What To Choose Between Hot And Cold Wallets And Why

The history of cryptocurrencies dates back to as long as the 80s when they were referred to as cyber currencies. They only started gaining attention in 2008 after Bitcoin came around. Since then, the crypto space has seen massive advancement and the advent of newer technology continues to revamp the space.

These days, at least 5 out of 10 people hold cryptocurrencies. A handful of people that do not already hold cryptocurrencies have the intention to do so. Cryptocurrencies have grown not only in usage but also in acceptance. Companies around the world already accept them as a means of payment. To hold cryptocurrencies, one needs a cryptocurrency wallet. This is where one’s crypto assets are saved or stored. Crypto wallets are like banks that hold money and other valuable items and provide these items on demand of their owners.

A cryptocurrency wallet is an app that allows cryptocurrency users to store and retrieve their digital assets, according to Bankrate.com. As with conventional currency, you don’t need a wallet to spend your cash, but it certainly helps to keep it all in one place. Crypto wallets store your private keys, keeping your crypto safe and accessible. They also allow you to send, receive, and spend cryptocurrencies like Bitcoin and Ethereum, Coinbase explains.

In other words, crypto wallets are a prerequisite to owning and using crypto-wallets. But there are two types of crypto wallets depending on the purpose of holding crypto assets and how you plan to use them. We have cold wallets and the more popular hot wallets.

What is a cold wallet?

A cold wallet is arguably the safest way of keeping crypto assets. They are also known as offline or hardware wallets. This type of wallet isn’t connected to the internet and has a lesser risk of being stolen from or hacked. According to Investopedia, these wallets store a user’s address and private key on something that is not connected to the internet and typically come with software that works in parallel so that users can view their portfolio without putting their private key at risk.

Although this type of wallet requires more expertise to set up and use, it is known to be more secure than its counterpart – hot wallets.

What is a hot wallet?

Unlike a cold wallet, a hot wallet is completely dependent on the internet. Also referred to as online wallets, they run on devices such as smartphones and computers that require the internet to connect. Because they require access to the internet to generate private keys needed to operate, they are susceptible to hacks and cyber thieves looking to steal these assets. What this means is that compared to cold wallets, they are less secure. They are, however, easier to set up and use – they require little or no expertise. They are super convenient and can be accessed anywhere and everywhere using any device as long as it is connected to the internet.

Differences between hot and cold wallets that should help you make your decision on which to use

We’ll be explaining the differences between hot and cold wallets such that you’ll be able to make informed decisions whenever you decide which to use when storing your crypto assets.

Mode of operation

Hot wallets are completely dependent on the internet and internet-connected devices. Users of this type of wallet can only access their wallets using their smartphones, computers, and any other devices that can connect to the internet. On the other hand, cold wallets do not need the internet or access to it via smartphones and other devices to operate. They are designed to be completely independent of the internet.

Storage of private keys

A private key is a piece of information, usually, a string of numbers or letters that are stored in a file, which, when processed through a cryptographic algorithm, can encode or decode cryptographic data. Hot wallets generate private keys and they are stored on the internet (which makes them vulnerable). On cold wallets, private keys are stored and used off the internet. They store users’ addresses and private keys on something that is not connected to the internet and typically come with software that works in parallel so that the user can view their portfolio without putting their private key at risk.

Associated risk

Hot wallets face the risk of being attacked by hackers and cybercriminals as they are completely dependent on the internet for all their operations. Cases of cyber-attacks on accounts of crypto owners have been heard of in the past. For instance, last year Poly Network lost over $600 million in what was tagged the biggest crypto hack of all time. Other crypto platforms have also experienced hacks across their platforms. Crypto.com had 400 accounts hacked and assets worth $33 million were stolen early this year. Wormhole, another platform lost crypto assets worth $320 million to hackers, and a lot more.

Cold wallets, on the other hand, are more secure than hot wallets. They are not connected to the internet and have less risk of cyber attacks like hot wallets. Cold wallets are physical items and can be kept more securely than hot wallets that depend on the internet to operate. They usually look like USB drives and can be kept securely by owners.

This goes to show that even with the advanced security and measures put in place, hot wallets are still prone to hacks, making cold wallets safer. Cold wallets are designed to be immune to hacks.

Storage of funds and usage

Hot wallets are used to store smaller amounts of crypto assets compared to cold wallets. They can be used for everyday transactions while the bulk of one’s crypto assets may be saved somewhere on a cold wallet. Say you have to make a ‘small’ crypto payment; you can easily do that via your hot wallet accessible through smartphones and computers that can easily be carried around.

Cold wallets, on the other hand, are not designed to hold smaller amounts of crypto assets. They are like a more secure system to hold the bulk of crypto assets and are not designed to be used every day. Cold wallets are, therefore, inconvenient to do everyday crypto transactions such as transfers and trade. To do that, one would need to find a device to connect his or her cold wallet and then transfer the required asset to his or her hot wallet.

In other words, hot wallets are like checking accounts, while cold wallets are like fixed deposit accounts or investment portfolios. While hot wallets are useful for everyday transactions, cold wallets are more preferred for storing bulk crypto assets for longer periods.

Deciding what type of wallet to use depends hugely on factors such as the number of crypto assets, what you plan to do with these assets, what you find convenient, and other factors. Some users (and exchange platforms) use a combination of both cold and hot wallets based on the combination of transactions they do or plan to do. Some individuals transfer specific amounts they intend to use for a long time from their cold wallet to their hot wallet. This keeps the bulk of their assets safe while they use a smaller percentage to go about their daily businesses.