Crypto Hot Wallet vs. Cold Wallet: What’s the Difference?
How to safely store cryptocurrency is a critical factor to consider when getting into the cryptocurrency space and using digital currencies. It’s estimated that hackers stole $3.8 billion in cryptocurrency last year alone, making security essential for digital assets.
This massive potential for lost or stolen funds is why it is crucial to understand cryptocurrency storage and security options, what crypto cold wallets are, how they can help secure crypto balances, and how hot and cold wallets differ.
What are Hot Wallets? Definition
Cryptocurrency hot wallets are mobile or desktop applications that are “hot” because they are always online or connected to the internet. This constant connection makes hot wallets easily accessible when buying, selling, or trading crypto. Still, it also makes them more vulnerable to hackers.
How Do Hot Wallets Work?
Hot wallets can store, send, and receive cryptocurrency balances. They are applications or software that can be used on desktops, laptops, or mobile devices. Wallets keep the private keys that verify crypto ownership and the public keys that enable transactions.
Notable Brands and Models of Hot Wallets
- Metamask: A leading wallet launched in 2016 for accessing Ethereum dApps, available as a browser extension or mobile application.
- Trust Wallet: A mobile application and browser extension owned by Binance.
- Coinbase Wallet: A mobile application and browser extension to send and receive crypto and access dApps.
What are Cold Wallets? Definition
A cold wallet is a cryptocurrency self-custody solution that stores cryptocurrency funds offline. The most common form of cold wallet is a hardware wallet such as a USB drive or other small physical device. Still, cold wallets can also be paper-based or even on a CD. Cold wallets are connected to the internet to make transfers, but when disconnected, they cannot be accessed by hackers.
How Do Cold Wallets Work?
Cryptocurrency wallets generate and store private keys, digitally sign cryptocurrency transactions with private keys, and return the transaction to a blockchain network. When transactions are broadcasted, there is a risk that attackers can discover the private key used for the transaction.
Cold wallets or cryptocurrency storage options sign transactions with private keys whilst offline, reducing the risk of hackers discovering the private keys required to access crypto balances.
Types of Cold Wallets
- Ledger Nano X: Connected to a computer via a USB cable or Bluetooth to mobile devices. Ledger supports over 5,500 coins and tokens.
- Trezor Model T: Major competitor to Ledger that allows access to third-party exchanges from its internet interface.
- CoolWallet Pro: A mobile hardware wallet the size and shape of a credit card that uses Bluetooth to connect.
Key Differences Between Cold (Hardware) Wallets and Hot Wallets
A. Online Connectivity
Cold wallets, or hardware wallets, use private keys to validate cryptocurrency transactions offline, making them less vulnerable to hackers. Hot wallets are always online, which makes them easy and quick to use but less secure.
As an application or browser extension, hot wallets are connected to the internet, so they are the most convenient for accessing dApps or exchanges and making simple, fast transactions. Cold wallets require extra steps and access to the physical device to connect them online and facilitate a transaction.
Hot wallets are generally more user-friendly as they are always online and don’t require extra steps. Crypto transfers can be made with a few clicks from a wallet or cryptocurrency exchange application. Cold wallets, in contrast, take a few more steps and can have extra security protocols, but this makes them far more secure, especially for more significant crypto balances.
Hot wallets are usually free or have inexpensive fees. Hardware wallets can cost over $60 for basic models or over $100 for more advanced devices.
E. Security Levels
Crypto hard wallets, known as cold wallets or available as hardware wallets, are far more secure because private keys sign cryptocurrency transactions offline, hiding them from potential attackers who trawl networks for such vulnerabilities. When disconnected, hardware wallets are offline and cannot be accessed. That said, hardware wallets that connect via Bluetooth can also be vulnerable to the same threats as hot wallets. In contrast, hot wallets remain online at all times and can be far more easily hacked.
Advantages and Disadvantage
Hot and cold wallet cryptocurrency storage has some notable advantages and disadvantages. In summary:
Hardware Wallets (Cold Wallets)
- They are less vulnerable to attack as they disconnect from the internet, and private keys are stored offline.
- Safer for more significant cryptocurrency balances or cryptocurrency investments stored for extended periods.
- Require fewer software upgrades, so are less vulnerable to new security issues.
- Require a less proactive approach to security.
- Hardware wallet options are more expensive.
- Require extra steps to perform transactions.
- It will require replacing if security has been compromised.
- Some hardware wallets don’t support NFTs.
- They are convenient as mobile and desktop applications with many more features.
- Usually free and easy to set up.
- Fast access to crypto funds for trading or purchase.
- Easy access to dApps, NFTs, DeFi, and Web3.
- Support a broader range of cryptocurrencies and newer coins.
- Greater risk of hacks and security breaches.
- Vulnerable to malicious software updates.
- Fewer steps in the process can make users complacent about security risks.
How to Choose the Right Wallet for You
A. Factors to Consider
- Usage Frequency
Frequent users of smaller cryptocurrency balances, dApps, and NFTs might choose the convenience and functionality of a hot wallet. Investors holding more significant balances or letting funds go “cold” without touching them may opt for cold storage or safer hardware wallets.
- Amount of Cryptocurrency
Holders of significant cryptocurrency investments will naturally want to protect their funds more by using a crypto cold wallet or hardware wallet option. Crypto users who wish to trade or access dApps and DeFi regularly but also hold more significant balances can opt for a combination of hot and cold crypto storage.
