Hot and cold wallets are the main means of storing and exchanging cryptocurrencies and tokens. It is necessary to differentiate between a hot wallet and a cold wallet to determine which works best for you.
A hot crypto wallet is connected to the internet, while a cold wallet is completely offline, usually linked and accessed through hardware devices. The differences between the two types of wallets allow you to discover your ideal wallet. Finding the best wallet is subjective and should be based on what fits your needs and gives you the most flexibility.
Key learning points
- Hot and cold wallets are the main way to store and exchange cryptocurrencies and tokens.
- Hot wallets are suitable for the internet and online, while cold wallets are offline and take the form of a physical device, such as a USB stick.
- The main advantage of using a hot wallet is convenience: it can provide ease of use and a well-designed interface.
- A cold wallet offers more security benefits because it is less possible to hack and therefore less vulnerable to the loss of digital assets.
Hot Wallets explained
Hot crypto wallets are connected to the internet. They offer a range of functions from storing, sending and receiving tokens to managing and viewing all available tokens in one place. Hot wallets can be accessed from internet-enabled devices such as mobile phones, tablets, and laptops. Hot wallets have been widely used due to the ease of transferring and receiving funds on demand.
The way a crypto wallet works is simple: it stores the private keys of your cryptocurrencies after you have bought or mined them. When a cryptocurrency transaction needs to be completed, private keys are required.
In a cryptocurrency wallet, two key components keep your digital assets safe: the private and public keys, made of a cryptographic sequence of letters and numbers responsible for successful crypto transfers to your wallet.
Private keys are designed to verify ownership of a token. You cannot exchange your cryptocurrency without them. Think of them as the passwords you need to complete a crypto transaction.
Public keys, on the other hand, are cryptographic letters and numbers that allow you to send crypto to others. They are similar to an account username.
Types of Hot Wallets
Hot wallets come in different types and serve different purposes. Some are used as mobile applications, web-only wallets or even ecosystem-specific wallets. The list is extensive and using the wallet depends on a user’s needs.
Some of the most common examples of hot wallets include Coinbase Wallet, MetaMask, Trust Wallet, Exodus Wallet, Robinhood, Edge, and more.
For example, MetaMask is an ecosystem-specific wallet that supports Ethereum-based tokens. Trust Wallet is non-custodial and more inclusive, supporting up to 65 cryptocurrencies and tokens. It is available for web and mobile software. Exodus Wallet is a feature-rich software wallet that supports more than 260 cryptocurrencies.
Other reasons why you might choose a specific hot wallet type include design, cost, and even integration with certain crypto exchanges. It is important to do research to find the best wallet for an activity.
Hot Wallet Pros and Cons
Internet based so they provide easy access and perform various activities efficiently and from a range of devices
Primarily free to use; some also require paying interest on the stored crypto
Unencrypted hot wallets are vulnerable to hacks because they are web-enabled. Unauthorized parties target these because they contain both public and private keys.
Some are only accepted and accessible in certain locations due to legal restrictions
Cold Wallets explained
Cold wallets differ from hot wallets in that they are not suitable for the internet. Therefore, they are less susceptible to hacking. This fact is why cold wallets are quickly gaining acceptance and popularity following the implosion of FTX, a major centralized crypto exchange that collapsed in November 2022, went bankrupt and reported an alleged hack that caused many users’ digital assets to freeze or disappear . .
These wallets come as hardware devices, usually like a USB stick, costing $50 to $200. Hardware wallets and paper wallets are examples of cold storage wallets.
An additional layer of security comes from the fact that cold wallets’ private keys are completely offline – compared to hot wallets – and are required to complete a crypto exchange from within the wallet.
Exchanging crypto from a cold wallet starts online, but one must sign out digitally offline to complete the transaction.
Types of Cold Wallets
Cold wallets also come in different types; some of the most common examples are:
- Paper wallet: This is a document with public and private keys printed on it. There is also a Quick Response (QR) code embedded in the paper to facilitate crypto transactions. The downside is that it becomes unusable once the document is damaged.
- Hardware wallet: This is a ubiquitous cold wallet type. They are offline devices used to store private and public keys. They come in the form of USBs or smart cards, without which you would not be able to access your cryptocurrency. Commonly available hardware wallets include Trezor, Ledger, and KeepKey.
- Deep cold storage: This type of wallet takes extra steps to make accessing your wallet very difficult. An analogy would be to keep your cold wallet in a physical vault or vault at a bank. These wallets are designed for people who need minimal access to their wallets.
Other types of cold wallets available are sound wallets and offline software wallets.
Cold Wallet pros and cons
Are warm wallets better than cold wallets?
There is no right answer to this question. Your needs and preferences determine which wallet is best for you. The hot wallet is suitable for someone who regularly makes crypto transactions. A cold wallet is ideal when a crypto holder does few transactions.
Which is more secure, a hot wallet or a cold wallet?
Hot wallets are less secure than cold wallets because your private and public keys are connected to the internet and are therefore more vulnerable. With a cold wallet, on the other hand, you have total control over your private and public keys.
Can I use both a hot and a cold wallet?
Yes, you can use both. Ideally, that approach is the best way to go. To do this, keep a fraction of the tokens you rarely use in a cold wallet and the rest in a hot wallet. This way, you better protect your digital assets and enjoy the flexibility that comes with maintaining both types of crypto wallets.
Why are hot wallets free and cold wallets not?
Not all crypto hot wallets are free; some charge interest on every transaction made. Cold wallets are paid in the price of the physical or hardware devices used.
It comes down to
Hot and cold crypto wallets each have specific benefits. If you are looking for convenience, choose a hot wallet; if you are looking for more security, a cold wallet is the way to go. However, it is good practice to use both types of wallets, to recognize the flaws in both and to take preventive measures to counter them.
It is best to do some research before choosing any type of crypto wallet. That way you are ready for an optimal experience when storing and trading your digital assets.