Hot Wallets vs. Cold Storage

Hot Wallets vs. Cold Storage

By Austin Reihl | Cyberdigital Network | 27 Jan 2021


Given that many new users have been entering the decentralized-finance (DeFi) craze, plus bullish factors like the recent PayPal announcement to adopt crypto – it’s vital to ensure you have the best method for keeping those digital assets secure.

 

With publicized hacking events on the rise, disingenuous scammers have created elaborate, and unfortunately, ingenious ways of stealing cryptocurrency. These so-called “hacks” take place in plain view: like rerouting coins from one wallet to an unintended one – by changing the receiving address just before the victim selects the final confirmation to execute the transaction (tx). The victim then helplessly watches as their wallet gets drained of funds.

 

This guide will help you avoid any crypto trader and investor’s biggest nightmare: a security breach. Choosing a reliable, secure, and compatible wallet that offers storage for all of your holdings is a crucial factor to consider when choosing between a hot wallet or cold storage to meet your digital security needs.

 

What’s a Hot Wallet?

 

One of the most popular cryptocurrency wallet types is known as a hot wallet. The primary difference between a hot wallet vs. cold storage is that while hot wallets remain connected to the Internet at all times – cold storage does not. Hot wallets are more popular than cold storage due to their convenience and friendly user-interface (UI).

 

There are many reasons why an investor or trader may want their crypto holdings connected to the Internet at all times. Because a hot wallet remains linked with public and private keys, not only does this help facilitate transactions, it also acts as a security measure. However, because hot wallets remain connected to the Internet at all times, they can be somewhat insecure in that they are more vulnerable to hacks that way – as opposed to cold storage.

 

Beginner investors often choose to keep their coins and tokens on a popular centralized exchange (CEX) such as Coinbase, while more experienced users will only keep a small portion of their holdings on a CEX and hold the rest of their digital assets on their hot wallet of choice. Because of this, hot wallets are a quick, popular, and user-friendly solution to getting your assets off of the exchange and into the safety of your own self-custodial digital wallet. Overall, a hot wallet is not a bad solution for storing your crypto.

 

Note: It can be advantageous to do your own research (DYOR) before choosing a hot wallet. Developers often have different strategies when it comes to keeping their products up-to-date, secure, private, along with varying levels of support for coins and tokens. Some companies may have proven track-records while others have poor to no reviews due to the fact that there are countless new products and services being offered in the world of cryptocurrency.

 

What’s Cold Storage?

 

Some cryptocurrency holders prefer to keep their digital assets in a physical wallet, known as cold storage. These aren’t your traditional fiat wallets, however. Usually, a physical wallet resembles something like a USB flash drive. The reason these devices are not considered hot wallets is because they are not actively connected to the Internet and can only be accessed when directly connected to a computer with Internet access.

 

Unauthorized access, cyber-hacks, and other vulnerabilities are some of the major drawbacks when opting for a hot wallet over cold storage. The most basic form of cold storage is the paper wallet, a document with the public and private keys written down on it, or even printed from an offline printer. The major drawback to this method is that if the document becomes lost, stolen, destroyed, or illegible, the user will not be able to access the address where their funds are now residing.

 

Lastly, users looking for a cold storage method can opt for an offline software wallet. These are quite similar to hardware wallets but can be slightly complicated for less technologically-inclined individuals. Offline software wallets are unique in that they split wallets into two accessible platforms – an offline wallet and an online wallet.

 

The offline wallet is where the private keys are stored, while public keys are available to the online wallet. Because the offline wallet never gets connected to the Internet, your private keys remain secure. Electrum and Armory are considered two of the best offline software wallets in the crypto-economy.

 

Your Security Matters!

 

Traditionally, when an account gets opened at a bank, the bank is usually able to refund any lost or stolen funds if the incident was at no fault of the account holder. But, should your hot wallet become compromised, it can be nearly impossible to retrieve the funds since most digital currencies are decentralized and don’t have the backing of a central bank or government.

 

Note: as previously mentioned, cryptocurrency traders and holders should ensure that their wallet of choice is compatible with the coins and tokens they hold or trade. Not all wallets support all cryptocurrencies. As previously mentioned, it is your responsibility to DYOR to reduce the probability of losing any assets due to foul-play, or a company going bankrupt.


Austin Reihl
Austin Reihl

Author. Creator. Musician.


Cyberdigital Network
Cyberdigital Network

Building peer-to-peer protocols for decentralized social networking. t.me/cyberdigitalnetwork

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.