Hello Readers,
As you are reading this post, most probably you already possess a decent knowledge about this Crypto world and the basics. Now, if you are a new soul to the world of cryptocurrency and just getting exposed to yourself and learning how this wild world works, you may have heard about many terms including Hot wallets and Cold wallets. Both are basically digital wallets which help to store and transact crypto tokens and help you to manage and store your digital crypto coins and tokens. However, by nature, they work in very different ways. So, in this post, let us explore both of these wallets, how they function, and which one to choose when. So if you are interested, let’s take a dive without any further ado.
What Is a Hot Wallet?
In simple terms, a hot wallet is like a digital wallet that always stays online, as it is connected to the internet. As a result, you can quickly send and receive crypto coins, tokens or NFTs with your PC or Mobile by simply accessing the digital wallet. Hot wallets are great for everyday use to perform daily transactions and active trading or other crypto related works. However, as it stays connected and exposed to the internet, there are always some risks attached to it.
How Do Hot Wallets Work?
Hot wallets generally can be accessed with secret private keys, a special type of codes that let you access and control your crypto online through wallets. This makes it very easy and convenient to use your crypto and transact it on any device. Only the owner holds these keys and if in any case, any other person gets his hands on these private keys, they can access your wallet and can steal tokens or acquire the wallet. In short, not your keys, not your wallet. So, Hot wallets, can be owned by whoever has that wallet’s private keys, so hackers might try to steal your keys if you are not careful.
Types of Hot Wallets
- Web Wallets - These types of hot wallets can be accessed through your web browser and are often provided by exchanges, for example - Binance or Bybit wallets.
- Mobile Wallets - These types of hot wallets are mobile app based wallets on your smartphone, such as Trust or Phantom Wallet, which let you access and manage your crypto funds on the go.
- Desktop Wallets - These types of hot wallets are actually software that you install on your computer, like Metamask or Exodus. Desktop wallets can offer a good balance between convenience and security.
Benefits of Hot Wallets
- Easy to Use - Since they are always online, transactions are fast and easy.
User-Friendly - Hot wallets are designed to be simple and very easy to use, making them great for beginners.
Accessibility - You can access your hot wallets from literally any device that is connected to the internet - like a Desktop, Laptop, smartphone or Tablet.
Risks and Safety
- Security Vulnerabilities - As hot wallets are online, it makes them more vulnerable to hacking and malware.
- Dependence - If you use a wallet hosted by a third party, a hack or security breach in their system may affect your wallet and the crypto tokens stored in it.
How To protect
- Enable Two-Factor Authentication (2FA) - Setting up a 2FA security is a great approach as it adds an extra step to verify your identity.
- Use Strong Passwords - Always create strong passwords (try to include a combination of Letters, Numbers and Special Characters) that are hard to guess or break.
- Keep Software Updated - Always keep updating your wallet app and device software so that the security standard always meets the latest updates.
- Limit Holdings - Only keep a small amount in your hot wallet and store larger amounts in a safer place like a cold wallet.
What Is a Cold Wallet?
Unlike hot wallets, cold wallets are rather physical devices and these types of wallets store your crypto offline and stay away from the internet when not being used. As they are not connected to the internet when in idle mode, this makes them much safer from online threats like hacking or malware.
How Do Cold Wallets Work?
In simple terms, Cold wallets store your private keys offline. They generate these private keys securely on a device that never connects to the internet until you choose to interact and keep them safe on a physical item like a USB drive or a special dedicated hardware wallet etc. Only when you need to make a transaction, then you take out your cold wallet, prepare it online and then use your device to sign it securely.
Types of Cold Wallets
- Hardware Wallets - Special dedicated physical devices designed to store crypto tokens safely offline. Ledger Nano S and Trezor are 2 great examples of Hardware wallets.
- Paper Wallets - It is rather just a piece of paper where your private and public wallet keys are printed on it. They are heavily secured if you can protect the paper.
- USB Drives - These are also physical USB devices that can store your private keys and can be easily plugged into your PC USB port to access the wallet. However, they are not considered as secure as hardware wallets if not managed carefully.
Advantages of Cold Wallets
- Enhanced Security - Since they are offline by nature, cold wallets are almost immune to online hacking.
- Long-Term Storage - They are ideal for keeping large amounts of crypto tokens securely for a long time without needing to access them frequently.
- Peace of Mind - Knowing your assets are stored safely away from the internet and any kind of potential online threats, will help you to stay tension free and sleep better at night.
Negative sides of Cold Wallets
- Less Convenient - With cold wallets, executing transactions takes extra steps and more time because the wallet is not always connected to the internet.
- Physical Risks - If you ever lose the device or paper where your private keys are stored, you could lose your crypto permanently.
How To use a cold wallet safely
- Back Up Your Keys - Always have a backup stored in a secure place.
- Choose Reputable Hardware - Stick with well-known brands like the ones I stated above to avoid fake or poor devices.
Keep It Private - always remember - Not your Keys, Not your Crypto. So, never share your private keys with anyone and always store them securely.
Regular Updates - If you are using a hardware wallet, always try to keep its firmware updated to the latest version.
Nothing I say is financial advice. Please DYOR before storing your valuable crypto.
Information Source:
I hope you liked reading my post about Hot Wallet and Cold Wallet and hope you find this information useful. Let me know which type of wallet you currently use to hold your crypto assets in the comment section below and I will be seeing you all in my next post.
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