Today we can use cryptocurrencies for many different things. You can make payments, buy products or services from online merchants and even make deposits at a real money casino online. But if you are actively using cryptocurrencies in your daily life or holding them as an investment tool, there is a problem you need to solve right away: where will you store your money? Where are digital currencies stored?
You need to use a digital wallet for this, and these wallets are divided into two – “hot” and “cold”. We can say that they are also divided into different categories within themselves. So, what do these distinctions mean? What are the differences between hot and cold wallets, and which one should you choose? We answer these questions below.
What is a wallet?
In order to explain the difference between hot and cold wallets, we first need to briefly talk about how digital wallets work. If you own a cryptocurrency (whichever it is), all your funds are actually stored on the blockchain. So technically, it is not possible to transfer them to a physical device or a digital program. The term “wallet” is therefore somewhat misleading, as no wallet, whatever the type, will store your cryptocurrencies.
What wallets hold is your private key. Private keys identify who owns cryptocurrencies and enable them to be transferred. For practicality, you can think of them as your banking password. You can access your money in the bank by entering your online password. The private keys of cryptocurrencies are similar: the person holding the key is considered the owner of the funds and can use them.
Wallets are devices or programs that store this private key. Private keys are a series of numbers and letters, and they really look like a password. Theoretically, you could even write such a key on a piece of paper. In fact, such a type of wallet does exist and is known as a “paper wallet”, but it has many disadvantages as we will discuss below. Therefore, the wallet you use should be more than just a piece of paper with your private key on it: it should provide additional security and make using cryptocurrencies more practical.
What is a hot wallet?
If a wallet is a digital program and can connect to the internet, it is considered “hot”. Technically, it is possible to make a more detailed definition, but the main feature of hot wallets is that they do not have a physical presence and are constantly online. If you need to be online to access your private key, you are using a hot wallet. These types of wallets are very practical and can be accessed from anywhere. Using your computer or mobile device, you can access your private key whenever and wherever you want, and for the same reason, you can access your crypto funds easily. Even with a simple Google search, you can find dozens of hot wallets that you can use absolutely free.
But this practicality comes at a price: anything available online can be hacked. This is not a theoretical assumption: anything connected to the internet is at risk of being hacked, and this also applies to hot wallets. Moreover, there are many malware and scripts that target these types of wallets. A link you click can give full access to your wallet, and you won’t even know about it. Phishing attacks, 2FA verification exploits, malware – there are countless security risks targeting hot wallets, and new ones are emerging every day.
What is a cold wallet?
If you are using something that has a physical presence and is not connected to the internet to store your private key, you have a cold wallet. This type of wallet can even be a piece of paper as we mentioned above. However, paper wallets are far from practical and cause some problems during money transfers. Currently, when you think of a cold wallet, you should think of devices like USB sticks. You can buy them online: these devices are actual hardware made to store your private key. Some include fingerprint scanners; others allow you to use a different password each time with RNG. So even if you lose this type of cold wallet, your private key remains safe.
However, this means that if you don’t know your private key by heart, you can no longer access your crypto funds too. Cold wallets are secure, and the risk of being hacked is very low (the hacker must have physical access to the device). But they do this by sacrificing practicality: transferring funds using a cold wallet can take minutes.
Which wallet type is better?
It is not possible to say that one type of wallet is better than the other. You need to decide based on your needs and how you use cryptocurrencies. For people who use crypto for investment purposes (for example, users who buy/sell on platforms like Binance), hot wallets are a better choice because they allow you to complete all transfers in no time. However, there are also users who just want to keep their cryptocurrencies, that is, not interested in trading. For them, cold wallets would naturally be the better choice.
