Cold and Hot Crypto Wallet — What is the Difference

If you have plunged into the world of blockchain and digital currencies, then sooner or later you will have a question of how and where to store your crypto assets. In this article, we will explain in simple terms what a cryptocurrency wallet is. You will learn the advantages and disadvantages of cold and hot crypto wallets, as well as when it is recommended to use one or another storage option.

What is a crypto wallet? This is a program, device or storage medium that provides access to digital assets, helps to carry out transactions and control account balance. The crypto wallet offers users tools and an interface for interacting with the blockchain, where records of manipulations with crypto coins are stored. There is no money on the wallet itself, all cryptocurrency tokens and coins are in the blockchain. To manage digital currencies, it is necessary to have cryptographic keys (public and private). The method of storing private keys is the main difference between cold and hot crypto wallets.

The public key is often compared to a bank account. This is a unique address from a set of letters and numbers, which is used to replenish the balance and receive payments from other members of the crypto-financial community. If the public key is lost, it can be restored from the private key, but the reverse transformation is impossible. A private key is exactly the main and secret tool that provides control over crypto assets. Generation and storage of keys for working with digital money is the main task of a crypto wallet.

Hot crypto wallet is an online service for storing cryptographic keys and transaction data. This can be a mobile application, a browser extension, a desktop program, or special crypto exchange tools. The main feature of hot cryptocurrency wallets is a constant/regular connection to the network.

The main advantages of hot cryptocurrency wallets:

Hot cryptocurrency wallets are the most popular tool for storing cryptocurrencies and transactions with them. You don't have to puzzle over how to get crypto wallet. There are quite a lot of services, exchanges and applications that provide functionality for "hot" storage of cryptocurrencies. But it must be borne in mind that it is this option for storing digital coins and tokens that is the most dangerous. Private keys are on the network, and therefore are always subject to encroachment by hackers and scammers. On hot wallets, users rarely store large amounts of cryptocurrencies.

How to open a hot crypto wallet — where to start. Experts advise responsibly choosing services for “hot” storage of digital assets. You need to carefully evaluate the reputation of the app or service you plan to use as a hot wallet. Decide which device you will work with, whether you need a wallet that supports multicurrency. Pay attention to the level of data protection, the convenience of the interface, etc.

It is always necessary to take into account the possibility of losing access to keys and possible hacker attacks. Based on these risks, calculate the amounts that will be in the hot wallet. In addition, you can generally refuse such an option for storing crypto assets, preferring the “cold” method - says Fraser Matthews, President of NetCoins.

A cold crypto wallet is a physical medium that contains a key that provides access to the user's tokens and coins. The main features of this storage option are that the data is exclusively at the disposal of the owner of crypto assets and is used only during transactions. Physical media can be of various formats: a flash drive, a small stand-alone computer (most often from Trezor or Ledger companies), physical bitcoin, etc. There are also software wallets (desktop and mobile) that provide “cold” data storage. A cold wallet can even be a sheet of paper with the necessary keys. However, this storage option is considered obsolete and irrelevant.

Hardware crypto wallets are currently considered one of the safest options for storing digital assets. These devices generate and store keys, and connect to the network only to conduct transactions. The design of hardware wallets uses security chips, and transactions are confirmed by a pin code. Also, a mnemophrase is generated to recover the keys. Manufacturers usually offer detailed instructions on how to set up a crypto wallet, recover data, and use the device to conduct transactions. Hardware crypto wallets are a paid pleasure. The price depends on the level of protection, functionality, interface, etc.

The main advantage of a cold wallet is its high reliability. It is almost always offline. Such wallets are much more difficult to hack, and therefore everything depends on the user himself. It is wallet hacking that is the biggest fear of any owner of a cryptocurrency account. Because of this, large amounts of cryptocurrency are most often stored on cold wallets.

There is only one problem here — a flash drive or hardware media (and even more so a sheet of paper) can be lost, or it can be stolen. Everything is the same as with a regular physical wallet. Cold wallet data, unlike the physical storage of money, can be copied, and the copies can be hidden in the most secure places. However, due to the loss of cold wallets, users have already irretrievably lost access to more than 3.7 million bitcoins.

Of course, using a cold cryptocurrency wallet or a safe with money is not very convenient if you need to make a large number of small cash transactions per day. And here a hot wallet will be much more relevant.

What is the best wallet for crypto? Everyone chooses where to store his cryptocurrency. Keep it on a cold wallet — like a currency in a purse, with the same risk of losing everything due to a hole in your pocket, inattention, some kind of emergency with a fire or being robbed? Keep it on a hot wallet — like a bank account, for convenient daily transactions and instant payments, but with the risk of falling for the bait of scammers or hackers?

All the main advantages and disadvantages are clear. The ideal option seems to be a hybrid approach to storing cryptocurrencies: the main funds on cold wallets and the necessary minimum on hot wallets. But this approach is obviously not a panacea. There will always be risks. The main thing is attention and awareness.

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