Whether you're hoping to invest in Bitcoin or other cryptocurrencies or want to use cryptocurrencies to pay for goods and services, you need a place to store your digital assets. This is where digital wallets come into play. There are two main types of wallets available when storing your crypto coins: hot wallet and cold wallet. Understanding the differences between a hot wallet vs cold wallet helps you decide how to keep your crypto assets safe, as well as make sure some of them are accessible.
In this Guide
Hot Wallet vs. Cold Wallet
Storage vehicles for cryptocurrencies are referred to as wallets. These wallets keep track of digital assets and are often digital in nature (although some cold wallets might not be completely digital). The main differences between a hot wallet and a cold wallet are:
- A hot wallet is connected to the internet. A cold wallet, on the other hand, offers storage that isn't online all the time.
- A hot wallet is often more accessible. This makes it easier to use in transactions across the internet. However, a hot wallet could be more vulnerable to hackers.
- Cold wallets, on the other hand, are considered more secure, since they can be accessed only in specific ways. They are a little less accessible than a hot wallet since you have to get the key for each transaction.
How a Hot Wallet Works
For the most part, hot wallets are designed to help you easily store and access your crypto assets. If you buy or mine digital currencies, you can have the coins easily delivered to your online storage. Additionally, if you want to buy something and pay with cryptocurrency, using your hot wallet is fairly straightforward.
Hot wallets usually have two types of keys:
- Public Key — This cryptographic key is usually designed to allow someone to send digital coins to an address without identifying the user. It's kind of like an account username.
- Private Key — This is your own information that you use to identify yourself as the owner of the wallet. It's kind of like a PIN or a password. You can use your private key to get into your hot wallet and see what's happening.
With a hot wallet, both of these types of keys are stored on the internet or on a device connected to the internet (such as your computer or smartphone). This means that the keys are vulnerable to hackers. If you aren't careful about guarding your information, the information can be stolen.
Who Hot Wallets May Be Suitable For
Hot wallets are attractive to those who frequently engage in cryptocurrency transactions online. If you're a cryptocurrency investor, having a hot wallet makes it easier to complete transactions. Many of the crypto exchanges offer to store your coins for you in an account. This is essentially a type of hot wallet. On top of buying and selling cryptocurrencies on the exchange, you're also provided with a cryptocurrency address. People can use that address to send you coins for payment.
It makes sense to have a hot wallet if you know that you will have a lot of transactions with individuals or exchanges. However, you should be aware that keeping a large number of assets in your hot wallet makes it a target for thieves. As a result, it makes sense to keep only a portion of your crypto assets in a hot wallet and store the bulk of your coins in a cold wallet.
Types of Hot Wallets
In addition to having hot wallets on exchanges like Coinbase and Binance, there are also specific hot wallets connected to certain cryptocurrencies or applications. And you can download software hot wallets designed to give you more control over your keys.
Here are two hot wallets that can help you make the most of your online transactions:
- Exodus — This hot wallet supports more than 130 cryptocurrencies. This makes it convenient if you own lots of different types of coins. Additionally, it allows for the easy exchange of one coin for another. You can use this wallet on a desktop or mobile phone. It's also compatible with Trezor (see below), making it easy to move coins into cold storage. However, the wallet isn't open-source, and there are concerns that the security is entirely dependent on the hot wallet's development team.
- Mycelium — This hot wallet is compatible with multiple cold storage options, including Trezor, Ledger and KeepKey. But it is limited in the types of cryptocurrencies you can store. You can use it only for Bitcoin investments, Ethereum and ERC-20 tokens. There's also a learning curve for novice cryptocurrency users.
Some investing apps, such as Robinhood, allow access to crypto trading but don't actually act as a wallet. You can't transfer your coins in or out of Robinhood, and Robinhood won't connect to your crypto wallet.
How a Cold Wallet Works
Unlike a hot wallet, which is connected to the internet and could even be on the internet, a cold wallet is offline.
Like a hot wallet, there are public keys — such as a crypto address for the cold wallet — and private keys that the wallet owner uses to access their assets. However, the private keys for a cold wallet aren't stored on the internet like they are for a hot wallet.
When making an exchange with crypto assets, a signing process using keys takes place. With a hot wallet, this process takes place entirely online.
But a cold wallet allows these transactions to take place offline. The transaction starts online, but then it's moved offline into the cold storage where it can be digitally signed. Once it's signed in an offline environment, the completed information can be sent back to the online network. The main point is that the private key used to sign the transaction doesn't end up anywhere online.
Who Cold Wallets May Be Suitable For
Cold wallets are ideal for those who want to store a large number of crypto assets in a more secure environment. For example, I have a cold wallet and a hot wallet. I keep some of my coins in a hot wallet for easy use online. My hot wallet makes it easy to buy coins. However, the bulk of my crypto assets are transferred to a cold wallet, where they are kept offline.
Some exchanges that provide hot wallets, such as Binance, limit the storage capacity to encourage you to move some of your assets offline and into a cold wallet to increase security. A cold wallet offers a good solution for storing some of your cryptocurrencies safely. Just be aware that if you lose your cold storage or you forget your private keys, you might not get those coins back.
Types of Cold Wallets
You can actually use paper as a cold wallet. With this, you write down your keys on a piece of paper. It's also possible to print out a page with a QR code that allows you to sign a transaction from your cold wallet.
But there are also specifically designed hardware wallets that look similar to USB drives or smart cards. Some of the most-used cold wallets include:
- Trezor — This cold wallet supports a large number of cryptocurrencies and has unlimited storage. On top of that, it's easy to interface with exchanges and can be compatible with some of the hot wallets. Models cost as little as $60 or as much as $180.
- Ledger — Unlike Trezor, Ledger doesn't come with unlimited storage. However, Ledger has Bluetooth capability in addition to the ability to connect to a smartphone or desktop via cable. The more expensive Ledger wallets cost less than the highest-priced Trezor. But some Ledger models start as low as $60.
For many cryptocurrency enthusiasts, understanding a hot wallet vs. cold wallet is an important part of deciding how to manage their assets. In many cases, it makes sense to have a hot wallet connected to the internet and keep a limited number of coins inside for ease of use. However, for security, use a cold wallet to store the bulk of your assets so they're less accessible to potential hackers.