When you think about joining the cryptocurrency universe, you will need to understand the concept of a cryptocurrency wallet. It is simple. Just like your physical wallet, which holds your bank cards and cash, a crypto wallet helps to store your cryptocurrencies.
Each cryptocurrency wallet has a private key, which only the wallet owner can access their funds. A cryptocurrency wallet stores the assets you buy on a platform and allows you to securely transact the cryptocurrencies in the wallet from anywhere in the world.
Key Takeaways
Hot wallets and cold wallets are two methods of storing cryptocurrencies, each with its own unique benefits and drawbacks.
Hot wallets are software-based wallets connected to the internet and provide easy accessibility to your funds, making them convenient for frequent transactions. However, hot wallets are vulnerable to hacking and theft, making them a riskier option.
On the other hand, cold wallets are wallets that are kept offline and provide high security against hacking and theft. While they may be less convenient for frequent transactions, cold wallets are generally considered the most secure way to store your cryptocurrencies.
Hot Wallet vs. Cold Wallet: Which Is Better?
In this part of the guide, we will compare hot and cold wallets based on accessibility, safety, risks, ease of use, cost, and transfer speed.
| Hot wallet | Cold wallet | |
|---|---|---|
| Accessibility | Easy access from any device with an internet connection | Less accessible as they are often offline or require additional steps to access |
| Safety | More vulnerable to hacking, theft, and loss of funds | Higher level of security as private keys are stored offline |
| Risks | Higher risk of loss of funds due to security vulnerabilities | Lower risk of loss of funds due to hacking or theft |
| Ease-of-use | User-friendly and convenient for frequent transactions | May be less user-friendly and require more technical knowledge to use |
| Cost | Often free or low cost | Higher cost due to specialized hardware device |
| Transfer speed | Generally fast, as transactions can be made instantly | Transfer speed may be slower due to the additional security measures in place |
What Is a Crypto Wallet?
Every crypto investor needs to have a cryptocurrency wallet. With the help of this, it is possible to manage their crypto assets easily. As a rule, such wallets allow storing, receiving, and sending cryptocurrencies through the blockchain network. Such wallets have software or hardware for managing, storing, and providing private keys to their users. They can be a smartphone app, a web platform with tools, or a desktop application. Or in the form of portable hardware designed specifically for performing transactions. These wallets are referred to as ‘cold and hot’ wallets. And although their main purpose is the same, it is the storage of crypto assets. However, there is a very significant difference between them.
What Is a Hot Wallet?
Hot wallets are those that are connected to the Internet. Therefore, they are more practical and convenient to use. There is a huge choice of platforms for storing cryptocurrencies online. Each of them competes with the versatility of their features, such as easy and fast transactions, built-in exchangers, and more. Such wallets tend to come in mobile, web, and desktop versions. Thereby providing their users unlimited access to their funds, from anywhere in the world, at any time. Guarda is an excellent example of a hot wallet; it combines all the types of wallets listed below to give you complete control over your keys.
How Do Hot Wallets Work?
Hot wallets are digital wallets used to store and manage cryptocurrency, often used for transactions. They are linked to the Internet and come in various options, such as online platforms, mobile wallet versions, or desktop wallet versions.
When you want to send cryptocurrency, you use your private key to sign the transaction, which is broadcast to the network and confirmed by other nodes. Hot wallets are highly convenient but less secure than cold wallets. Therefore, they require additional security measures such as a backup file and encryption of private keys to reduce risk.
Mobile Wallet
Mobile wallets are cryptocurrency wallets that can be downloaded from marketplaces such as Google Play and the App Store. This type of wallet option will definitely suit the user for whom fast and unhindered access to their assets plays a crucial role. Such wallets store private keys that allow access to transactions. They are controlled solely by their owner and encrypted on the user’s local device.
Web Wallet
These are wallets that users can access directly through their computer’s browser. Go to the wallet page and enter your personal information to access your assets, including your username and password. Just like mobile wallets, they are practical and convenient, and multi-functional.
