What are the differences between hot and cold crypto wallets? Since you can store your crypto coins in a hot or a cold wallet, you should pick the right one among the two for that matter.
However, if you do not know the differences between them, it will be quite hard for you to choose. This article will help you significantly with that letting you know about the differences and which is better among the two for your crypto storage needs.
If you spend some time on different crypto forums you will probably come to know that there is an ongoing war among the members on hot wallets and cold wallets.
This seems to have no end and therefore it is hard for a user, especially a beginner, to find out the winner among the two types of crypto wallets.
However, things need not be as difficult as they seem to be. Check out Differences Between Crypto Wallet and Ledger.
If you only know the pros and cons of each type, the differences and also the price ranges and compare and contrast both the types of wallets, you can find out easily which one among the two will be the most suitable for you.
9 Differences Between Hot and Cold Crypto Wallets
When it comes to storing crypto coins, it is imperative that these should be kept safe in a wallet and at the same time it should offer maximum functionality. Ideally, choosing a crypto wallet to use is entirely a personal matter.
Some say cold wallets are the best since they have better features and functionality in comparison to the hot wallets while others may refute them.
If you intend to buy crypto coins and HODL then a cold wallet is the best option and if you wish to spend them regularly, a hot wallet will be the best choice.
However, knowing the other differences between the two is vital in making the right choice, which is why you should not skip any part of this article.
When you know all of the differences well, you may even use a combination of the two types of wallets, if need be.
1. Security Aspects
Ideally, a hot wallet is connected to the internet and therefore is more vulnerable to online attacks in comparison to the cold wallets. However, do not conclude that all types of hot wallets are inherently unsafe. The truth is that these are potentially more vulnerable to attacks.
Apart from the susceptibility of the hot wallets to hacking, the fact that the centralized entity holds the keys allows less control over your wallet and funds. This also means that they can freeze these wallets and in that case you will not be able to withdraw funds from it.
The custodian may even run away with your keys just like it had happened with Thodex and QuadrigaCX. In such situations the crypto maxim, ‘Not your keys, not your money,’ will surely hurt you. That is why it is always advised to go with a noted and trustworthy crypto exchanges and brokers only.
A cold wallet, on the other hand, is not connected to the internet and therefore is not vulnerable to online attacks. Therefore, the cold wallets are more secure.
In terms of cybersecurity, the hardware wallets and the paper wallets seem to be invulnerable to cyberattacks. These wallets come with different layers of security over and above the fact that these are PIN protected.
These wallets also come with a seed phrase that acts as a backup of the private keys. These seed phrases actually act as a recovery password and contain as many as 12 to 24 English words.
You can use these seed phrases to regain access to your wallet in case you lose the wallet in any accident, or to a thief, or due to any failure and other issues in the device, as well as when the manufacturer of the wallet goes out of business.
You will have a complete peace of mind if you buy a new device that supports the old seed phrase. All you have to do is set it up properly and if successful you can reclaim the keys and manage your crypto wallet as if nothing had happened.
Also, if you buy a cold wallet from a reliable vendor, it may also come with a passphrase. This will act as a secondary password and will not appear by entering simply the PIN but allow you to access your crypto account.
2. Speed of Performance
The hot wallets are much faster and easier to use for trading crypto coins. This is because, being connected to the internet, these wallets allow direct communication with the respective blockchain in real time which results in much faster processing of transactions. Therefore, the hot wallets are more convenient and faster to use.
In comparison, the cold wallets are slower since the communication established through these wallets is not fast enough. This results in much slower performance by these cold wallets in comparison to the hot wallets.
Also, you will need to find a device first, such as a computer, to plug it in so that you can use it. This makes it quite inconvenient in comparison to the hot wallets.
As for the types, there are different types of hot wallets which include web-based wallets that run in remote cloud-based servers. You can access these wallets from anywhere and with any device using that particular server. However, the private key is held by a third party and therefore can be compromised.
The software wallet is another type which is more secure to use because it stores the private keys in the local hard drive allowing you to have full control over it.
And, there are the standalone hardware wallets that look like a USB or a flash drive. Typically, these wallets act as a hot and cold storage both depending on whether it is plugged in or not at a specific point in time.
In comparison, the cold wallets come in two specific types namely paper wallets and metal wallets. The paper wallets are actually prints of your private keys.
