Cold storage vs. Hot Storage
To begin understanding why every crypto investor needs a cold wallet, we must first understand the difference between cold and hot storage.
Hot storage refers to any crypto wallet that is run through an internet connected system. Hot wallets can be run on the cloud, a mobile device, or a desktop. Depending on the system, the user may or may not be in control of their private keys (see InvestVoyager).
Cold storage is as you can imagine, the exact opposite of hot storage, whereas the crypto wallet is not connected to the internet. It remains completely isolated from the outside world. Last, but most importantly, you retain control of your private keys! 🔑
Can you see where I’m going with this yet? 😅
Why would anyone use a hot wallet?
Of course, the most basic yet, fundamental purpose hot wallets possess are their ability to facilitate transactions seamlessly. You can send and, or receive tokens to virtually anyone, anywhere at any given time.
Another use for hot storage might be a situation where a certain coin needs to remain on an exchange in order for holders to participate in the latest and greatest passive income strategy that wasn’t around last bull market cycle, staking. Exchanges handle the paperwork so to speak, which isn’t much, but they take a cut of your staking rewards for doing so. (For the record, there are many cold wallets you can stake with 👀)
The good is good, the bad is just awful
Now that we looked over some of the advantages of hot wallets, we need to point out the blatant disadvantages. Since they are so readily accessible, and connected to the internet ecosystem, this by default makes them extremely vulnerable. Not only to outside hacks, but from the very system that controls the private keys to the crypto in that account from within. Imagine trying to get out the market or trade into a different coin, only to be locked out of your account, and being prompted with a “currently under maintenance” screen. I know, how terrifying! (It still gives me goosebumps)
Feel free to peel back more layers on hot wallets and other use cases, advantages and disadvantages here.
Now you might be asking yourself, “why wouldn’t everyone just get a cold wallet?”
Plain and simple, crypto in general is still far from plain and simple for the masses. It’s almost there for your average Joe, maybe not quite for grandma at the moment. Some people are lazy, while most are uneducated. The method of keeping your crypto in cold storage can be tedious and require a little more understanding into the crypto-verse. For starters, It took me a few months just to realize why I needed a cold wallet. Although, once I purchased one I have to to admit, after following a quick tutorial, I was off to the races. A wave of financial freedom ran through my body, something I never felt. Something I never knew I was missing.
As a token holder, as a crypto investor, you have to determine which wallets best service you. You have to make the decision how much of your assets are in your control and how much are at risk. Albeit, some exchanges and hot wallets do offer substantial insurance, but again, who wants to be in that position? Who wants to take that risk? You have to prioritize security over convenience in the crypto space, especially since we’re all still in the early stages of this industry. The wild, Wild West if you will. The savvy owners who use cold storage keep some tokens in a standard hot wallet for daily spending and keep the rest in a cold storage device. This is how you reduce the effort of having to dig out coins from cold storage every now and then for everyday use. At the same time, you minimize your portfolio’s exposure to the outside world. Thanks for stopping by and thanks for the tip! Check out my other posts and hit follow to stay tuned for future posts!
Find out more about cold storage, hardware wallets, different types of software, how to set everything up and it’s beneficial use cases in the links below ⬇️