Crypto Hot Wallet vs. Cold Wallet: A Beginner’s Guide
What's the difference between a crypto hot wallet and cold wallet? Take a closer look and learn which one is right for you.
A quick web search on “how to start investing in crypto” will show you that one of the first things you’ll need is a crypto wallet, essentially a place to securely store your cryptocurrencies.
You’ll also quickly learn that crypto wallets come in all sort shapes and sizes. The most common difference between crypto wallets are the distinction between hot wallets and cold wallets, which basically boils down to the storage method; but more on that later.
That being said, a common question we get asked is which one is better – hot wallet or cold wallet?
Well, there’s no definite answer for this. Only you can decide which one is right for you. In this article, we’ll explore hot vs cold wallets and give some insight into both.
- Cryptocurrencies are stored in crypto wallets that allow the user to access and manage their coins.
- Hot wallets prioritise accessibility, convenience, and cross-platform support.
- Cold wallets are designed for long-term storage with enhanced security measures for maximum protection.
What are crypto wallets?
Before we get started, what is actually a crypto wallet?
Simply put, a crypto wallet is a place to store your cryptocurrencies. It’s like a regular wallet that holds your cash. But with crypto, it’s digital and you have extra privacy keys.
You can think of a crypto wallet as the bank account where you keep your money. And just like when you deposit cash into your bank account, you can transfer cryptocurrency into your crypto wallet.
When it comes to storing your digital coins, there are many different types of wallets available. Some of them are hot wallets and cold wallets.
New to crypto? Start with our 101 guide on cryptocurrencies.
What is a crypto hot wallet?
Crypto hot wallets are a type of crypto wallets that require an active internet connection in order to access its functions – hence the term hot, referring to its active connection to the internet.
Hot wallets are the most popular type of crypto wallets due to their user-friendly design, accessibility, and ease of use.
It’s also worth mentioning that there are two types of hot wallets, a custodial wallet and non-custodial wallet:
- Custodial hot wallets: involve storing your cryptocurrencies with a third party, or a custodian, usually a crypto exchange who will then manage and be responsible for its storage. Examples: Coinbase, Binance, etc.
- Non-custodial hot wallets: you are the sole owner, or custodian of your crypto assets. This means you hold both the public and private keys to your assets, providing you the most decentralised way of owning your digital assets.
The ease of use and accessibility of hot wallets makes them excellent options for those just wanting to start with cryptocurrencies. If you’ve ever used mobile banking apps, you’ll feel right at home with hot wallets.
What is a crypto cold wallet?
Cold wallets store your crypto assets in a secure, offline environment, hence the term cold storage. These wallets are often referred to as hardware wallets and comes in the form a small device like a USB drive, which you can then plug into your computer whenever you need to access your assets.
Cold wallets prioritise safety and protection above all else. Making them the ideal storage solution for long-term holding or those who have large volumes and want the highest protection possible for their assets.
The setup process requires additional steps to ensure the wallet is properly secured, and may involve using the software that comes with the device. While they do take a bit of learning curve to use, the protection that they provide is the highest possible in the industry.
Another important note to keep in mind is that cold wallets by default non-custodial, meaning you are the sole owner, or custodian of your assets. Therefore, it is your responsibility to secure and backup your password, seed phrases, and credentials.
Hot wallets vs. cold wallets: Which one to pick?
Now that you know the distinction between hot and cold wallets, which one is right for you?
The answer ultimately lies with your preference and use cases. Below are some additional contextual use cases for you to consider when choosing between hot and cold wallets.
Crypto hot wallets are generally favored by beginners due to their user-friendly interface, ease of use, accessibility, and integration with your existing devices.
The cons of hot wallets are arguably their lower security measures, and in some cases your dependency with exchanges should you opt with wallets from exchanges, such as Binance, Coinbase, etc.
However, it doesn’t necessarily mean hot wallets aren’t secure, you can easily fortify your security by setting up a 2FA, and using a password manager to secure your credentials.
Crypto cold wallets by design prioritise security and protection of your assets above all else. That means a bit of compromise in terms of accessibility and usability, in exchange for arguably the most secure storage option for your crypto assets.
Cold wallets store your private keys in a secure offline environment, disconnected from the internet, hence the term cold wallet. To access your assets you’ll also need to setup layers of security credentials that is usually facilitated by a program that comes with your cold wallet.
Examples of cold wallets are the Trezor Model T and Ledger’s Nano X and Nano S. Both of which employ industry-leading encryption technology and a variety of security measures to protect your assets.
Keep in mind that while cold wallets are by far the most secure way to store cryptocurrencies, it also emphasizes the responsibility on the user to safekeep and remember the login credentials.
Important: Be sure to back up and secure the credentials of your cold wallets and non-custodial wallets. Your seed phrase and/password is the only way to access your wallet.
Here are some additional detail on the differences between hot and cold crypto wallets.
|Hot Wallet||Cold Wallet|
|Price||No fees are usually charged, but you may have to deposit a certain amount before you can start buying cryptocurrencies.||You’ll need to buy an external device. Prices range from $50 to $250, depending on what devices you need.|
|Better For||People who are just starting to invest in cryptocurrency and want to use an easy-to-use platform.||People who need to store their crypto for a long time.|
|Security||Average, they need to be connected to the internet, which can potentially be hacked.||Excellent. They can’t be accessed online, but they must be handled carefully to avoid damage, loss or theft.|
|Accesibility||They are easily accessible on the computer or phone once you connect them to the internet.||Average, you will need to take one extra step to connect your hot wallet.|
More on safety: Crypto Hot & Cold Wallet Security Tips.
Whether you’re new to the crypto space, or someone with prior investing or crypto experience there is no right or wrong answer for you choice of crypto wallets. After all, we all have our own purpose and intention for investing in crypto.
If you’re someone who is just looking to get started with cryptocurrencies, or maybe you want to look into buying or creating NFTs, then perhaps a hot wallet like Metamask or Trust Wallet is more ideal due to its ease of use and more importantly, its integration with OpenSea, and many other NFT marketplaces.
However, if you’re a high-volume trader or the type of user who prioritises the safety and protection of your assets for long-term investing, then a cold wallet is preferred in this scenario.
You’ll have more peace of mind knowing that your crypto assets are safely secured in an offline environment, away from potentially malicious parties and/hacks attempting to compromise your assets.
Another important advantage with cold wallets is that you have full control and authority over your assets.
Again, this distinction is important because that makes you the sole custodian of your assets, unlike a crypto wallet that you get with an account at a crypto exchange for example, where they are the custodian of your assets, and hold your private keys for you.
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated December 9, 2022