One of the first words you’ll come across in the world of cryptocurrency is “wallet.” Traditionally, wallets are real things that you carry around with you and use to carry cash and cards. Wallets are used for a different thing in the crypto world, though: they hold the keys to your digital goods. It’s important to know about the different kinds of wallets if you want to keep your coin safe, especially when it comes to picking between “hot” and “cold” wallets.
We’ll go into more detail about what crypto wallets do and the main differences between hot and cold wallets in this blog. This will help you choose the type of wallet that works best for you.
What Are Crypto Wallets?
A crypto wallet does not actually hold bitcoin. No, it saves the “private keys,” which are unique, secret codes that show who owns digital assets on the blockchain. You need these keys to get to and manage your coin.
Crypto wallets are made to keep two main things in check:
- Security: Keeping your digital goods safe from people who shouldn’t have access to them.
- Usability: Making it simple to get to your money when you need it.
There are various kinds of cryptocurrency wallets to meet different needs. Hot wallets and cold wallets are the two main types. Since hot wallets are linked to the internet, they make it easier to access your money, but they also make you more vulnerable to online risks. Cold wallets, on the other hand, are not online and are designed to be as safe as possible.
Hot Wallets Explained
Hot wallets are made for people who need to get to their cryptocurrency often. These wallets can connect to the internet and make it easy to buy, sell, and send crypto.
What Is a Hot Wallet?
When you store cryptocurrency in a way that stays online, you’re using a “hot wallet.” People who sell or use crypto every day will love these wallets. Mobile apps, PC apps, and browser-based wallets are all types of “hot wallets.”
It’s easy to use a hot wallet, but that ease of use comes with some security risks. Hackers and malware are more likely to be able to get into hot wallets because they are always online.
How Hot Wallets Work?
Your secret keys are kept on internet-connected devices like computers and smartphones that work with hot wallets. This makes it easy for users to sign and send out deals. Cyberattacks are more likely to happen with these wallets, though, because the secret keys are kept on devices that are online.
Many hot wallets employ additional layers of security, such as:
- PIN protection: Requiring a personal identification number to access the wallet.
- Biometric authentication: Using fingerprint or facial recognition.
- Two-factor authentication (2FA): Adding an extra layer of security through verification codes sent to your mobile device.
Once a transaction is authorized, the hot wallet broadcasts it to the cryptocurrency network for verification.
Popular Hot Wallets
You can pick from a number of different hot wallets based on your needs:
- Mobile wallets: Cake Wallet, AQUA (bitcoin-only)
- Desktop wallets: Exodus, Sparrow (bitcoin-only)
- Browser-based wallets: MetaMask, Alby (bitcoin-only)
- Exchange wallets: Kraken, Coinbits (bitcoin-only)
Cold Wallets Explained
Cold wallets are designed to be safe, while hot wallets are designed to be easy to use. If you want to keep your secret keys safe from internet-based threats, you can use a cold wallet.
What Is a Cold Wallet?
Cold wallets, which are also called “cold storage,” are never tied to the internet. Because of this, cold wallets are the safest way to store large amounts of cryptocurrency for a long time. For investors who value safety over convenience and don’t need to access their funds often, cold wallets are the best option.
How Cold Wallets Work
Hardware wallets and metal wallets are two different kinds of cold wallets.
- Hardware wallets: These are physical devices designed to store cryptographic keys. They feature advanced security measures like PIN protection and can only be accessed when physically connected to a computer.
- Metal wallets: A metal wallet is a real thing, like a steel plate, that has the secret keys or seed phrases engraved on it. Metal wallets are often used to store crypto for long periods of time because they are very resistant to damage from things like fire and water.
Users must connect their cold wallet to a device that can sign transactions in order to get to their funds. This could be a hot wallet or a hardware wallet. This extra step may make spending more difficult, but it adds an extra layer of security by making sure your secret keys stay offline.
Popular Cold Wallets
These are some of the most well-known cold wallets:
- Hardware wallets: Ledger, Trezor, Passport (bitcoin-only), Bitkey (bitcoin-only)
- Metal wallets: Steel wallets from companies like Cryptosteel and Billfodl
Key Differences Between Hot and Cold Wallets
The main differences between hot and cold wallets are how easy they are to use, how safe they are, and how much they cost. These factors are broken down in more detail below.