Desktop Wallet
Desktop wallets are programs that can be downloaded and installed on your computer’s hard drive. Unlike web and mobile wallets, desktop wallets store user information on the computer, not on the browser. In general, they are more secure than mobile and web-based cryptocurrency wallets. However, the user must be careful and keep the device safe from malware, viruses, and other things.
Browser Extension
Browser-extended wallets are a type of hot wallet that can be added as an extension to your web browser. They allow users to easily manage their cryptocurrency directly from their browser without downloading and installing additional software on their devices.
Hot wallets with a browser extension work by generating private and public keys, just like other types of hot wallets. Once a wallet is created, it can be accessed using the browser extension icon, usually on the browser toolbar. Users can view their account balance, send and receive cryptocurrency, and view transaction history through the browser.
What Is a Cold Wallet?
Simply put, this wallet provides storage of cryptocurrencies without an Internet connection. Not for nothing, this storage method is considered the most reliable and secure. The increased offline protection gives reliable protection against hackers and scammers. It should be noted that offline storage makes it difficult for the user to access the coins instantly. So, this option is more suitable for the user who does not need to make transactions regularly.
How Do Cold Wallets Work?
Cold wallets or cold storage are physical devices that store and manage cryptocurrency offline. A cold wallet generates a private key stored on the device and never goes online.
To use a cold wallet, you connect it to a computer or mobile device with Internet access to initiate transactions signed with the cold wallet’s private key and then broadcast online.
Cold wallets are more secure than hot wallets, come in various forms, including USB drives and paper, and are often equipped with additional security features to protect your cryptocurrency.
Hardware Wallet
This is a compact and modern way to store funds. Specially designed devices like flash drives, which can easily fit in your pocket, are considered one of the most reliable ways to save cryptocurrencies. Moreover, most of them are equipped with SEED phrases and password protection, besides the absence of connection to the network.
Paper Wallet
Though controversial in this technological and information age, one of the most reliable methods of storing cryptocurrencies is considered paper. More precisely, the public and private keys are recorded on it. And this is a truly no-cost method for 100% protecting funds from hacker attacks.
However, you should understand that you will lose access to your funds if you lose or damage the paper carrier. That’s why keeping your keys locked in a safe is a good idea. In order to create a paper wallet, you will need to generate a public and a private key to the wallet and then write them on a paper carrier.
So, Which One Should You Choose? Cold or Hot Wallet?
And here, the choice is completely formed based on the user’s needs. Suppose you make frequent transactions exchange, purchase, sales, payment, etc. In that case, you may want to opt for the hot wallet since they give you quick and easy access to your funds as far as there is internet. However, if you are going to buy a cryptocurrency, just hold it and occasionally make some transactions. It is worth stopping at the choice of cold storage. Whichever option you choose, it is always important to consider your funds’ safety, the amount you are storing, how often you make crypto transactions, and accessibility.
FAQ
1. Do I need a hot wallet and a cold wallet?
It depends on your use case and personal preference. A hot wallet is useful for frequent transactions, while a cold wallet is ideal for long-term or large storage.
2. Is it safe to keep crypto in a hot wallet?
While hot wallets are convenient for transactions, they are less secure than cold wallets. In addition, they can be vulnerable to hacking, so keeping small amounts of cryptocurrency in a hot wallet is best.
3. What are the disadvantages of a cold wallet?
A cold wallet’s main disadvantages are that it can be more difficult to use and require additional steps to access your cryptocurrency. Additionally, they can be lost or damaged, and it can be difficult to recover the funds if this happens.
4. What do I do if I lose my cold wallet?
If you lose your cold wallet, it’s important to have a backup of the recovery phrase given to you when you set up the wallet. This phrase can be used to recover your funds onto a new device.
5. Can a cold wallet get hacked?
While cold wallets are generally considered more secure than hot wallets, there is always a risk of hacking or other security breaches. Therefore, taking appropriate security measures and using a reputable cold wallet from a trusted source is important to minimize this risk.
