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Hot Wallets vs. Cold Wallets

When storing your cryptocurrency, you want to keep it safe while also striking the right balance of functionality and security.

If you buy any amount of cryptocurrency and want to store it yourself, you must choose between storing it in a “hot” wallet, a “cold” wallet, or a combination of the two. A hot wallet is connected to the internet and may be vulnerable to online attacks, which may result in stolen funds, but it is faster and makes it easier to trade or spend cryptocurrency. A cold wallet is usually not connected to the internet, so while it is more secure, it is also less convenient. Should you use hot or cold wallets or a combination of the two? Continue reading to find out more.

Hot Wallets: Pros and Cons

Hot wallets are typically web-based wallets, mobile wallets, and desktop wallets. Web wallets are the least secure of the bunch, though all crypto hot wallets are vulnerable to online attacks.

The ease of use of hot wallets is one of their advantages. There is no need to switch between offline and online to make a cryptocurrency transaction because they are always online. Many people, for example, use mobile hot wallets to trade or buy cryptocurrency. It would be inconvenient to do so with a cold wallet. You’d need to find a device (typically a computer) to plug your cold wallet into, then transfer the required amount of cryptocurrency to a hot wallet before making your purchase.

Users who hold a large amount of cryptocurrency will not typically keep significant amounts of cryptocurrency in hot wallets. Although a hot mobile wallet is not the same as a traditional analog wallet, one similarity exists: carrying a large sum of money on your person is generally a bad idea. When your hot wallet’s balance falls below a certain threshold, you can send more crypto to it, just like you can withdraw cash from an ATM.

Most reputable exchanges keep the majority of their customers’ funds offline in a network of cold wallets, with a portion kept in hot wallets for withdrawals. If you’re storing large amounts of cryptocurrency online, do your homework on the exchange you’re using.

Cold Wallets: Pros and Cons

Cold storage wallets are generally quite secure. Stealing from a cold wallet usually necessitates physical possession or access to the cold wallet, as well as any associated PINs or passwords required to access the funds. The majority of hardware wallets are cold wallets that run on devices that resemble small to medium-sized USB sticks. Cold storage wallets can also be paper wallets, physical bitcoins, or a secondary offline computer used to store cryptocurrency. However, while these methods are still relatively secure, they have fallen out of favor and have been replaced by reputable, high-quality hardware wallets or very secure cold-storage options available on reputable exchanges.

Hardware wallets are built to be resistant to hacking. The funds stored on a hardware wallet cannot be stolen even when it is plugged into your computer or connected via Bluetooth, depending on the storage method. While technically connected to the internet, transactions are signed “in-device” and then broadcast to the network via your computer’s internet connection. This “signature” allows you to transfer ownership of a cryptocurrency transaction to the recipient. Because your private keys never leave the device, even if malicious malware on your computer tried to steal your funds by maliciously “signing” a transaction initiated in your hardware wallet, the transaction would fail because the signature was incorrect.

Because hardware wallets must be powered on and then connected to the internet, they are less convenient than hot wallets. Furthermore, while hot wallets are typically free, hardware wallets can range between $50 and $200. If you have more than a few hundred dollars in cryptocurrency, you should consider investing in a hardware wallet before buying more. It’s a small price to pay to protect yourself from the possibility of losing your money.

Best of Both Wallet Worlds?

Given the trade-offs associated with using either type of crypto wallet, a combination of cold and hot wallets is usually the best option. You want to find a happy medium between the convenience of a hot wallet and the peace of mind and security of a cold wallet. Many people will have multiple versions of each: an exchange account hot wallet, a mobile hot wallet, and a hardware cold wallet. Each cryptocurrency wallet can be used for a specific purpose, resulting in a balance of ease of use and security when using and trading cryptocurrency.

Another popular trend is to use a second phone solely as a mobile crypto-cold wallet. When using a cell phone as a cold wallet, you would only use it when making a transaction. The secondary phone, which is acting as a cold wallet, is then Bluetooth or WiFi connected to your primary phone, and funds are transferred to your hot wallet for the transaction. After the transaction is completed, the WiFi or Bluetooth connectivity is disabled, and the secondary phone is turned off.

Many people find this more convenient than a hardware wallet, and it also provides the peace of mind that comes from knowing your cryptocurrency is safe and secure. This method of using a secondary phone as a cold wallet is more secure than a standard mobile hot wallet but less secure than a hardware cold wallet. This method is typically used to store a small amount of cryptocurrency.

Find the Combination that Works For You

Storing cryptocurrency, like any valuable asset, necessitates a personal decision about how to best safeguard it while striking the right balance between functionality and security.

In recent years, there has been a sort of convergence — hot wallets are becoming more secure, while cold wallets are becoming more convenient. Those who prefer to keep personal custody of their own cryptocurrency are increasingly storing funds in hardware cold wallets. Those who use a crypto exchange wallet to store the majority of their funds must use an exchange with a strong security reputation and adhere to its security recommendations.

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