Accessibility and Convenience
- Hot Wallets: If you sell or use crypto a lot, hot wallets are better because they are easy to get to. When you have a hot wallet, you can trade and receive cryptocurrency from anywhere with an internet connection. This makes them great for everyday use.
- Cold Wallets: Security is more important than ease of use with cold wallets. To get to your money, you have to do extra things, like connect a hardware wallet to your computer or read a metal wallet’s secret key. Cold wallets are best for storing things for a long time and are less useful for making quick purchases.
Security Features
- Hot Wallets: You can get hacked, phished, or infected with malware more easily with hot wallets because they are always online. But safe hot wallets use security features like two-factor identification (2FA) and encryption to lower these risks.
- Cold Wallets: Because they stay away, cold wallets are safer than hot wallets. If hackers get physical access to a hardware wallet, they can’t get to the secret keys because they are stored on a secure chip. Metal wallets are even more durable because they can’t be damaged by the elements.
Cost Considerations
- Hot Wallets: You can use a lot of hot wallets for free, like apps for your phone or on the web. Some, though, may charge fees for transactions or take a cut of the money you make from selling.
- Cold Wallets: Hardware wallets, which cost between $60 and $200, are the most expensive cold wallets. You can buy metal wallets or make them yourself. Prices vary based on the materials used and the level of craftsmanship.
Pros and Cons of Hot and Cold Wallets
It’s important to think about the pros and cons of both types of wallets before choosing one.
Pros of Hot Wallets:
- Convenient access: You can get to your cryptocurrency quickly and easily, which makes it great for everyday use.
- User-friendly: Most hot wallets have simple interfaces that are good for newbies.
- Integration with exchanges: A lot of hot wallets let you connect directly to cryptocurrency markets so you can trade quickly.
Cons of Hot Wallets:
- Security risks: Because hot wallets link to the internet, they can be hacked or phished.
- Third-party trust: To use many hot wallets, you have to trust a third-party provider to keep your secret keys safe.
- Device dependency: If you lose the device that holds your hot wallet, you may not be able to access your funds, especially if you haven’t saved them up properly.
Pros of Cold Wallets:
- Enhanced security: Since cold wallets are stored offline, hackers have a much harder time getting into them.
- Ideal for long-term storage: “Hodlers” who keep a lot of cryptocurrency for a long time will love cold wallets.
- Full control: Users have complete control over their private keys, without relying on any third-party service.
Cons of Cold Wallets:
- Less convenient: Using a cold wallet to spend money can take several steps, so it’s not good for everyday purchases.
- Upfront cost: Hardware wallets need a purchase at the start that some users may not be able to pay.
- Learning curve: It may take more technical know-how to set up and use a cold wallet than a hot wallet.
How to Choose Between Hot and Cold Wallets
Which one you choose (hot or cold) depends on your needs and how you usually use crypto. Here are some things to think about:
1. Frequency of Transactions
A hot wallet is probably the best choice for you if you buy or trade cryptocurrency a lot. Hot wallets are simple to use and let you get to your money quickly. A cold wallet, on the other hand, is better for long-term investors who want to keep large amounts of cryptocurrency safe.
2. Security Concerns
If you have cryptocurrency, security should be your top concern. If you are worried about possible internet threats, cold wallets are the safest way to store your money. But if you’re only selling small amounts and want to save time, a hot wallet with extra security features like 2FA and biometric authentication might be enough.
3. Crypto Holdings
If you’re in charge of a lot of cryptocurrency, cold wallets can give you peace of mind by keeping your funds safe offline. Hot wallets are better for keeping small amounts of money that you plan to use or trade often.
4. Cost and Investment
Since hot wallets are usually free, they are a good choice for people who are new to crypto. Cold wallets, which cost money up front, provide the highest level of security for people who want to keep large amounts of cryptocurrency safe.
Bottom Line
In the end, picking between hot and cold wallets comes down to how safe and convenient you want your wallet to be. Hot wallets let you get to your money quickly, making them perfect for traders and people who use crypto every day. Cold wallets offer the highest level of security, making them ideal for long-term investors and people who keep a lot of cryptocurrency.
Combining the two types of wallets might be the best choice for many people. You could use a “hot wallet” for everyday activities and a “cold wallet” to keep your crypto assets safe for a long time.