You therefore do not need to keep it on the internet and therefore it will not be compromised. However, if you lose the paper, you lose the keys and therefore the access to your wallet.
The metal wallets are made of steel and titanium and store the seed phrases. These are far more durable options as compared to paper wallets. These wallets are also heat and fire resistant and will not degrade over time as a paper wallet would.
4. The Price Factor
One of the most significant factors of difference between hot and cold wallets is that the hot wallets are usually free. You simply have to find one according to your needs and wants, register with them by following the requirements and you are ready to use it. All free of charge.
In comparison, such leisure and freedom is not offered by the cold wallets. These devices are quite expensive which is why these wallets are comparatively less popular among the users.
5. Crypto Coin Support
In terms of crypto support, the hot wallet wins, once again, over the cold wallets. Usually, the hot wallets will support all of the major cryptocurrencies and a large number of stablecoin and Altcoins as well.
As for the cold wallets, on the other hand, these devices usually come with a very limited support for cryptocurrencies for storing.
In fact, most of the cold wallets that you may come across will only support the major crypto coin types available in the market such as Ethereum, Bitcoin, Dash and a few more. This inability of it, along with its high cost, reduces the usage of the cold wallets quite a bit.
6. Safety Enhancing Methods
As it is, you cannot typically do anything to change the safety and security aspects of the hot wallets that are online and with the exchange.
However, there are a few specific ways in which you can enhance the safety of your crypto assets. These methods will make the hot wallets somewhat less susceptible to cyberattacks by malicious actors as well as other allied issues.
Apart from limiting the amount of storage in these hot wallets, you should also ensure that you use a reliable and reputed Virtual Private Network or VPN. This will add an additional layer of security since all your transactions will be encrypted when you are online.
This will make you truly anonymous since no one will be able to see what exactly you are doing online. A VPN service usually comes with military-grade encryption that not only makes everything secure as much as possible but also makes it difficult to track your location and identity.
On the other hand, the security and safety aspect of the cold wallets are entirely in your hands. You must make sure that you use proper and strong passwords so that no one can access your device even if they get a chance to lay their hands on it.
The password should be hard, if not impossible, for others to guess. It should be a long and complex string that includes a set of letters both in upper and lower case, a lot of symbols and letters.
Also, make sure that you create a proper backup of the storage and keep it in a safe place or with someone you can trust and get it back when you need it in case you lose the wallet or it is damaged due to fire or any other hazards.
7. The Working Process
The working process of the hot wallets is quite simple and it is mainly due to its design. It is easy to store your crypto assets as well as access them because when you buy or mine a particular crypto coin it is delivered quickly and easily on this online storage.
Apart from that, when you want to make a purchase of any goods or services and pay for it in crypto coins, these hot wallets will allow you to use them in a fairly straightforward manner.
It is because the hot wallets typically have two types of keys either stored on the internet or in a device that is connected to the internet such as your computer or your smartphone.
The public key, which is a specially designed cryptographic key, allows the users to send the crypto coins to a specific address. This key is used just like the username of a bank account but it does not need identification of the users.
There is also a private key stored in the hot wallet which contains all the information of the users. This key is particularly used to prove the identity of the user as the owner of a particular hot wallet.
This is just like the PIN or password used in a bank account. A user can use this private key to access their wallet and see what is happening in it.
On the other hand, the working process of the cold wallets is significantly different in comparison to the working process of the hot wallets. As said earlier, a cold wallet works offline and nothing is connected or can be connected to the internet.
Though, just like a hot wallet, the cold wallets also contain public keys which are the crypto address and private keys as well with which the wallet owner can access their crypto assets, the private keys in a cold wallet are not stored on the internet as these are in a hot wallet.
When you make a transaction of your crypto assets, these keys are typically used for the signing process but the entire process does not happen online as it is in the case of hot wallets.
Though the transaction starts online initially, everything else takes place offline since all these are moved offline into the cold storage. It is here the transaction is signed digitally and all the completed information is then again sent back to the network online.
8. Used By
The cold wallets are ideally used by those users who want a more secure storage to store a large number of crypto coins or assets, and most importantly, offline.
People who use a combination of online and offline storage typically store the larger share of their holdings in a cold storage and a smaller part in the hot wallet that they need to use daily or a more frequent basis.
However, it is good to know that though a cold wallet offers a more secure and a good solution for storing your crypto coins safely, there is a chance of losing or forgetting your private keys. In that case you may not get those stored coins back.
