cyber group Lazarus stole $34.9 million from the WazirX exchange, marking one of the largest thefts in recent months. Hot (online) wallets are inherently vulnerable to targeted attacks and private key compromise, which is why investors are increasingly switching to cold storage for their assets.
Cold Cryptocurrency Wallet
In this article, we will explain in simple terms what a cold wallet is, how it works, and why this option helps protect your funds from hacks.
What Is a Cold Wallet
Before answering this question, let’s briefly dive into how cryptocurrency and wallets work in general.
Basics of Crypto Wallet Operation
Encryption in cryptocurrencies is used both for maintaining the blockchain (a chain of blocks containing transaction records) and for sending transactions from users. For the network to accept a transaction for processing, it must have a digital signature: a sequence of characters created by applying encryption to your transaction data.
Encryption is performed using secret information—the so-called private key. But how will network participants understand that the signature is genuine? Modern encryption algorithms account for this, and a public key always accompanies the private key.
The public key can be freely distributed. It is needed to verify that the digital signature was indeed created by the corresponding private key. Anyone with the public key can verify the authenticity of the signature and confirm the transaction.
To simplify the system, engineers came up with using the public key as crypto account details. It is the public key (or its representation format) that is called the crypto wallet address.
Each cryptocurrency in a wallet has its own address. Using it, you can verify all transactions from that address. Free transaction verification makes cryptocurrencies decentralized and transparent to every network participant. However, the weak point of cryptocurrencies becomes the private encryption keys of each participant. If a private key falls into the hands of third parties, the crypto community can no longer distinguish who created the transaction: the real owner or a malicious actor. Therefore, protecting private keys is a critical issue in cryptocurrencies.
Features of Cold Crypto Wallets
A cold wallet is a means of storing private keys completely offline, without a constant internet connection. If hot (online) wallets are constantly connected to the network and store keys on servers or in applications, a cold wallet physically isolates keys from any remote attacks. A cold crypto wallet guarantees that no program, virus, or hacker can gain direct access to your funds.
But how do you conduct transactions if the cold wallet has no internet access? All cryptocurrency operations work as follows: you create and sign a transaction on a device not connected to the internet, and then transmit only the finished digital signature to the network—for example, via a USB drive or QR code—for verification and publication on the blockchain.
Who Invented Cold Cryptocurrency Wallets
The idea of storing private keys offline emerged almost immediately after Bitcoin appeared. In 2011, participants on the Bitcointalk forum first described the “paper wallet” method, where keys were generated on a computer without an internet connection and printed on a sheet of paper.
This practice borrowed the concept of cold storage from traditional banking, where valuables are kept in a physical safe. Authors of these publications consistently emphasized: if a private key never appeared online, attackers would not be able to reach it.
It was precisely these first experiments with paper media that laid the foundation for subsequent hardware solutions, turning offline storage into an essential tool for protecting crypto assets. Thus, the concept of a cold wallet was born.
First Cold Wallets
The first commercial hardware cold wallet was presented by the Czech company SatoshiLabs on July 29, 2014, with the release of the Trezor Model One. The device was built on the ATMega 32U4 microcontroller, equipped with an OLED screen and two buttons for confirming actions, while private keys were reliably isolated inside the device, preventing them from ever reaching the network. The basic plastic version of the crypto wallet sold for 1 BTC, and the aluminum version for 3 BTC—which, at Bitcoin’s price at the time, made Trezor one of the most expensive, yet also safest, solutions on the market.
In 2016, the French startup Ledger released the Nano S hardware crypto wallet, which applied a Secure Element chip with CC EAL5+ certification level and its own BOLOS operating system. Thanks to its USB interface and integration with the Ledger Live application, the Nano S cold wallet supported dozens of cryptocurrencies, simplifying asset management on a computer or smartphone.
By 2022, Ledger had sold over 3 million such crypto wallets, confirming mass demand for hardware solutions. Soon, manufacturers began developing the concept further: in 2018, SatoshiLabs began shipping the Trezor Model T with a color touchscreen, a more powerful processor, and a built-in microSD slot. The new interface simplified PIN code and recovery phrase entry, while expanded functionality allowed processing more types of cryptocurrency transactions without an internet connection. And today, new manufacturers of hardware crypto wallets have entered the market, attempting to challenge the veterans with simplicity and ease of use combined with security.
How a Cold Wallet Works “Under the Hood”
A cold wallet is built around a secure chip or microcontroller, surrounded by security components: encrypted non-volatile memory for private keys, a screen, and physical buttons for confirming operations.
If it is a cold wallet, the device runs a simplified operating system devoid of network modules and third-party software. Interaction with the outside world occurs only through a predefined channel—for example, USB ports or a QR code scanner—and only after physical confirmation of each cryptocurrency operation by the user.
