Cryptocurrency Wallets – Hot Storage vs. Cold Storage

The time when cryptocurrency was exclusively associated with the dark web, hackers, and unsavory internet activities is now long in the past.

Today, the world of cryptocurrency has captured the hearts and minds of average internet users across the world.

With crypto exchanges becoming more user-friendly and more types of cryptocurrency tokens being made available, buying, selling, trading, and storing cryptocurrency has never been more accessible.

To own and manage cryptocurrency in 2021, you will need to understand everything there is about crypto wallets.

One of the most frequently asked questions among beginners is regarding the difference between a hot wallet and a cold wallet.

Moreover, many people wonder which option is safer and more convenient to use when storing their cryptocurrency.

This article will outline everything there is to know about both hot storage and cold storage for cryptocurrency.

By the end, you will have a much better understanding of how these two types of crypto wallets compare with one another, and which option is right for you.

So let’s get into it.

What is a Crypto Wallet?

Before we can get to the heart of the matter, we will have to cover some basics first.

Namely, we will have to understand what a crypto wallet is, how it works, and what it is used for.

A crypto wallet is a way of digitally storing the cryptocurrency you own so that you can access it in the future.

To perform any task with cryptocurrency, be it buying, selling, trading, investing, etc. you will need a crypto wallet.

Although there are some important differences, a crypto wallet can be considered the crypto version of a bank account.

In other words, a crypto wallet is software that allows you to store, access, and interact with your cryptocurrency in a relatively safe way.

Unlike a bank account, where your account number is public and is linked to your identity, a crypto wallet address cannot be linked back to the owner’s identity.

Public Keys

The more widely used term for a crypto wallet’s account number is ‘public key’ which is also the unique address of your crypto wallet.

The public key is a string of letters and numbers (both upper and lower case) generated by a wallet provider whenever you set up a crypto wallet.

This public key is, by definition public, and can be used by anyone to send cryptocurrency directly to your wallet.

Private Keys

Alongside a public key, each crypto wallet has a private key which should be known only by the owner of the crypto wallet.

This private key is used to access and interact with your cryptocurrency.

As suggested by the name, a private key should not be shared with anyone, as access to your private key means access to your cryptocurrency.

HD Wallets

Although public and private keys have been used by crypto traders for many years, today you won’t find many crypto traders use these terms.

This is mostly because they have been superseded by a much more secure type of crypto wallet called an HD wallet.

HD stands for Hierarchical Deterministic and is a type of cryptocurrency wallet that is known for being much easier to use.

Rather than generating public and private keys that are strings of hard-to-memorize letters and numbers, an HD wallet generates a string of common, everyday words from the English language known as a Mnemonic Seed.

People are usually much better at memorizing random words than they are at memorizing random strings of letters and numbers.

Hence, mnemonic seeds help to create much more secure wallets which is what owes to the immense popularity of HD wallets today.

What’s more, you can potentially create many addresses from just a single seed.

If you’re wondering ‘how many, exactly?’ let’s just say it’s far too many for one person to use.

Therefore, with just a single Mnemonic seed you can own multiple wallet addresses or accounts for a cryptocurrency and none of them can be traced back to you.

Hot Wallets

The two types of wallets we have talked about so far in this article are both examples of a hot wallet or hot storage.

Simply put, a hot wallet is any digital wallet, including web-based, mobile, and desktop wallets.

Every time you create an account on a crypto exchange, download a desktop wallet on your computer, or a mobile wallet on your phone, you are creating a hot wallet.

In other words, any time you set up a cryptocurrency wallet that is connected to the internet, this is a hot wallet.

Hot wallets store your cryptocurrency on digital software that can either be on your laptop, your phone, or a cryptocurrency exchange.

Since hot wallets store your cryptocurrency online, they are relatively easy to use and make managing and interacting with your cryptocurrency relatively simple.

Hot wallets make cryptocurrency transactions easy because one doesn’t have to transition between offline and online to make the transaction.

While hot wallets certainly allow you to seamlessly manage and interact with your cryptocurrency with just a few clicks, there is one major drawback: security.

Since all types of hot storage are connected to the internet, the cryptocurrency you have stored in your hot wallet is susceptible to cyber theft by hackers.

Your cryptocurrency might be relatively secure due to your private key or mnemonic seed, however, those who are engaged in cyber theft have ways of hacking the system to retrieve your cryptocurrency.

For this reason, it is not advisable to store large sums of cryptocurrency in hot storage as this leaves your money very vulnerable to such cybersecurity threats.

The same holds for cryptocurrency exchanges.

If you choose to store large amounts of crypto on an exchange, be sure to research the reputation and security measures of the exchange you are using.

While most exchanges today store the majority of their funds on an offline matrix of cold wallets, those that do not make their customers’ crypto susceptible to cyber theft.

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Cold Wallets

Cold wallets, also known as cold storage or hardware storage, are a way of storing your cryptocurrency offline to avoid the cybersecurity concerns associated with hot storage.

As the name hardware wallet suggests, cold storage wallets are a physical piece of hardware – typically a USB drive – on which your cryptocurrency can be stored offline.

The only time you would connect your cold wallet to the internet is when you connect the hardware to your computer to make a transaction.

Even during this stage, the funds you have stored in your hardware wallet are not vulnerable to theft because the actual signing of crypto transactions is done on the hardware device.

This signature process allows the owner of the crypto funds to assign ownership to the recipient of your cryptocurrency, hence making it almost impossible for any outside party to initiate a transaction via your hardware wallet.

The fact that a cold wallet is a piece of hardware means that the cryptocurrency you have stored on there is unreachable to potential hackers.

For a hacker to steal cryptocurrency from a cold wallet, they would need to possess the actual hardware itself, as well as the associated passwords and PINs that would give them access to your funds.

While cold storage wallets are much more secure than hot wallets, they come with two major drawbacks. The first is with regards to cost.

Since hardware wallets are actual pieces of hardware they tend to cost anywhere between $50 and $200.

In addition to this, cold wallets are not great options for storing crypto for those who want to use their crypto for trading every day.

For such traders, it can become quite cumbersome to initiate transactions from their cold storage every time they want to send or receive crypto.

Although it makes the process a lot more secure, it is certainly much more time-consuming to use cold storage.

Which Wallet Should I Choose?

As a crypto trader, whether you opt for hot storage or cold storage is entirely up to you and is dependent on your cryptocurrency trading needs.

If you are buying and holding a certain cryptocurrency token for future use and investment, you will likely have large sums of cryptocurrency to manage.

In this case, it is advised that you use cold storage to keep your crypto funds as secure as possible.

On the other hand, if you are a crypto trader or a regular crypto spender who manages crypto transactions essentially every day, you might find it rather cumbersome to connect your hardware wallet to your computer every time you want to make a transaction.

This is also true for those who keep their cryptocurrency on an online crypto exchange.

In these cases, it is advised that you opt for hot storage to make managing your crypto transactions a lot more convenient.

Conclusion

As the world of cryptocurrency extends its reach into the lives of more and more average internet users, cryptocurrency security concerns have also tended to rise.

Whether you are a crypto day trader, crypto investor, or just someone who uses cryptocurrency to buy products online, you want to make sure your crypto funds are as secure as possible.

For this reason, a cold storage wallet is highly recommended, especially for those managing large sums of cryptocurrency.

While there are many different types of crypto wallets to choose from, you must do your research and opt for the wallet that suits your cryptocurrency needs the best.

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