Hot Wallets vs Cold Wallets – What’s the difference?
When storing your digital currency, you want to safeguard it while finding the right balance between functionality and security.
Hot Wallets: Pros and Cons
Mobile Wallets, desktop wallets, and web-based wallets are all typically hot wallets. Among them, web-based wallets are the least secure, though all the digital currency hot wallets are vulnerable to online attacks.
The major benefit of hot wallets is convenience since they are permanently online, there is no need for a transition between offline and online for a digital currency transaction. For example, several customers use mobile hot wallets to buy or sell with digital currency. The same customer would find it inconvenient to make the same trade using a cold wallet. It would require a device (typically a computer) in which to plug a cold wallet, then move the requisite amount of Digital Currency to a hot wallet, and then make the purchase.
Customers who hold a large amount of digital currency typically won’t keep that amount in hot wallets. Although a hot mobile wallet is not the same as a traditional analog wallet, one similarity holds, for example, it is generally not recommended to keep a lot of cash in your traditional wallet. Just like you can withdraw cash from an ATM, you can send more digital currency to your hot wallet when the balance gets low.
Most renowned exchanges, like Coinbase Crypto Exchange, Kraken Digital Asset Exchange, and Binance Exchange, store a high percentage of their customers’ funds offline in a matrix of cold wallets and also keep a certain amount needed for withdrawals in hot wallets.
Cold Wallets: Pros and Cons
Generally, cold storage wallets are quite secure. Stealing from a cold wallet would require physical possession of or access to the cold wallet, as well as access to any associated PINs or passwords that must be used to access the funds. Most hardware wallets are cold wallets and work on devices that look like small to a medium-sized USB devices. Paper wallets, physical bitcoins, or a secondary offline computer used to store Digital Currency are also some of the cold storage wallet options. However, while still fairly secure, these methods have gone out of favor due to security issues and have been replaced by high-quality hardware wallets or very secure cold-storage options available on reputable exchanges.
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Hardware wallets are developed to be immune to hacking and stealing. Even when a hardware wallet is plugged into your computer or connected via Bluetooth, depending on the storage method, the funds stored on the drive are difficult or even impossible to steal. While technically connected to the internet, the signing of transactions is done “in-device,” and only subsequently broadcast to the network via your computer’s internet connection. This “signature” lets you assign ownership to the recipient of the Digital Currency transaction. Because your private keys never leave the device, however, even if some malware on your computer tries to steal your funds by maliciously “signing” a transaction initiated in your hardware wallet it would not match the signature and hence the transaction would not go through.
Hardware wallets are less fitting than hot wallets because they must be powered on and then connected to the internet. Also, while hot wallets are usually free, hardware wallets can cost you between $50 and $200. If you have more than a few hundred dollars in digital currency, you may want to invest in a hardware wallet before purchasing more. It’s a small price to pay to keep yourself secure from the fear of losing your funds.
Best of Both Wallet Worlds?
Given the pros and cons of using either type of wallet, a combination of cold and hot wallets is ideal in any situation. You should aspire to strike a balance between the accessibility of a hot wallet, and the peace of mind and security of a cold wallet. Many users will end up with several versions of each: an Exchange Account hot wallet, a mobile hot wallet, and a hardware cold wallet. Each Crypto Wallet can be used for a specific purpose, thus creating a balance between ease of use and security when using and trading digital currency.
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Another popular trend is using a secondary mobile phone that functions only as a mobile digital currency cold wallet. When using a mobile phone as a cold wallet, you would only turn it on when you want to make a transaction. The secondary phone acting as a cold wallet is then connected to your primary phone via Bluetooth or WiFi and funds are transferred to your hot wallet for the transaction. After the transaction, the WiFi or Bluetooth connectivity is turned off and the secondary phone is shut down.
Many find this more convenient than a hardware wallet, while also offering the peace of mind that comes with knowing your Digital Currency is safe and secure. This method of using a secondary phone as a cold wallet would be more secure than a typical mobile hot wallet but less secure than a hardware cold wallet. This approach would typically store an intermediate amount of Digital Currency.
A combination that suits you
Storing Digital Currency, just like any valuable asset, involves making a personal decision on the best way to keep it safe while finding the right balance between functionality and security.
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Over time, there has been a combination of sorts — hot wallets have become more secure, and cold wallets are more convenient. For those who decide to maintain personal custody of their Digital Currency, the trend is toward storing funds in hardware cold wallets. Those using a Crypto Exchange Wallet to store the majority of their funds must make sure that their exchange has a security-focused reputation.
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