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Hot and Cold wallets explained

The time has come: You’ve made the decision to buy crypto and need to figure out how. Step one is fairly simple: to create a crypto wallet. However, there are several types of wallets and the differences depend on the use cases, level of security and user interface. It is also important to choose a wallet wisely, especially depending on how much crypto you intend to hold. 

Wallets are categorized into two categories: Hot and cold. Each have their own advantages and disadvantages. Below we explore the differences so you can decide which wallet works best for you.

Hot Wallets

Hot wallets are always connected to the internet. These include exchange wallets, mobile wallets like Exodus and desktop wallets like Metamask. These types of hot wallets keep your crypto online at all times, allowing you to make trades instantly. For example, wallets like MetaMask give you access to the entirety of the cryptoverse to its fullest extent, giving you access to decentralized applications (Dapps), non-fungible token (NFT) marketplaces and gaming platforms. 

There are many benefits to hot wallets. First, they are extremely user friendly and make it easy for beginners to make transactions between any hosted crypto or fiat. Not only do the exchange platforms that serve as hot wallets provide education and information on how to trade along with the latest news in crypto but you are also able to access your savings and transfer crypto at any time through the mobile application or website. For example, Coinbase offers instant transfer to a fiat bank account — with a fee — and a trading platform for pro-traders.

However, there is also a downside to this fairly simple method of holding crypto in a hot wallet. And it’s how easy it is to experience hacks and exploits of the system. A hot wallet’s constant connection to the internet means your crypto has a chance of being compromised. For example, the Binance hack of 2019, when the major exchange Binance saw an exploit of 7,000 BTC — $41 million at the time of the hack — claiming the hacker stole API keys and two-factor verification information, among other information. 

This rings especially true when using an exchange wallet. There is the famous Mt Gox exchange exploits in 2013, resulting in a total loss of almost $25 million, with reparations still looking to be made now. 

Despite that, hot wallets are easy for newcomers and those familiar with the crypto space alike. This is because provides a simple way of holding crypto and being in the space.

Cold wallets

Cold wallets are the more secure option. This is because they’re external hardware wallets that do not connect to the internet or a server. Cold wallets serve the purpose of holding cryptos, and nothing can transfer away due to system breaches or exploits in the code.

There are two types of cold wallets: hardware wallets and physical wallets. Hardware wallets are like small USB-like devices that hold your crypto in it. They can connect to your computer or bluetooth to move funds when you need it. Physical wallets include paper wallets and offline computer wallets. This is when you have another computer that completely wipes and its use is only for operating a BTC wallet via a USB connection. These are wallets where both physical and private keys detach from any internet-connecting device. The only way to connect to your crypto is if you enter in the keys and a unique signature. 

This is what makes cold wallets immune to hacks: They are offline with no way to successfully sign a cold wallet transfer unless you are the holder of the wallet itself. The device or paper conducts every transaction. So it keeps your private keys safely in the hardware wallet, and not on the internet. 

Note: It is important to always purchase a hardware wallet first hand. Second-hand devices — while a bit more eco-friendly — can be manipulated in a way that when connected to Bluetooth or a computer, could wipe your crypto with absolutely no chances of getting it back. 

Like with hot wallets, cold wallets, too, come with downsides. Hardware wallets are costly, ranging between $50 to $200. If you decide to go the paper wallet route, you completely lock yourself out of your crypto savings if you lose your password and key information. Moreover, hardware wallets are simply impractical for many, as it requires a separate system and extra log-in information to have.  

Find the Perfect Wallet for You

If you are having trouble figuring out which wallet would be the most beneficial for you, then a great resource is this site. First, choose your desired platform: mobile, desktop, or hardware. Enter if you are new or experienced and which features or requirements you need, and then the site will suggest various options for you to explore. For example, here are two of the most commonly used wallets on the internet MetaMask representing a common Hot Wallet Option. Whereas Ledger representing a common Cold Storage Option:

Closing Notes

There is an option to use hot wallets for transactions and cold wallets like a savings account. This unlocks the benefits of both wallets while minimizing the risk of losing crypto. It is necessary to explore all options of the different kinds of wallets and exchanges. Finally, never share your wallet information with someone else or forget this information, or you may lose your crypto savings

Whichever wallet you choose, don’t turn out like this guy. Stay safe and happy hodling!

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