Hot Wallets vs. Cold Wallets

Hot Wallets: Pros and Cons

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 to 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 then 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 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.

Cold Wallets: Pros and Cons

Generally, cold storage wallets are quite secure. Stealing from a cold wallet usually would require 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 a small to medium-sized USB stick. 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 However, while still fairly secure, these methods have fallen out of favor and been replaced by reputable, high-quality hardware wallets or very secure cold-storage options available on reputable exchanges.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.

Best of Both Wallet Worlds?

Given the trade-offs when using either type of crypto wallet, a combination of cold and hot wallets is usually ideal. You want to strike a balance between the accessibility of a hot wallet, and the peace of mind and security of a cold wallet. Many will end up with several versions of each: an exchange account hot wallet, a mobile hot wallet, and a hardware cold wallet. Each crypto wallet can be used for a specific purpose, thus creating a balance between ease of use and security when using and trading cryptocurrency.

Another popular trend is using a second phone that functions only as a mobile crypto cold wallet. When using a cell phone as a cold wallet, you would only turn it on when you want to make a transaction. The secondary phone acting as a cold wallet is then connected to your primary phone via bluetooth or WiFi and funds are transferred to your hot wallet for the transaction. After the transaction is made, the WiFi or bluetooth connectivity is turned off and the secondary phone is powered down.

Many find this more convenient than a hardware wallet, while also offering the peace of mind that comes with knowing your cryptocurrency is safe and secure. This method of using a secondary phone as a cold wallet would be more secure than a typical mobile hot wallet but less secure than a hardware cold wallet. This approach would typically store an intermediate amount of cryptocurrency.

Find the Combination that Works For You

Storing cryptocurrency, like any valuable asset, requires making a personal decision about how best to keep it safe while striking the right balance between functionality and security.

Over time, there has been a convergence of sorts — hot wallets are becoming more secure and cold wallets are increasingly convenient. For those who choose to maintain personal custody of their own cryptocurrency, the trend is toward storing funds in hardware cold wallets. Those using a crypto exchange wallet to store the majority of their funds must make sure that they use an exchange with a security-focused reputation and follow its security recommendations.