What is a Cold Wallet in Crypto terms and how does it work?

What is a cold wallet?

A cold wallet is a vehicle for storing cryptocurrency keys privately, in an offline environment as opposed to publicly, in an online one. In simple terms, private keys (i.e.: the secret alphanumeric password that grants access to a person's crypto assets and is required to authorise transactions) are transferred from an internet-accessible device such as a laptop, tablet or phone, to one without a connection. This concept is known as cold storage, and the non-connected device in question is the cold wallet.

It is a security measure that has been used by everyone from national governments to small businesses and individuals as a way of making sensitive data inaccessible to potential thieves, and to store it for future use. The distinction between the wallet and storage phrasing is largely a cryptocurrency-specific one - crypto investors prefer the former. In the world of crypto, cold wallets are used by both individual investors and many crypto exchanges.

Making the case for cold wallets - in numbers

• Crypto theft totalled $3.4bn in 2025, with centralised exchange hacks responsible for 88% of Q1 loses (Chainalysis)  
• Private-key compromise accounted for almost 44% of stolen crypto value in 2024 (Veritas Protocol)
• Retail investor cold storage adoption rose 34% YoY in 2025 (CoinLaw)

How does a cold wallet work?

A crypto cold wallet stays permanently offline, never connecting to the internet. Hackers therefore cannot reach it (and your private keys) using common techniques such as viruses, malware, or remote PC attacks.

Cold wallets use a physical chip to safely hold both your private keys and seed phrase. A seed phrase is the master backup key for a crypto wallet. Consisting of a long sequence of random words, it allows users to recover all digital money if a device gets lost or broken. Anyone who can view these words can steal your funds, and there is a far higher risk of them being able to be seen in an online (hot) environment, versus an offline (cold) one.

To execute a transaction using a cold wallet, the user connects it briefly to an online device. An app on the online device creates a transaction request which is reviewed and approved via the cold storage device. This device then uses the hidden private key to approve the transaction inside the secure offline environment. Crucially, only the "signed" approval travels online to a blockchain network to complete the transfer. The private keys and seed phrase never encounter the online environment.

Types of cold wallets

Cold wallets come in several different forms, each with varying features and degrees of security, ranked below broadly from low to high.

1. Paper wallets

As its name suggests, a paper wallet is a document on which an investor's crypto keys (both public and private) are written. Some generate and add a QR code to the wallet for scanning to make transactions, however this increases the risk of theft owing to another level of contact with online software. Additionally, if the paper gets lost or destroyed, you won't be able to access the funds, making the use of backups or a secure storage location for your paper wallet essential.

2. Software wallets

More commonly perceived as hot wallets, because they are generally connected to the internet, there are however offline versions available. These retain private keys in an offline environment, and the public keys online. All transaction approvals take place in the offline wallet, signed exclusively with the private keys. The offline wallet never connects to the internet, keeping the private keys secure. Only new and unsigned transactions are initiated in the online setting, together with contact between the sender and receiver.

3. Hardware wallets

There are several types of hardware crypto wallet. Firstly, and most commonly, USB-style devices that are physically connected to a computer or phone only in order to authorise a transaction. Then there are smart card wallets that act like a contactless debit or credit card with NFC technology, and only connect to your online phone when tapped. And perhaps the most secure of the trio, air-gapped wallets that never connect to an online device – they transfer data completely offline via QR code.

4. Sound wallets

An expensive, obscure, time-consuming and uncommon cold storage methodology, sound wallets involve encrypting private keys as sound files. These files can then be deciphered into the written format using a special application called a spectroscope. 

5. Deep cold storage

Large institutions such as governments and banks managing enormous digital funds often turn to deep cold storage. Defined by its difficulty of access, even for the owner, methods include storing cryptocurrency keys in a secure vault that requires several steps to access. At an individual level, deep cold storage may involve placing a hardware wallet in a secure container and burying it somewhere.

Cold wallet vs. hot wallet - a comparison

The following table describes the general mechanics of both hot and cold wallets, and neither makes a claim about any specific product nor endorses any particular method.

Cryptoassets are highly volatile and largely unregulated. No consumer protection. Tax on profits may apply.

Is a cold wallet absolutely necessary for crypto users?

Whether you "need" a cold wallet or not depends on the frequency with which you plan to trade, as well as the amount of funds invested. If planning to engage in active day trading, then keeping funds in a well-regulated, reputable crypto exchange is a much quicker way to buy, sell and swap tokens. The same can be said if your total crypto value is relatively low (or the loss is one that you can comfortably afford to take). 

On the other hand, if you plan to hold assets for months or years without touching them, then many investors prefer security over convenience. Crucially, if the value of your investment is more than you are comfortable losing in a single breach, then a cold wallet is essential.

Extra security and risk management strategies should be considered if using CFDs, a derivative that lets you speculate on the price movement of cryptocurrencies without owning the underlying asset. 

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets or CFDs with us. You should consider whether you understand how these instruments work, and whether you can afford to take the considerable risk of losing your money.

Advantages and disadvantages of cold wallets

Whilst helping to protect private keys and seed phrases from hackers, cold storage is not foolproof. When choosing whether to use a cold wallet, there are some pros and cons to weigh up against the nature of your investment, and your risk tolerance.

Crypto Cold Wallet FAQs