Key Differences Between Hot Wallets & Cold Wallets

Key Differences Between Hot Wallets & Cold Wallets

A cryptocurrency wallet is a method of storing cryptocurrency – hot and cold refers to the underlying storage method of the data. For most cryptocurrency exchanges, there are both hot and cold wallets. 

Many crypto veterans will prefer to use cold wallets to store their crypto due to the superior safety features, however, cold wallets do have some drawbacks.

In this article, we will be explaining the key differences between hot and cold wallets and analysing which might be better for you.

What is a crypto wallet?

A crypto wallet is a digital tool that allows users to store their cryptocurrencies. As cryptocurrencies are purely digital, the actual ‘storage’ is in the form of keys.

These cryptographic keys are at the heart of cryptocurrency, and are what make them such a secure form of money.

How crypto wallets work

Crypto wallets work with two ‘keys’, which are essentially account numbers. There is a public key and a private key.

The public key is your account number that you will use to receive cryptocurrencies and can be sent around as you like. The private key is like the password to your account – it must be kept secret at all times (unless you want other people to be able to access your account).

There are two different types of cryptocurrency wallets: hot wallets and cold wallets. Here are the key distinctions between the two.

What is a hot wallet?

A hot wallet is a cryptocurrency wallet that is connected to the internet. This means that cryptocurrencies can be exchanged quickly and easily.

Hot wallets are best suited for day-to-day transactions such as trading. They are often available as apps or as desktop wallets, or simply as another online service.  

Some examples of hot wallets include:

• Coinbase Wallet
• Trust Wallet
• Best Wallet
• OKX
• MetaMask

Advantages of hot wallets

Hot wallets are convenient as they are easy to set up and to use. Users can set up a hot wallet at any time and start trading their crypto straight away as long as they have access to the internet. For many beginner crypto users, their cryptocurrencies will be held in a hot wallet.

Transactions are also quick due to the permanent access to the internet.

Disadvantages of hot wallets

As the information to the wallet is permanently online, hot wallets are more vulnerable to hacking and security breaches. The online nature of the wallet also means that if you lose internet connection or there is some kind of disconnect, then you will lose access to your cryptocurrencies.

There is also the issue of autonomy, as many cryptocurrency users feel that the nature and philosophy of crypto is to have personal control over your money. A hot wallet is often owned by a centralised exchange (CEX) and therefore is technically in the hands of a central organisation, much like a central bank.

What is a cold wallet?

A cold wallet is a cryptocurrency wallet that is not connected to the internet. This means that cryptocurrencies can not be transferred as quickly or as easily.

However, cold wallets are for long-term storage and provide a much more secure method. The usage of cold wallets is often simply referred to as cold storage. The private key that is used for the cryptocurrency wallet is transferred to a device that is offline. This means that the data is completely inaccessible except by the user.

Cold wallets can come in multiple forms. This can be broken down into two categories: custodial and non-custodial.

Non-custodial is where a user will store the information themselves, either in a separate USB drive or a paper wallet, which is a literal paper printout of the private and public keys.

Custodial storage is where users will go to a crypto custodian and use their services to store cryptocurrency. These trusted third-party companies specialise in storing digital assets securely.

Some examples of cold wallets include:

• Ledger
• KeepKey
• Trezor
• Keystone
• ColdCard

Advantages of cold wallets

As cold wallets are entirely offline, they are completely immune to cyber attacks. Unless an attacker could obtain access to the cold wallet in the physical world, there is simply no way for them to access it.

For users storing their crypto for a long time, cold wallets are the ideal choice. You can also still stake your cryptocurrency in a crypto liquidity pool, so you can still earn ‘interest’ on your stored crypto.

Disadvantages of cold wallets

Cold wallets are more complicated to understand and set up. It is also much more difficult to move cryptocurrency in and out of a cold wallet – a cold wallet’s purpose is primarily storage, so will not cater to quick transactions.

Custodian cold wallets are also not free and can be expensive in the long run, compared to hot wallets which are free. Not all cryptocurrencies can be stored either, so if you are trading some new altcoins, you may be restricted.

The future of crypto wallets

Many in the cryptocurrency world will use a combination of both hot and cold wallets. Hot wallets are ideal for making trades on a day-to-day basis, and cold wallets are ideal for storing crypto in the long term.

As the popularity of crypto grows, it is likely that new products are on the horizon that cater to both the needs of a hot and cold wallet.

Businesses are also starting to accept cryptocurrency as a form of payment, so accommodating this in the product offering will also be a huge benefit.

Conclusion

Many are also choosing to make their platform decentralised, as well as their cryptocurrency storage method. If you are looking for the same, then you can also try Uniswap or Sushi, which operate as decentralised exchanges (DEXs), where there is no central authority in control of the cryptocurrency.

For more articles like this, make sure to stay up to date with our crypto insights.

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Author

Caleb is a financial copywriter with a specialisation in fintech and forex. Former copywriter at Barclays and Paysafe. Contributing writer for LiquidityFinder. You can message Caleb here.