Crypto

Not sure how to store your crypto? Should you go cold or hot? You've come to the right place! Here, we explain the difference between hot and cold wallets.

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One of the first questions that beginner crypto users may ask is where to store your precious digital coins. The issue may be rather challenging. The diversity of options that are now available in the market can be confusing, while not taking appropriate security measures may potentially result in the loss of your funds, with no chance of recovery.

There are two basic storage methods at the disposal of users: hot, or cold wallets. Depending on your situation, and at different times, one type of wallet may be more appropriate for you than the other. 

 is a piece of software designed for storing cryptocurrencies. Though it is named a “wallet”, it isn’t a wallet in a literal sense. 

A crypto wallet stores public and private keys that determine each unique wallet. The software generates the data that helps users to manage their own digital assets, and send and receive cryptocurrencies through blockchain transactions. When transfering cryptocurrencies, a user has to provide a digital signature that is generated mathematically with the help of a private key. The signature is not valid if the provided key is wrong.

The public key is the address that you can freely share with other participants of the network to receive funds as this information doesn’t provide access to the third party to your wallet. The situation is different with a private key.

The private key is a succession of symbols that serves as a secret code providing the access to the cryptocurrency. With the loss of a private key, you lose access to your crypto wallet as well as all the funds you store there with no chance of recovery. There is no third party to help a cryptocurrency holder to restore access as it happens in a bank, for instance, or with any other centralized payment service.

Protecting a private key is essential for the security of your funds. You may take full responsibility yourself and implement all the possible precautions, or you may entrust your funds to a centralized service. This is the key aspect that differentiates cold and hot wallets.

A hot wallet is an online wallet that is used for storing and managing cryptocurrencies. In the early years of Bitcoin when it was just created, this was the only option available for cryptocurrency enthusiasts and adopters.

Hot wallets are provided online via special platforms which offer services for storing crypto. In this case, users have to entrust both their private keys to the service. Hot wallets can be found on numerous cryptocurrency exchanges offering this service for the convenience of users. Thus, members of the platform get wallets by default after they sign up.

The following types of wallets fall under this category:

Hot wallets can be non-custodial or custodial depending upon the policy of the service. Non-custodial wallets provide users with the possibility to control their private keys. With custodial wallets, on the contrary, the private keys are controlled by a third party. 

This brings on the following question: are hot wallets safe? Generally yes, but there is the potential of hacks, which could result in users losing their funds. Therefore, for long-term investors, who are holding their funds, hot wallets might not be the best option.

Despite reduced security, there are several situations when a hot wallet is the best option, so there’s no reason to give up on them. Here are some of the most popular use cases:

The convenience of use is indisputable in many aspects. With that said, hot wallets come with the following advantages:

Though hot wallets are a preferred choice for millions of users thanks to their convenience, the option comes with some serious drawbacks:

The key difference of a cold wallet compared with a hot one is that it is not connected to the internet. This characteristic turns cold wallets into the most secure storage options, as it makes them unreachable for hacking attacks and malware. The connection is required only during transactions. 

A cold wallet most often comes in the form of a physical device resembling a flash drive that should be plugged into the computer to access the funds. Are cold wallets safe? If we talk about hacker attacks, then the answer is obviously positive. Even when a cold wallet is connected to the internet, it’s almost impossible to steal funds as the signing of transactions is done in-device. However, it may still be stolen if thief gets physical access to the device and the private key. For this reason, it’s recommended to store cold wallets as securely as possible.

A cold wallet is usually applied for storing digital assets on a long-term basis. This is a reliable and secure solution for those who move their cryptocurrencies around often. Therefore, it may be best for long-term investors to resort to this medium to store their cryptocurrency funds. 

The two most popular types of cold wallets include hardware and paper wallets. 

Hardware wallets are specifically designed physical devices that hold public and private keys in a digital form. There are several popular hardware wallets offered in the market such as Ledger Nano X, Ledger Nano S, Trezor, KeepKey, and others. Their cost usually varies between 60 and 200 USD.

If you look for a free alternative, paper wallets may be a solution. To use a paper wallet, you should have its print-out on a piece of paper and keep it in a secure place. In terms of security, it is considered to be an obsolete method now, as it is not that reliable in comparison with other options. Paper can be easily damaged and destroyed. Besides, it’s necessary to be tech-savvy to use this storage method correctly. 

Some people use reserve mobile devices as a cold storage device, turning them on for transactions only. During the transaction, the phone must be connected to the primary phone via wifi or Bluetooth to transfer funds from it to your hot wallet. Once the transaction is complete, the reserve phone is disconnected and turned off again to keep your digital assets safe. Old laptops may serve in the same fashion, too.

Security is the primary feature that distinguishes a cold wallet from its hot alternatives. It is not connected to the internet, therefore only the wallet owner has access to the data contained in it. With that said, the main benefits of cold wallets include:

Despite advanced security, cold wallets feature many drawbacks that prevent their widespread adoption.

Though the number of drawbacks exceeds the number of advantages, cold wallets still remain the best option for storing crypto long-term due to the enhanced level of security they provide.

The choice of a wallet depends upon the particular circumstances and activities of cryptocurrency holders. If you are a cryptocurrency newbie that requires the convenience of use, a trader that needs fast access to your funds, or if you simply pay with crypto on a daily basis, the hot wallet may well be the best option for you.

However, if you are an investor who is keen on storing crypto long-term and values security above all other features, then a cold wallet is probably better because of its increased level of safety.

It is important to think through your crypto goals and choose the type of wallet that fits your requirements best.

Crypto Wallet: Hot Wallet vs. Cold Wallet

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