Hot Wallet vs Cold Wallet – What’s the Difference?

In the realm of cryptocurrency, safeguarding your digital assets is paramount, and understanding the difference between hot wallets and cold wallets is crucial for any investor. Whether you’re a day-to-day trader or a long-term holder, knowing which wallet suits your needs is crucial for your investment strategy in the volatile cryptocurrency market.

This article will delve into the intricate differences between the two, examining their respective advantages and trade-offs.

What is a Crypto Wallet?

A cryptocurrency wallet is a digital or physical device that stores your private and public keys safely and facilitates transactions. These digital wallets are decentralised applications (DApps) that run on a blockchain network of computers in lieu of relying on a single computer. they are offered by crypto exchanges like Xverse offers an Android BTC wallet.

The wallets can locate all your crypto-related data on the blockchain and come with a summary in your smart device, like a smartphone, PC, tablet, etc., of the assets you possess.

Crypto wallets come in various types; not all wallets support all currencies. So you need to put some effort into research to reach a decision to choose one that will perfectly suit your preferred cryptocurrency. Moreover, you also have to decide on the wallet category between a custodial and non-custodial wallet or hot and cold wallet and the type of device you need to use for the wallet.

Custodial wallets are web-based third-party digital wallets where the authority ensures the security of the fund and private keys, and the owner controls permission to send or receive transactions. On the other hand, non-custodial wallets are like the owner is controlling his/her own bank; security of the keys and funds is solely the owner’s responsibility.

Hot Wallet Vs Cold Wallet

To define it simply, hot wallets are those digital web-based online wallets that are connected to the internet, and cold wallets are the offline ones, which can be merely a piece of paper or metal holding the keys to access the blockchain. Every category comes with its pros and cons; before choosing one, a crypto asset owner must understand the difference. Security and flexibility are the most sought-after features of cryptocurrency wallets, which actually create all the differences.

Hot Wallet Explained

You might be curious to know why hot wallets are called “hot”? It’s because these cryptocurrency wallets generate and store your seed phrases (secret recovery phrases to access the crypto assets) online. When you are buying some cryptocurrency, the company you are buying it through will give you a wallet to store the digital coins.

They are also known as software wallets as they come in mobile, desktop, or web-based applications and can be used from smart devices like smartphones, tablets, laptops, etc. There are custodial and non-custodial hot wallets offered by crypto exchanges. Some experts found the software wallets better than the cold wallets for everyday trade and flexibility. As most of the hot wallets are integrated with the exchangers, it

Pros:

1. More accessible than a cold wallet, transactions can be made anytime, anywhere, if you just have internet access.
2. When you see prices dropping, you can sell your crypto assets immediately on your phone.
3. Can be used like a current account for regular trade and other daily uses.
4. Seed phrases are generated online, stored online, and used online.
5. An attractive and easy option for those who are new in the crypto world.
6. No transition is required between offline and online.
7. Most of the hot wallets are free.

Cons:

1. Require an internet connection to access.
2. Hot wallets are more vulnerable than cold wallets; hackers can take control of the keys remotely.
3. Need trustworthy infrastructure to secure the wallets.
4. Not perfect for securing high-value crypto assets.

Cold Wallet Explained

Cold wallets are hardware-based storage where private keys can be stored and transferred by plugging into other devices.  They are also called hardware wallets and often look like USB sticks.

The other forms of cold wallets are paper wallets, physical bitcoins, and offline computers, but they have been replaced by the emergence of better-quality hardware wallets and highly secured online wallets. Cold wallets are like savings accounts where you can deposit your funds until you need to spend it. To avoid high risk, most of the reputed exchangers keep the majority of the customers’ funds offline in cold wallets.

Pros:

1. Made immune to hacking, quite secure until the physical device, along with the PIN or Password, gets stolen.
2. Worth investment for high-valued crypto assets.
3. As the signing of the transaction takes place in-device, even computer malware can’t steal the transaction.
4. Can store multiple cryptocurrencies in the same wallet.

Cons:

1. Less convenient than hot wallets.
2. A cold crypto wallet can cost USD 50 to 200, whereas most of the hot wallets come free of cost.
3. Not very user-friendly, and extra steps are needed for connection.

As both hot and cold wallet has their conveniences and limitations, a crypto owner can look for the right balance between functionality and security. For regular transactions, a level of funds can be maintained regularly in a hot wallet, and the rest of the can be stored in a cold wallet safely.