How the Key Hierarchy Is Formed — In Simple Terms
Attentive readers will notice that each cryptocurrency requires its own private key. Each of these keys must be stored in the wallet to sign transactions across different networks and for different coins. Sometimes investors collect dozens or even hundreds of coins in their portfolio. Of course, working with each key individually in such a mode is inconvenient. Therefore, the concept of a master key was invented. A master key is a “key to keys,” with which all others can be recovered.
Signing a Transaction Step by Step
If in a hot wallet you create a transaction by selecting a coin, amount, network, and then directly sending it to the network, in a cold wallet this process is slower.
First, in an application on your computer or smartphone, you create a transaction draft—specifying the recipient’s address, the cryptocurrency amount, and the fee size. The draft cannot be sent to the network because it is unsigned, and without a signature from the private key, the network will not accept the transaction. Then this draft is transferred to your cold wallet via a USB cable or by scanning a QR code.
All transfer details appear on the device screen: where and how much is being sent, what fee is charged. After verification, you press the wallet buttons, confirming the operation. Inside the device, the built-in program takes your private key and creates a digital signature—a unique code confirming the transaction’s authenticity. The finished signature is output as a string or QR code, which is returned to the application on the main device.
Finally, the application publishes the signed transaction to the blockchain, while your private key remains securely protected and never leaves the crypto wallet.
Backup and Recovery
As we already mentioned, for backup you can use either private keys directly (write them to a medium and lock the medium in a safe) or through a medium—for example, paper. But private keys are very inconvenient to write down, as they often consist of a long string of characters. Therefore, engineers came up with seed phrases.
A seed phrase is a set of 12/24 words that precisely encode the private key. In this sense, a seed phrase and a master key are equivalent. A seed phrase cannot be changed, and its leakage means the entire wallet is compromised.
Therefore, the seed phrase is usually shown only once during the wallet’s initial setup.
This phrase must be written down (preserving the word order!), for example, on paper, and stored in a secure location. To exclude the risk of losing the seed phrase, you can make 2–3 copies and place them in different locations. On one hand, this increases the phrase’s security, but on the other—it also increases the risk of accidental exposure to outsiders.
If you want to place a paper with the written seed phrase in a safe, that is an excellent idea. However, for safe storage, it is worth using more durable cold wallet backups, such as metal. You can make a plate yourself, or you can buy specialized ones where you simply need to imprint the seed phrase.
Regularly check the readability of the written phrase and its storage location. If the paper starts tearing or the text becomes unclear—transfer the words to a new copy. Competent backup and timely updating of copies will save you from the risk of permanent loss of funds.
But what if the seed phrase is lost? It all depends on whether you still have access to the wallet. If access to the wallet is preserved, you simply need to create a new cold crypto wallet, write down and save the new seed phrase, and then promptly transfer funds from the old wallet to the new one. If, however, there is no access to the wallet and the seed phrase is lost, restoring access to your funds is technically impossible. No one can do this: no one has your private keys, and brute-forcing them is a task that cannot be solved in a reasonable time.
A seed phrase can be used not only in case of losing a hardware wallet or its malfunction but also, for example, if you want to access the same wallet from another device. Moreover, the manufacturer of this device can even be different. You will be able to sign your transactions on any of them. However, using a seed phrase to restore a wallet in a hot variant is already not a very good idea, as this compromises the very idea of cold storage. In this case, all the protection of the hardware wallet simply ceases to function.
Types of Cold Wallets
The safest cold wallets are hardware wallets. These are compact devices with a screen and buttons, inside which a secure chip is placed.
Paper cold wallets involve generating a key pair offline followed by printing on paper. This method requires no electronics, but paper tears and fades. For long-term storage, water- and fire-resistant steel is used, onto which the words of the seed phrase or the private key itself are engraved.
Offline applications and USB drives store wallet software on a flash drive or microSD card, which is loaded onto a computer without network access. Private keys remain in an encrypted container on the medium, and transactions are signed locally. This method reduces costs compared to hardware devices but requires periodic software updates, which are quite inconvenient to perform without an internet connection.
There are also cold wallets with multi-signature support. In this case, the private key is split into several parts stored on different devices. A transaction can be signed only with the approval of the majority of participants—this increases storage reliability but complicates the fund transfer procedure.
Conclusion
A cold wallet remains one of the most reliable ways to protect cryptocurrencies from hacks and private key compromise. As cyberattacks on exchanges and hot wallets become increasingly widespread, and the amounts of stolen funds hit new records, a cold crypto wallet is transforming from an option into a necessity for those who want to preserve their cryptocurrency. A competent choice and setup of a cold wallet, regular updating of backups, and careful handling of the seed phrase will help protect your investments and reduce risks even amid growing threats in the crypto market.
