Hot Wallet vs. Cold Wallet: An Overview
Hot wallets are internet-connected tools that allow users to quickly access and trade cryptocurrencies, making them ideal for frequent transactions or trading. Cold wallets are offline storage devices, such as hardware or paper wallets, that provide greater security by keeping crypto assets safe from online threats. Hot wallets offer crypto investors convenience for daily use, while cold wallets are best for long-term storage of larger holdings.
Key Takeaways
- Hot wallets are internet-enabled and used primarily for transactions, while cold wallets are offline and used for secure storage.
- Cold wallets offer enhanced security since they are not connected to the internet, reducing hacking risk.
- Hot wallets are accessible from various devices such as phones, tablets, and laptops, facilitating easier access to cryptocurrencies.
- Common cold wallet types include hardware devices resembling USB sticks and paper wallets with printed keys.
- Cold wallets need to be transferred to a hot wallet to complete a cryptocurrency transaction.
Understanding Hot Wallets: Features and Uses
Hot wallets are software that stores your private keys on a device connected to the internet. They offer a series of features, from storing, sending, and receiving tokens to managing and viewing all your available tokens in one place.
Hot wallets are accessible from internet-enabled devices such as cellular phones, tablets, and laptops. They have been widely adopted by cryptocurrency users because they are an interface that makes it easier to transfer and receive cryptocurrency.
Exploring Cold Wallets: Security and Storage Options
Cold wallets differ from hot wallets in that they don’t have a connection to another device or the internet. Hence, they’re less susceptible to hacking. This makes them a popular method for storing crypto keys.
These wallets usually come as hardware devices that look like USB sticks and cost between $50 and $200. Hardware and paper wallets are examples of cold storage wallets.
An added security layer stems from the fact that the private keys in cold wallets are entirely offline—compared with those of hot wallets—and must be transferred to a hot wallet to complete a crypto exchange.
Types of Hot Wallets: Choosing the Right Fit
Hot wallets come in different types and have various purposes. Some are mobile applications, web-only wallets, or even ecosystem-specific wallets. The list is extensive, and wallet usage depends on a user’s needs.
Some of the more common hot wallets include:
- Coinbase Wallet: Specific to the Coinbase exchange
- MetaMask: An ecosystem-specific wallet that supports Ethereum-based tokens.
- Trust Wallet: A noncustodial and more inclusive wallet supporting over 300 cryptocurrencies and tokens. It is available for web and mobile software.
- Exodus Wallet: A software wallet with many functions that supports hundreds of cryptocurrencies.
Other reasons you might choose a specific hot wallet type include design, fees, and even integration with certain crypto exchanges. It is essential to research wallets to find the best one for an activity.
Types of Cold Wallets: Secure Your Assets
Cold wallets are available in different types; some of the more common examples include:
- Paper wallet: This is a document that has public and private keys printed on it. You can also print a quick response (QR) code on the paper to facilitate crypto transactions. The downside is that you can easily lose access to your crypto if the document is damaged.
- Hardware wallet: Offline devices used to store private and public keys. They usually look like a thumb drive, are smart cards, or might even look like a smartphone. Commonly available hardware wallets are Trezor, Ledger, and KeepKey.
- Deep cold storage: This isn’t necessarily a wallet, but rather a technique. It involves extra steps to make access to your wallet very difficult. For instance, you might keep your cold wallet in a physical vault or a safe deposit box at a bank. Deep cold storage is for those who don’t need to access their crypto often.
Important
Hardware wallets are not always cold wallets, so make sure you don’t assume one is before purchasing it.
Wallet Keys: Securing Your Digital Currency
There are two key components in a cryptocurrency wallet: the private and public keys. These keys are made up of a string of letters and numbers.
The way a crypto wallet works is straightforward: The public key is your wallet’s address. You can think of public keys as similar to a bank account number, where transactions are sent to and from.
The wallet holds the private keys to your cryptocurrencies after purchasing or mining them. When a cryptocurrency transaction needs to be completed, private keys are required.
Private keys are designed to verify the ownership of a token. Without them, you can’t use your cryptocurrency. Think of them as the passwords you need to complete a crypto transaction.
Is Coinbase a Hot or Cold Wallet?
Coinbase offers a hot wallet for users and custodial cold storage for customers who are not comfortable storing their keys.
Are Cold Wallets More Secure Than Hot Wallets?
As far as being hacked through a connection to the internet, yes. However, cold wallets can be lost, stolen, or damaged. Some “cold” wallets have Bluetooth or wireless connections that can accidentally be left on, require software to be installed on a device, and even have apps you need to install. The more convenient a storage method is and the more features it has, the less secure it is.
What Are the Advantages of a Cold Wallet?
The primary advantage is that a cold wallet keeps someone from remotely stealing your keys because there is (or should be) no connection.
The Bottom Line
Hot wallets provide you with easy access and convenience to your crypto, giving you the ability to execute frequent transactions or trades. Cold wallets promise strong security advantages because they store your tokens offline, keeping them safe from hackers and online threats. Many investors use both to balance the benefits of both, keeping most of their assets in cold storage while using a hot wallet for everyday activity.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.