Many people are curious about what a cold wallet is in the world of blockchain. Can a cold wallet, which emphasizes high security, be hacked?
Recently, the chairman of the People First Party, Ko Wen-je, became involved in the Jinghua City case and was detained and forbidden to meet by the Taipei District Court. Recently, the media revealed that the prosecutor has seized Ko Wen-je’s cold wallet (Cold Wallet) and is currently trying to crack it.
What exactly is a cold wallet? Can a cold wallet, which emphasizes high security, be hacked?
What is a wallet?
What exactly is a wallet? This is a common question for many newcomers to the world of blockchain.
Unlike bank accounts or transportation cards, cryptocurrency wallets do not actually store virtual assets (cryptocurrencies, NFTs) in the wallet. Instead, they serve as a digital medium for storing, sending, and receiving virtual assets. They are a critical part of the cryptographic infrastructure that enables the implementation of various blockchain technologies.
Cryptocurrency wallets have three important elements: private keys, public keys, and addresses.
Private key:
When you need to use virtual assets, you must use the “private key” to prove that you are the owner of the wallet. Only the person who has the private key for that address can use the wallet. Therefore, the private key must never be revealed to others, otherwise, the virtual assets may be stolen. The private key is designed based on cryptography and generates a random number of 256 bits. There are no two identical private keys.
Public key:
It is a symbol used by miners on the blockchain to decrypt and identify the wallet.
Address:
It represents a specific “location” on the blockchain and can be used to send and receive virtual assets. The public address can be shared with everyone to receive assets. The address is a unique string calculated through the private key. Technically, the private key cannot be reverse-calculated from the address. Only the person who has the private key for that address can use the wallet.
A wallet is similar to a Google, Facebook, or LINE account used to log in to various services in the online world. Some people describe a wallet as a passport in the world of blockchain, representing a person’s identity in the virtual world. With a wallet, one can explore everywhere and it is a key to interact with the blockchain network.
The use and management rights of a cryptocurrency wallet belong to the wallet owner and are not controlled by any company or organization. Users can send and receive cryptocurrency assets, such as Bitcoin, Ethereum, and even NFTs, through the wallet. The concept of a wallet can also be compared to a bank account. Without a wallet, it is impossible to send or receive cryptocurrencies. In other words, the first step to owning cryptocurrency is to have a wallet, which is not stored by any bank or financial institution.
Wallets are mainly divided into hot wallets and cold wallets based on whether they are connected to the internet or stored offline. They come in the form of hardware wallets, mobile applications, browser extensions, etc., making cryptocurrency payments or usage as convenient as online credit card transactions.
Hot Wallet: High convenience in transactions
A hot wallet, also known as an online wallet, includes exchange wallets, browser extensions, and apps. When a withdrawal is needed, it can be easily done through a simple approval process. However, because it is connected to the internet, there is an increased risk of being hacked and having cryptocurrencies stolen.
Among them, the hot wallets of “centralized exchanges” belong to users, but the control is not independent of the users. Mechanically, it is equivalent to entrusting the custody of cryptocurrencies to the exchange. Although it offers high transaction convenience, if there are problems with the exchange, it may be impossible to retrieve the cryptocurrencies stored there.
The recent bankruptcy case of FTX exchange illustrates the risk of misappropriation of cryptocurrencies stored in centralized exchanges. Once the bankruptcy is established, even though the wallet is owned by the user, the user cannot freely withdraw the cryptocurrencies inside. That’s why when there is news of risks at an exchange, investors tend to withdraw their assets.
In addition, there is a well-known browser extension called MetaMask, which allows users to connect and interact with various decentralized applications (dApps). The biggest difference and advantage compared to exchange wallets is that users keep their private keys and store them in the extension software, giving them full control over their wallets. Although the control over the wallet is higher, the private keys of these hot wallets, which connect to the internet during the generation and use, have a certain probability of being attacked by internet hackers and are not 100% secure.
There are also app wallets, which operate similarly to browser extensions, but they are applications installed on mobile phones, while browser extensions are plug-in software for computers. Depending on the user’s situation, different software can be used for wallet operations.
Cold Wallet: High security
Compared to the danger of potential asset loss in hot wallets, cold wallets store private keys in physical forms such as hard drives or USB devices, and they are stored offline. When there is a need to deposit or withdraw cryptocurrencies, they are connected to computers to reduce the possibility of hackers stealing private keys.
Even if your cold wallet is lost or damaged, as long as you remember the private key and mnemonic phrase of the wallet, you can recover the assets in the cold wallet. This is because the assets are not stored in the cold wallet itself but are accessed by connecting the cold wallet to a computer to read the data on the blockchain.
Compared to free hot wallets, common cold wallet brands on the market include Ledger, Trezor, and Coolwallet, with prices ranging from around $100 to $250. They have different security specifications, appearances, operating interfaces, supported currencies, and services depending on the brand and model. They come in the form of credit cards, USB devices, or hard drives, support a range of 1000+ to 10,000+ cryptocurrencies, including NFTs, and provide functions such as transactions, staking, and DeFi.
Purchasing and using a cold wallet have certain thresholds. It is important to place orders through official links and confirm the integrity of the packaging upon receipt to avoid the installation of malicious software by ill-intentioned individuals.
How to choose a wallet?
Regardless of the purpose of holding cryptocurrencies, it is recommended to have a “hot wallet” for convenient transactions. In addition to the wallets created when opening accounts on exchanges, it is advisable to install the most well-known browser extension, MetaMask, to use various decentralized applications (dApps).
Furthermore, there is Trust Wallet, an officially supported decentralized wallet by Binance, which has attracted a large number of users with its clean interface and simple operation process.
To increase asset security, it is also recommended to use a “cold wallet” to store cryptocurrencies that do not need to be traded temporarily. The choice of wallet can be based on budget, the number of currencies owned, usage habits, etc. In terms of convenience, CoolWallet, issued by a Taiwanese blockchain company, not only supports a Chinese interface but also connects directly to smartphones via Bluetooth. Its card-like appearance is lightweight and easy to carry.
According to data from Glassnode, after the closure of the FTX exchange, approximately 450,000 bitcoins were transferred from exchange hot wallets to cold wallets in 2022, reducing the percentage of bitcoins held by exchanges to less than 12% of the total. For example, in December, Binance lost 90,000 bitcoins within seven days, and Coinbase had 200,000 bitcoins withdrawn within four days in November.
Despite many exchanges offering interest rewards to attract users to store cryptocurrencies on their platforms, in situations where market risks are high and the security of exchanges cannot be determined, investors tend to prefer to safeguard their assets. Storing cryptocurrencies in cold wallets is a safer way to protect oneself from unknown market risks.
Proofreading editor: Gao Jingyuan
