Crypto experts have been widely advocating the use of offline crypto wallets amid an exponential growth in cyber crimes targeting the sector. Offline crypto wallets are those that are not connected to or reliant on the internet. Hardware wallets are the most common form of cold wallets, followed by paper wallets – that refer to literal paper pieces jotted with private key details.
New entrants into the crypto space usually sign up on centralized exchanges like Binance, Coinbase, and Kraken among others. These exchanges store the private keys to users’ crypto wallets within their ecosystems.
After major centralized crypto exchanges like ByBit, WazirX, and Nobitex suffered large-scale hacks, billions of dollars worth of user funds bled out and got displaced. Apart from the market imbalance these hacks caused, the incidents also caused major financial distress to those who lost their funds.
Amid these hacks, the phrase “not your keys, not your funds” gained popularity – through which, industry experts sent out the message that unless users do not hold their own private keys and stay reliant on exchanges to store them, their funds could be lost to theft or rug pull scams anytime.
Through this article, let us understand how hot wallet users can transition their funds to cold wallets without risking losing their funds.
The A-to-Z of wallet transition
Get the wallet: Purchase a hardware wallet that is equipped with a dedicated, tamper-resistant chip often rated EAL5+ or EAL6+ grade-wise. This makes the device protected against physical damages and prevents the private keys from being exposed on the web in case of an attack. Actively avoid purchasing third-party wallets from e-commerce websites.
Install companion apps: The brand of the wallet will often offer a corresponding app service to calibrate the wallet. Download the app and step-by-step follow the initiation process.
Set it up: The device, which usually resembles a pendrive, will require the users to generate a seed phrase ranging from 12 characters to 24 characters. This phrase must be written down on paper and secured in a safebox. Avoid storing the phrase digitally.
Generate, verify wallet addresses: The companion app with the hardware wallet, after being set up, will let users choose if they want to send or receive funds. It is extremely crucial for wallet holders to ensure that they provide the right wallet address with which they wish to facilitate a transaction.
Transfer from hot wallets: By this point, the hardware wallet is all set up and ready for use. To transfer funds from a hot wallet, enter it and punch in the hardware wallet’s address into the recipient tab. For the first transaction, transfer the network’s minimum amount to check if the transaction processes smoothly. The transaction could take up to a few minutes to be logged on the related blockchain. Once the transaction is complete, the hardware wallet’s app needs to be checked for confirmation.
After confirming the successful transaction, initiate a new transaction from the hot wallet and wire the remaining funds to the exact same cold wallet address. Upon this main transfer, the private key for these funds will be stored offline by the hardware wallet.
Risks involved
Hardware wallets need to be protected against physical damage and loss. It must be kept in a secure and private storage. Additionally, ensuring that the transfer addresses are accurate is crucial to keeping the funds safe during transfers.
The empty hot wallet, meanwhile, can continue to exist with zero balance much like several traditional bank accounts. A minimum balance could be maintained in these wallets to take care of the gas fees to process transactions.