When you are trading in traditional financial markets such as Forex or stocks, you need to have a bank account in order to move money around. When it comes to cryptocurrencies, since they are decentralized digital assets, they are not a part of the traditional banking system, and in order to store, transfer, and receive these cryptocurrencies, you will need to have a crypto wallet.
But cryptocurrency wallets come in different shapes and forms. There are custodial and non-custodial wallets, as well as hot and cold wallets, and today we will be taking a look at the later ones. It is very important to know the difference between these hot and cold wallets, and we will be explaining what they are and why they are important.
What are crypto wallets in general
Before we take a look at the differences between hot and cold wallets, let’s take a look at crypto wallets in general. There is a misconception that crypto wallets actually store your cryptocurrencies, but in reality, cryptocurrencies never leave the blockchain, and technically crypto wallets don’t hold these tokens inside of them. Every single crypto wallet has a private key assigned to it, and whenever you receive cryptocurrencies on your wallet, using a Public Key, the blockchain allocates these tokens to your private key, and that private key is the proof of ownership of these tokens. So whenever you want to transfer your money out of the wallet, your wallet uses this private key to prove the ownership of the tokens and instructs the blockchain where to send them.
Considering that each crypto wallet has one private key that can never be changed, protecting this private key should be a top priority. If someone were to gain access to your private key, not only will you lose all of the cryptocurrencies in the wallet without any possibility of getting them back, but you will also need to make a new wallet as there is no way to change the private key, and once more tokens get added to the same wallet, the person that has access to the private key will also have access to these funds as well. The protection strength of these keys is what differentiates hot and cold wallets. Let’s take a look at each of these wallets in more detail.
Hot Crypto Wallet
Hot wallets are the most common cryptocurrency wallets out there. These are wallets that are always connected to the internet and they come in the form of software. Every crypto wallet that you add as a browser extension or download as a piece of software is a hot wallet. Having this type of wallet exposes you to the risk of being hacked and your funds being stolen. If you were to accidentally download malware or give someone access to your computer in some way, they can easily access your crypto wallet and the private key, meaning they can easily steal your crypto. But this does not mean that it is not a useful wallet or that you should not use it. While being connected to the internet all the time exposes your wallet to hackers, it also brings the benefit of being effective and comfortable to use whenever you need it. If you need to deposit crypto on an exchange, or any other website that deals with crypto, you can do so by simply pressing a few buttons. There are also websites, where you need to have an account, and most crypto-related websites simply let you connect your wallet to the website and create the account that way. When you do so, using this website in combination with your wallet becomes much easier.
Cold Crypto Wallet
On the other hand, cold wallets are hardware-type wallets that maximize the security of your assets, by being off the grid when you are not actually making any transactions. These cold crypto wallets come in many different shapes and forms, some as flash drives, some as external storage, and there are even software cold wallets that you download on a phone and you use that phone only for making transactions and nothing else at all. These cold wallets maximize security since they are not being used and connected to the internet, no hacker or scammer will be able to gain access to this wallet and its private key. But having this level of security comes with downsides. First of all, since these are hardware-type wallets, if you are someone that makes frequent crypto transactions, you would need to have this wallet with you at all times, so if you are not at home and want to send some crypto somewhere and you don’t have this wallet with you, there is no way to make a transaction. There is also a risk of losing this wallet altogether since most come as USB sticks and are very small.
Which of these two should you use?
Now that you know exactly what these cold and hot crypto wallets are and what their strengths and weaknesses are, let’s consider exactly which of them should you use. We would suggest that you have both a hot and cold wallet and use each of them as you see fit. The choice should come down to personal preference and how you are going to use it. If you are someone that trades with cryptocurrencies quite frequently and does not hold very large quantities of tokens at all times, then a hot wallet will fit you better. While hot wallets lack a bit of security, they are still very secure wallets and with basic safety measures in place, your funds will be kept safe. So for traders and people who make frequent transactions, hot crypto wallets bring comfort and efficiency since you can use them whenever and wherever you want as long as you have your phone with you.
On the other hand, if you are a long-term crypto investor or planning to invest a lot, then cold wallets should be your choice. Cold wallets bring the maximum possible security an individual can put on their wallets. Since cold wallets are hardware wallets that are not connected to the internet at all times, hacking into them is pretty much impossible. So if you plan on investing in crypto and holding assets for quite some time, then just putting them in a cold wallet and storing this wallet in a safe place will be the best plan of action. These crypto wallets can be purchased online from many different providers, but make sure to never buy them from a shady provider or a random person. There is a possibility that these sellers might have installed malware inside of this wallet and they might be able to steal your funds.
So in the end it comes down to personal needs and preferences, this is why understanding hot and cold crypto wallets is important.
FAQs on cold and hot crypto wallets
Which is more secure, a hot or cold crypto wallet?
When talking about pure security, cold wallets are the most secure crypto wallets out there. These wallets come in the form of hardware and unless you have it plugged into your computer, they are off the grid and away from potential hackers, making them the most secure crypto wallets.
Can you have hot and cold crypto wallets?
Absolutely. This is the best way to approach crypto wallets in general. If you have big crypto investments and you also use crypto frequently, you can keep the majority of your investments in a cold wallet, and use a hot wallet for other activities such as trading and making other sorts of transactions.