Many people are curious about what a cold wallet in the blockchain world is. Can a cold wallet, which emphasizes high security, be hacked?
The chairman of the People’s Party, Ko Wen-je, recently became involved in the Jinghua City case and was detained and prohibited from seeing anyone by the Taipei District Court. Earlier, the media revealed that the prosecutor had seized Ko Wen-je’s cold wallet, which is still being decrypted.
So 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 among newcomers to the blockchain world.
A cryptocurrency wallet is different from a bank account or an EasyCard. It does not actually store virtual assets (cryptocurrencies, NFTs) in the wallet. Instead, it is a digital medium for storing, sending, and receiving virtual assets. It is a critical part of the cryptographic infrastructure that enables various applications of blockchain technology.
There are three important elements of a cryptocurrency wallet: private key, public key, and address.
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 owns the private key of the address can use the wallet. Therefore, the private key must never be revealed to others, otherwise, the virtual assets will be stolen. The private key is designed based on cryptography and generates a random number of 256 bits. There are no two sets of duplicate private keys.
Public Key:
It is a symbol used by miners on the blockchain to decrypt and identify wallets.
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 owns the private key of the 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 blockchain world, representing a person’s identity in the virtual world. With a wallet, one can explore everywhere and it is a key to interacting 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, or even NFTs, through the wallet. It is also important to note that the concept of a wallet can 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 managed by any bank or financial institution.
Wallets are categorized mainly based on “online or offline storage” and are divided into hot wallets and cold wallets. They come in forms such as hardware wallets, mobile applications, browser extensions, etc., making payment or the use of cryptocurrencies 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, apps, etc. With a simple approval process, funds can be withdrawn easily. However, because it is connected to the internet, there is an increased risk of being hacked.
Among them, the hot wallets of “centralized exchanges” belong to users, but the control is not independent of users. Mechanically, it is equivalent to entrusting the custody of cryptographic assets to the exchange. Although it is highly convenient for transactions, if there are problems with the exchange, it may not be possible to retrieve the cryptographic assets.
The recent bankruptcy case of the FTX exchange illustrates the risk of misappropriation of cryptographic assets stored in centralized exchanges. Once the bankruptcy is established, even if the wallet belongs to the user, the user cannot freely withdraw the cryptographic assets inside. That is why when there is news of risks associated with exchanges, investors tend to withdraw their assets.
In addition, there is the well-known MetaMask fox wallet as a “browser extension”. Once installed, it can connect and interact with various decentralized applications (dApps). The main difference and advantage compared to exchange wallets is that the private key is self-managed and stored within the extension software, giving the user full control over their wallet. Although the control over the wallet is higher, the generation and use of private keys for such hot wallets are connected to the internet, making them susceptible to network hacker attacks and not 100% secure.
App wallets operate in the same way as browser extensions, but they are mobile applications installed on smartphones, 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 risks of potential loss of cryptographic assets in hot wallets, cold wallets store private keys in physical forms such as hardware drives or USB devices and are stored offline. They are only connected to computers when there is a need to deposit or withdraw cryptocurrencies, reducing 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, 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 the cold wallet to read data from the blockchain.
Compared to free hot wallets, common brands of cold wallets on the market include Ledger, Trezor, and Coolwallet, with prices ranging from $100 to $250. They have different security specifications, appearances, operating interfaces, support for various currencies, and service content depending on the brand and model. They come in forms such as credit cards, USB devices, or hard drives and support different numbers of currencies, ranging from 1000+ to 10,000+, and even including NFTs. They also provide functions such as transactions, staking, and DeFi.
The purchase and use of cold wallets have certain thresholds. It is important to order from the original manufacturer’s link and confirm that the packaging is intact upon arrival to avoid the installation of malicious software by malicious 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 wallet created when opening an account on an exchange, it is advisable to install the most well-known browser extension, MetaMask, to use various decentralized applications (dApps).
In addition, there is the Trust Wallet, officially supported by Binance, which has gained a large number of users with its clean interface and simple operation process.
At the same time, to increase asset security, it is also recommended to use a “cold wallet” to store cryptocurrencies that are not needed for immediate transactions. The choice of wallet can be based on factors such as budget, number of currencies owned, and usage habits. In terms of convenience, the CoolWallet, issued by a Taiwanese blockchain company, not only supports a Chinese interface but also connects directly to the phone 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 proportion of bitcoins held by exchanges to less than 12% of the total bitcoins. For example, in December, Binance saw 90,000 bitcoins disappear within 7 days, and Coinbase had 200,000 bitcoins withdrawn within 4 days in November.
Despite many exchanges offering interest rewards to attract users to store their cryptocurrencies on the exchange, in situations with higher market risks and the inability to determine the security of exchanges, investors prefer to safeguard their assets. Storing in a cold wallet is a safer way to preserve assets and protect oneself from unknown market risks.
Proofreading Editor: Gao Jingyuan