Hot wallet or cold wallet! They are both storage places for crypto coins, although there are major differences between these two different wallets. Below we tell you more about hot wallet, cold wallets, the difference between them and which one is the best to use.
What is a hot wallet?
A hot wallet is the most well-known and used type of wallet. This is a wallet that is connected to the internet. For example, wallets at crypto exchanges are hot wallets. When you have crypto in your possession, and store it in the wallet at a crypto exchange such as Binance , Bittrex or Bitmex, they are in a hot wallet.
It is often free to use a hot wallet. Especially when this is at an exchange, you pay nothing for the hot wallet. However, it is not completely free. You pay indirectly for the hot wallet through the transaction costs that you pay per transaction.
You can get to your hot wallet by simply logging into a website that supports the hot wallet. It is recommended to always secure your hot wallet with at least two-factor authentication. The risk of theft is otherwise too great.
Disadvantage hot wallet
Because a hot wallet is connected to the internet, it is a lot less secure than a cold wallet. That is why many hackers set their sights on crypto exchanges. If you have a lot of crypto in your possession, it might be wise to put it in a cold wallet. The chance that crypto currencies are stolen from a cold wallet is very small. First, let’s explain a little more about a cold wallet.
What is a cold wallet?
We speak of a cold wallet when the wallet is not connected to the internet. A cold wallet is also physical. It is a piece of hardware where you can store your crypto coins. It is similar to a transportable hard drive. You can connect this to a computer or laptop by means of bluetooth or a cable.
A cold wallet is a lot safer than a hot wallet. This is because a cold wallet is not connected to the internet. When you put cryptocurrencies on a cold wallet, and then disconnect the cold wallet, no hacker can get to the crypto coins. They will then have to physically steal the cold wallet to get the crypto coins. That is why it is best to use a cold wallet when you have large numbers of crypto coins in your possession. The chances of them being stolen from a cold wallet are much smaller than being stolen from a hot wallet.
Disadvantages of cold wallet
But a cold wallet also has several disadvantages. For example, a cold wallet does not support every cryptocurrency. A cold wallet is issued with certain software. This software must be able to support the different protocols of cryptocurrencies. Because more and more new cryptocurrencies are added, it may be that the latest cryptocurrencies cannot be stored on a cold wallet.
In addition, a cold wallet costs money, while you do not have to pay money directly for a hot wallet. When you want to purchase a cold wallet, you should expect to lose about 100 euros. After all, it is also important that you buy a good quality cold wallet. Of course you don’t want to lose your crypto coins. That is why it is well worth the investment at all times.
Also used by crypto exchanges
Crypto exchanges also use cold wallets. They own a lot of client cryptocurrencies. That is why the majority is stored on cold wallets, which are often safely kept in a vault. It is therefore almost impossible to get here as an outsider. In this way, crypto exchanges want to ensure that thieves do not get into the hands of the crypto coins of the customers that the crypto exchange has.
When do I use a hot wallet, and when do I use a cold wallet?
We just told you. If you have a lot of crypto coins, it is best to put them on a cold wallet. It is much safer to store crypto coins on a cold wallet. But it is not convenient to put ALL your crypto coins on a cold wallet. A cold wallet is a lot more inconvenient to use.
Suppose you trade a lot in cryptocurrencies. So every time you want to sell and buy crypto coins, you will have to grab your cold wallet and connect it to your laptop or computer. It is very inconvenient to do that for cryptocurrencies you trade with.
Large amounts of crypto coins that you store are therefore best placed on a cold wallet. You then put the coins that you use for crypto trading on a hot wallet, so that you can trade with it quickly and easily.
How safe is a cold wallet?
A cold wallet is therefore much safer than a hot wallet. But how safe? It is not the case that a cold wallet cannot be hacked. A vulnerability was found in the Nano S Ledger in 2018. This is a cold wallet, where hackers are able to steal private keys, PINs, passphrases and recovery seeds.
Now that is also the only cold wallet in which a major vulnerability has ever been found. For the rest, a cold wallet is actually very safe. It also depends on the user.
When you keep a cold wallet in a safe, the chance of theft is very small. But it is also possible that you take your cold wallet with you everywhere. This increases the chance that you will lose the cold wallet, or that someone will steal it. That is why it is also important to handle your cold wallet in a good way. Safety is largely in your own hands.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com