A "cold wallet" is a wallet that's not connected to the internet. This usually means a hardware wallet. A hardware wallet secures your seed words by locking them in a device the internet can't reach. By doing this, it secures your wallet and everything in it.
A "hot wallet" is a wallet that's connected to the internet. This usually means an app with your seed in it. Hot wallets are convenient, but if your phone or desktop gets hacked, your Bitcoin could get stolen.
If somebody finds your seed phrase, they don't need your wallet to steal your coins, because your seed phrase IS your keys. If somebody finds your seed phrase, or if a hacker hacks an app you typed your seed phrase into, they found the keys to your coins.
Technically speaking, a hardware wallet isn't actually a wallet. It's a device for signing transactions. You'll use an app on your phone or desktop as your wallet, but that app won't be able to move your coins without getting a signature from your hardware wallet. These wallet apps are often referred to as hardware wallet "companion apps." More on that later.
Here's a quick overview of Bitcoin self custody:
You start with a seed phrase (usually 12 or 24 words). If you don't already have a seed phrase, your wallet app or hardware device will randomly generate one for you. It's very important that the words in your seed phrase are random. This prevents anyone from guessing or cracking your seed and stealing everything in your wallet.
Let's talk about those odds:
Do you play the lottery? The odds of winning the Powerball jackpot are 1 in over 292 million.
The odds of somebody guessing a 12 word Bitcoin seed phrase are:
1 in 340,282,366,920,938,463,463,374,607,431,768,211,456.
The odds of guessing a 24 word seed phrase are beyond astronomical.
Using random words protects you by making sure your seed words aren't guessable.
A hardware wallet protects you by locking up your seed words in a device that isn't connected to the internet.
An air gapped hardware wallet further protects you by locking up your seed words in a device that doesn't even have the ability to connect to the internet. No wifi. No bluetooth. No USB connection. No way for hackers to reach it.
A stateless hardware wallet further protects you by not saving your seed on the device. When you turn the device off, the seed is erased. The downside is, you have to load the seed every time you use it. The upside? If the device gets stolen, your seed isn't it, which means the thief got nothing.
My Hardware Wallet Recommendations:
Trezor is the easiest hardware wallet for newcomers to use. Even the cheapest model will make an excellent first hardware wallet. Trezor hardware wallets use the Trezor Suite companion app for desktop and mobile over USB or bluetooth (not air gapped, not stateless, but still, excellent security).
Blockstream Jade is a great hardware wallet with some advanced features. It can be used air gapped and stateless. It works with their own Green wallet app, but it can also work with open source companion apps like BlueWallet for mobile or Sparrow for desktop.
SeedSigner is fully open source firmware that runs on a Raspberry Pi. Air gapped and stateless. It's great, but it's DIY, though you can buy a fully assembled kit. Pair it up with BlueWallet for mobile or Sparrow for desktop, among many others. Those two are my favorites.
I don't recommend ColdCard for anyone new to hardware wallets. Their devices will keep you safe, but they're clunky and not user friendly.
Only buy a hardware wallet from a trusted source. Never buy one used. Be extra careful to make sure you download any firmware or companion software from the source. Beware of scammers.
DO NOT BUY ANYTHING FROM LEDGER.
Ledger added key extraction firmware to their hardware wallets, as part of their Ledger Recover subscription service. The fact that seeds can be extracted from Ledger hardware wallets means their devices are no longer truly "cold." You should never trust a device that has the ability to send your seed over the internet, even if that feature is optional. If hackers can figure out how to exploit that feature, the owner's keys can be stolen without the owner knowing.
Making matters worse, when Ledger announced their key extraction feature, they lied about it. And making matters even worse, Ledger (the company) has been hacked twice. Once, they leaked their entire customer database, giving hackers customer names, email, phone numbers and home addresses! And Ledger's companion app, Ledger Live, includes tons of trackers.
DO NOT BUY ANYTHING FROM LEDGER.
Write 'Em Down. Back 'Em Up.
Regardless of whether you use a hardware wallet or a hot wallet app, write your seed phrase on paper, make a metal backup, and secure them in two locations only you have access to.
Owning Bitcoin means being your own bank.
Secure your seed.
— Posted on March 13th, 2024