Hot Wallet vs Cold Wallet

With over 1200 cryptocurrencies in existence, it is essential to learn how to secure your crypto tokens or crypto-coins properly.

For an ideal long-term cryptocurrency storage, users are recommended to divide their funds into so-called “hot” and “cold” wallets. Let’s evaluate why users need to take these extra steps to maximize their defense against malicious actors in the crypto-verse.

The Basics

Hot wallets are like checking accounts whereas cold wallets are like savings accounts. As the name suggests, hot wallets are used for the everyday spending of cryptocurrencies and typically only hold small amounts of any token, very similar to real wallets that people keep with them on a day-to-day basis. Cold wallets, on the other hand, are used for long-term secure storage of cryptocurrencies and typically holds large amounts of money that are not intended to be touched very frequently. Hot wallets are usually always connected to the internet to be readily usable while cold wallets are only ever connected to the internet to make a transaction, which is not very often thereby decreasing the likelihood of a user’s funds being stolen by a hacker.

A result of this is that all the hardware wallets in existence are cold wallets as they are not actively connected to the internet and are used to store funds for long periods of time securely. On the other hand, any funds held in exchanges like Bittrex and Poloniex are considered to be stored in hot wallets as they are stored in these companies’ servers and are connected to the internet to be actively traded. Storing funds in exchanges is therefore considered the least secure way to store your cryptocurrencies since by doing so you do not hold the keys to your wallet. This practice of users trusting an exchange to hold their funds led to the infamous Mt. Gox hack in December 2013, in which approximately $450 million worth of Bitcoin was stolen that led to the 3-year bear market for Bitcoin. Note that hot and cold wallets can both be used to receive cryptocurrencies, regardless of being online or offline, although it’s considered the good practice to use hot wallets to accept payments since it’s faster to verify with a wallet that is connected to the internet.

Why does it?

Although it may seem like a cumbersome process to have to manage an extra wallet just for cold storage for your funds, it is nonetheless important due to the security loopholes that exist in almost all the major operating systems like Windows, Android, and iOS, which users depend on to store the cryptocurrencies. In addition to this, there is malware like keyloggers and trojans that hackers have used to steal the large amount of Bitcoin and Ethereum in the past. This malware is much more likely to affect a device connected to the internet than to a cold storage hardware wallet, and that is why it is worth the effort to secure large amounts of money.

What kind of hardware do I need for cold storage?

The great thing about cold storage wallets is that they do not necessarily have to be expensive. Paper wallets are easy to create with an air-gapped computer (a computer that has never been connected to the internet) or guides like this. Paper wallets are used to store funds most securely since they are impregnable to any cyber-attack because of the computer used to generate your private keys has never been connected to the internet.

Other forms of cold storage wallet can be made using old smartphones and computers that have been wiped and disconnected from the internet and used for the sole purpose of storing your cryptocurrency of choice. Since they cost next to nothing and the reduce the risk of your funds getting stolen significantly, cold storage is worth investing your time in if you do not want to worry about your funds for the long hold.

What about dedicated Hardware Wallets?

For users looking to get the highest level of security mixed with relative ease of use, dedicated hardware wallets offer the most use out of all the wallet options available. Hardware wallets like Ledger, Trezor, and Keepkey, cost anywhere from about $100 to $400 and offer the security of a cold wallet combined with the ease of use of a hot wallet. What makes these hardware wallets so secure is that a user’s private key never leaves the wallet, thereby making it impossible for hackers to get access to the secured funds. These wallets require users to press a physical button on the device to sign the transaction without with transactions could not take place, thereby protecting users from spoofing attacks. So, for people who are heavily invested into cryptocurrencies, hardware wallets have a lot to offer by mixing the highest-grade security with ease of use.