Self-custody is a fundamental feature of cryptocurrencies. Instead of relying on third parties like traditional banks, crypto investors manage their digital assets directly via private wallets. While crypto wallets don’t actually store cryptocurrencies, they contain the private keys that allow users to access their funds on the blockchain.

Two main categories of private wallets exist: hot wallets and cold wallets. Cold storage crypto wallets, in particular, are known for their offline design, offering a more secure and hack-resistant option for safeguarding private keys.

In this guide, we’ll explain how crypto cold storage wallets work and why many in the crypto space consider them the optimal choice for securing digital assets.   

What is cold storage in crypto? Cold vs. hot wallets

All crypto wallets, whether cold or hot, contain a cryptographically linked pair of public and private keys. The private key grants access to the digital assets in the wallet, meaning anyone with this key – authorized or not – can access the funds it protects.

The cold storage approach to securing cryptocurrencies is simple. Unlike hot wallets, which connect to the internet, cold wallets remain offline, keeping their private keys safer from malware, phishing, and other cyberattacks. The cold storage approach to securing cryptocurrencies is simple. Unlike hot wallets, which connect to the internet, cold wallets remain offline, keeping their private keys safer from malware, phishing, and other cyberattacks. However, cold wallets are entirely self-custodial, meaning if the private key is lost, there’s no way to recover access, unlike some hot wallets that may offer recovery options.

How does a cold wallet work?

Several types of cold storage wallets exist, from physical paper to USB-like hardware devices  (more on those below). But their core concept is the same: to generate and keep a user's private key offline.

When the user initiates a crypto transaction, they use an internet-connected device – such as a smartphone, tablet, or desktop computer – to request the transfer. They then sign the transaction using their offline private key.

After signing, the transaction is transmitted to the blockchain. Throughout this process, the cold wallet's private key never connects to the internet, which helps protect it from potential hacks or compromised software systems.

Types of crypto cold storage wallets

Cold storage hardware wallets

Since Trezor introduced its Model One cold storage wallet in 2014, hardware wallets have become the most popular cold storage solution for many investors. These USB-like devices feature advanced technology that securely stores private keys offline within the hardware. To begin a transaction, the wallet owner uses their private key to connect to a computer, tablet, or smartphone.

Now, more modern hardware wallets from newer brands like Ledger and KeepKey – as well as Trezor – feature touchscreens, PIN verification, and optional passphrases, offering safer and more user-friendly storage solutions. Many also include companion apps and software interfaces, making portfolio management simpler and enabling seamless integration with decentralized applications (dApps).

Cold storage NFC wallets 

Short for “near-field communication,” NFC technology uses radio frequencies to transmit data (similar to other types of contactless payments). 

NFC wallets use a "tap-to-transact" system, allowing users to sign transactions by tapping their NFC-enabled wallet against a compatible device. The private key is stored on a tamper-resistant chip, ensuring secure storage.

NFC wallets are typically compact and often resemble a card or small token, making them one of the most intuitive cold storage solutions for crypto. While NFC wallets lack the accessibility and advanced features of hardware wallets, their convenience and simplicity make them an appealing option for many crypto traders.

Cold storage paper wallets 

A paper wallet is a physical copy of a user’s cryptographic keys, often represented as a QR  code. Users generate their keys using offline tools, print them, and store them securely.

Paper wallets are the most cost-effective cold storage option, as they typically cost no more than the paper and ink needed to create them. They’re also one of the earliest mainstream cold storage solutions for crypto, but they’ve become less popular as hardware and NFC wallets have become more common in recent years.

While paper wallets can be great for storing digital assets, in order to transfer funds out of a paper wallet, users would have to import their cryptographic keys into a hot or cold wallet in order to sign transactions using that wallet’s private keys.

What are the benefits and risks of cold storage

Many crypto enthusiasts consider cold storage the gold standard for crypto security, but it’s not without potential downsides. Here are a few advantages and drawbacks of cold storage to be aware of: 

Pros of cold storage

• Extra security: Cold wallets keep private keys offline, making them far less vulnerable to malware, phishing, and hacking attempts.
• Full control: Cold storage wallets generate and store private and public keys, giving users total control over their digital assets without relying on third-party custodians or exchanges.
• Great for long-term storage: If you're planning to hold onto cryptocurrency for years, cold wallets offer peace of mind with their strong security, even if they’re arguably less convenient than hot wallets.

Cons of cold storage 

• Higher learning curve: Cold wallets can be intimidating for beginners. Their setup and use often requires more technical know-how than online or mobile hot wallets.
• Still vulnerable to theft: While safer from online threats, cold wallets can be physically stolen. Additionally, anyone with the recovery phrase or private key can access the funds, with or without the device.
• Physical damage or loss: Paper wallets are especially fragile and prone to fire and water, but even hardware wallets can get damaged or lost. While replacement is possible in some cases, losing access to a wallet could mean losing your assets forever.

How to set up a cold wallet

After choosing a type of cold wallet, paper or hardware, the next step is to generate private and public keys for their blockchain address. The process differs depending on the wallet type:

For paper cold wallets

As previously mentioned, key generation websites allow users to create printable keys in incognito mode or after disconnecting from the internet. This helps minimize the risk of exposing private keys to malware, phishing attacks, or unauthorized access during the key generation process.

For hardware cold wallets

Hardware devices should always come from a reputable manufacturer, such as Ledger or Trezor, and be purchased from official websites or authorized retailers. This helps ensure the device is authentic, free from tampering, and not preloaded with malicious software, minimizing the risk of a compromised wallet that could expose private keys to hackers. Device setup typically involves these steps:

1. Download the official app: Most hardware wallets have an app for managing digital assets (e.g., Ledger Live for Ledger or Trezor Suite for Trezor). Install the latest version from the official links on the wallet’s website.
2. Connect the hardware wallet: Link the device to a computer or mobile device using a USB cable or Bluetooth connection, depending on the model.
3. Select “Create New Wallet”: After connecting the device, select the “Create New Wallet” option in the app and follow the on-screen instructions.
4. Create a PIN: Create a PIN to access the hardware wallet. While this PIN adds an extra layer of protection, it cannot be used to recover the wallet or its funds.
5. Generate and write down the recovery phrase: The wallet will display a recovery phrase, typically 12 or 24 words, which acts as the master key to the wallet. Write the words on paper or a specialized steel backup sheet and store them securely.
6. Verify the recovery phrase: Many wallets require users to re-enter the recovery phrase to ensure accuracy. This step confirms the user has correctly recorded the phrase.

CoinTracker connects with 500+ exchanges and wallets

Whichever type of wallet you use to protect your private keys, when it comes to monitoring your transaction history, CoinTracker’s Portfolio Tracker has you covered. By linking your wallet’s public addresses and exchange APIs, CoinTracker allows you to instantly view your portfolio’s current value and past transfers in one convenient dashboard. CoinTracker also compiles this data into IRS-approved tax forms to help make filing a breeze.

Get started with a free CoinTracker account today and discover how easy crypto portfolio management can be.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.