- Technical Proficiency
A user’s technical knowledge might influence their wallet choice either way. Hardware wallets can be simpler to use as they have less functionality and are safer, but there are extra authentication steps. Users should understand how public and private keys work and should be protected. Hot wallets can be easier to use but require higher security awareness if users access new projects or update hot wallet software.
B. Case Studies
Cryptocurrency value and a user’s motivations are critical when choosing cold wallets over hot wallets.
- Scenario A: Long-term Investment
Imagine crypto user X has decided they would like to hold Bitcoin to accumulate value as the cryptocurrency market hots up. Their Bitcoin holdings are worth thousands, and they only want to access them if they notice the market starting to change. Crypto user X chooses a hardware wallet that only connects via USB. They transfer their Bitcoin to the hardware wallet, disconnect it from their desktop, and store it in their safe at home.
- Scenario B: Frequent Trading
In contrast, crypto user Y likes to trade smaller balances of coins to take advantage of short-term price swings. They want to be able to react quickly if they see signals of a cryptocurrency starting to gain in price, and they make numerous transfers between their hot wallet and cryptocurrency exchange daily. User Y chooses a hot wallet to access their balances quickly.
Best Security Practices
Crypto cold wallets and hard wallets differ in their security features, and both have vulnerabilities. Cryptocurrency users should always be aware of the most applicable security practices for their intentions and the cryptocurrency self-custody option/s they choose.
It’s vital to use strong passwords for any application, enable two-factor authentication (2FA) protocols, and, for cold wallets, adopt suitable storage and handling practices to avoid physical damage or loss.
Backup and Recovery
Depending on the storage option, backup and recovery options will be available. It’s possible to make software and hardware backups of a wallet and use seed phrases stored elsewhere to calculate and retrieve private keys.
Hardware wallets are physical devices that can be lost or damaged. Remember the case of the Bitcoin investor still searching his local dump for his crypto keys? That can easily happen. When disconnected, hardware wallets should be stored in a safe place where they cannot be easily damaged.
Software updates are necessary to stay ahead of developments in technology and security. Hardware wallets will require infrequent firmware updates. Hot wallet applications will need more frequent software updates as they are higher risk and have more functionality. Though these updates can address software vulnerabilities, they can also install new ones, so care should always be taken.
Diversify Storage Options
One of the best security practices for cryptocurrency storage is diversifying holdings across suitable mediums. For example, smaller balances are frequently used in hot wallets, and more significant balances can be stored in cold wallets.
Investors that have multiple significant holdings could use more than one hardware wallet. Cryptocurrency users who access new projects, buy ICO tokens, participate in NFT mints, or use dApps regularly might want a hot wallet specifically for these riskier activities. This wallet can contain lower balances and be burned or destroyed if compromised.
The best way to protect cryptocurrency balances against loss is to stay informed and ahead of the technology and any vulnerabilities. Understanding all aspects of cryptocurrencies is vital for investors and traders. Knowing how hot wallets differ from cold wallets is crucial to this approach. For more insights and options, explore Top Crypto Wallets You Should Consider in 2024.
A. Recap of Key Differences
A hot wallet stays connected to the internet, making it more vulnerable to online attacks, including device malware, malicious smart contracts, and software upgrades that contain bugs. But hot wallets are fast, easy to use, and cheap, allowing users to access many cryptocurrencies, dApps, and projects.
In contrast, a cold or hardware wallet can be more challenging to set up use and have less functionality but is a far more secure option to protect more significant crypto balances over more extended periods.
B. Making an Informed Choice
The key to choosing hot wallets vs. cold wallets is understanding the cryptocurrency sector, the risks, the technology, and one’s activities, technical knowledge, and needs. It’s always wise to make an informed choice – constant research is essential. Cryptocurrency storage options are constantly iterating to overcome security and usability issues.
C. The Importance of Security in the Cryptocurrency Space
This article began with the statistic of $3.8 billion in crypto losses last year. These are funds gone from exchanges, scam investments, breaches of DeFi projects, and user wallets. The cryptocurrency sector has yet to be widely regulated, and its decentralized nature means no third parties are protecting consumers. Cryptocurrency users must conduct their research and due diligence and adopt the most stringent security options.
- When should I use a hardware wallet?Hardware wallets, or crypto cold storage options, offer the greatest security for more significant cryptocurrency balances and when investors want to put aside cryptocurrencies for some time.
- When should I start using a cold wallet?Choosing when to use a cold wallet is a personal decision. No minimum balance is required to move funds to a cold wallet for safety. It’s also not wise to leave any cryptocurrency balances unattended in a hot wallet for any period.
- Is Coinbase a hot or cold wallet?Coinbase is a hot wallet, constantly connected to the internet as a mobile application or browser extension, that can easily access cryptocurrency balances and utilize dApps and DeFi projects.
- Can I transfer a hot wallet to a cold wallet?It’s easy and recommended to transfer funds from a hot wallet to a cold wallet for more secure storage, significant balances, or to protect cryptocurrency investments over time.
- What happens if a cold wallet fails?A cold wallet can fail. Cold wallets have been victims of cyber attackers, and they can be stolen, lost, or damaged. To protect against cold wallet failure, it’s vital to keep seed phrases safe and offline, as hardware wallets can be accessed using the seed phrase, and a wallet and funds can be accessed via a new device or online using the seed phrase protection. When choosing a cold wallet or hardware wallet, it is essential to check what security is in place in the event of a cold wallet failure and be aware of how to use this backup option.