If you buy any amount of crypto and you want to store it yourself, you have to choose between holding your cryptocurrency in a “hot” wallet, a “cold” wallet, or using a combination of the two. A hot wallet is connected to the internet. That’s why it could be vulnerable to online attacks. This could lead to stolen funds, but it’s faster and makes it easier to trade or spend crypto. A cold wallet is typically not connected to the internet, so while it may be more secure, it’s less convenient. Should you use hot wallets, cold wallets, or a combination?
Generally, cold storage wallets are quite secure. Stealing from a cold wallet usually requires physical possession of or access to the cold wallet, as well as any associated PINs or passwords that must be used to access the funds. Most hardware wallets are cold wallets and live on devices that look like small to medium-sized USB sticks. Paper wallets, physical bitcoins, or a secondary offline computer used to store cryptocurrency are also cold storage wallet options. However, while still fairly secure, these methods have fallen out of favor and have been replaced by reputable, high-quality hardware wallets. Or very secure cold storage options available on reputable exchanges.
Hardware wallets are designed to be immune to hacking. Even when a hardware wallet is plugged into your computer or connected via Bluetooth, depending on the storage method, the funds stored on the drive are difficult or even impossible to steal. While technically connected to the internet, the signing of transactions is done “in-device” and only subsequently broadcast to the network via your computer’s internet connection. This signature allows you to assign ownership to the recipient of a cryptocurrency transaction. Because your private keys never leave the device, however, even if devious malware on your computer tried to steal your funds by maliciously “signing” a transaction initiated in your hardware wallet, it would not be the correct signature, so the transaction would not go through.
Hardware wallets are less convenient than hot wallets because they must be powered on and then connected to the internet. In addition, while hot wallets are usually free, hardware wallets can cost you between $50 and $200. If you have more than a few hundred dollars in crypto, you may want to invest in a hardware wallet before purchasing more. It’s a small price to pay to protect yourself from the threat of losing your funds.
Web-based wallets, mobile wallets, and desktop wallets are all typically hot wallets. Among them, web wallets are the least secure, though all crypto-hot wallets are vulnerable to online attacks.
A benefit of hot wallets is ease of use. Because they are always online, there’s no need to transition between offline and online to make a cryptocurrency transaction. For example, many people use mobile hot wallets to trade or make purchases with cryptocurrency. To do so with a cold wallet would be inconvenient. You would need to find a device (typically a computer) in which to plug your cold wallet. Then move the requisite amount of cryptocurrency to a hot wallet and make your purchase.
Users who hold large amounts of cryptocurrency typically won’t keep significant amounts of crypto in hot wallets. Although a hot mobile wallet isn’t the same as a traditional analog wallet, one similarity holds true. It’s generally a bad idea to keep a lot of money on your person. Just like you can withdraw cash from an ATM, you can send more crypto to your hot wallet when the balance gets low.
Most well-respected exchanges store the majority of their customers’ funds offline in a matrix of cold wallets. And then they keep a certain amount needed for withdrawals in hot wallets. If you’re storing significant amounts of cryptocurrency online, be sure to research the reputation of the exchange you’re using.
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