On the other hand, the hot wallets, in comparison, are a good and more attractive choice for the users who engage in crypto transactions frequently online. In case of a crypto investor, a hot wallet will facilitate in making a transaction and will also make it easier to complete it fast.
These hot wallets not only allow buying and selling of crypto coins on the exchange but also provide you with a crypto address which you can use to send the coins to make a payment.
However, you must know at this point that there are a few specific types of crypto exchanges, for example Binance, that provide hot wallets that may restrict the storage capacity.
This is usually done to encourage the users to move the remaining of their crypto assets offline particularly in a cold wallet. This is done as an upgraded security measure by the exchanges.
If you do not store a large number of coins in your hot wallet it will not be a target for the thieves. Therefore, always keep a reasonable portion in a hot wallet and the bulk of your holding in a cold wallet.
The cold storage wallets will ensure higher privacy in comparison to the hot wallets. This is because the developers of these wallets typically do not have any KYC or Know Your Customer policy.
This means that you will not need to go through any stringent verification process when you sign up to use their products or any identification process while making a transaction.
The maximum information and details that you may be asked to furnish is your email address. This is typically required in case it is needed to set up your account as well as for placing your orders.
However, if you choose a centralized trading platform then things can be significantly different if you use anything else other than a hardware and paper wallet, which ideally anyone is free to use.
This is because the centralized trading platforms may single out users from specific jurisdictions in order to avoid upsetting the local regulators and the government that dislikes crypto.
The geo-restrictions imposed may block specific sites that sell cold or hardware wallets. However, you can still get around such online censorship by using a proxy server or a Virtual Private Network or VPN service.
The hot wallets, on the other hand, need their users to go through a specific identification verification process. In such situations you may need to provide a lot more details than your email address.
This however, experts say, is in contradiction of the fundamental cannon of cryptocurrency which is allowing the users to make anonymous transactions.
Which is Better – Hot or Cold Crypto Wallets?
Cryptocurrencies, like any other valuable asset, must be stored safely and it is your responsibility to decide how best you can do that.
You can choose either a hot wallet or a cold wallet but you should not compromise with both the safety aspect and functionality.
Ideally, the hot wallets are considered to be less secure and the cold wallets are more convenient to use.
Still, the need for the hot wallets, in fact, cannot be overlooked, especially by the crypto exchanges, since they need to store a part of their holdings in it. This is done for increasing efficiency in the market as well as the liquidity.
To put things in simplest of words, it can be said that neither of these two types of wallets is suitable for every user, nor should one use either of these for every crypto activity.
While the cold wallets are best for long term storage of the keys, the use of hot wallets would make more sense if you want to make crypto transactions every day.
Also, if you want to have full control over the private keys and maintain personal custody of your crypto coins, a hardware cold wallet will be the best option to store your funds.
However, if you trade frequently and have full confidence in the safety and security aspects of the exchange, then you can go for a hot wallet.
If you want to get the best of both worlds of crypto wallets, you can even use a combination of the two, hot and cold wallets, especially considering the trade-offs.
This will be most ideal since this combination will allow you to strike a perfect balance between the securities of a cold wallet and get a complete peace of mind as well as the greater accessibility and faster performance of a hot wallet at the same time.
However, when you go for a combination of crypto wallets, make sure that you follow the rule of thumb.
That is, you should not store more money in your hot wallet as you would in a leather wallet in your pocket.
This will ensure that you do not incur huge losses. Store the major part of your holdings in a cold wallet which is much more like a bank vault.
A unique trend noticed among the people nowadays is using another cell phone that functions as a mobile crypto cold wallet.
The good thing about it is that you will need to turn it on only when you wish to make a transaction. You can easily connect this cell phone, or your cold wallet, to the main phone via Wi-Fi or Bluetooth.
This way, you can transfer the funds to your hot wallet to make the transaction and when it is completed simply turn off the Wi-Fi or Bluetooth connectivity and the second cell phone.
This will add to the convenience as well as security, even more than a hardware wallet. However, you must be informed at this point that this method of using a second phone as a mobile cold wallet will certainly be more secure and safer in comparison to a usual mobile hot wallet but less secure than a hardware cold wallet.
This is a good method to follow if you need to store some amount of crypto coins in the middle of a process.
However, whichever option you choose, make sure that it is a non-custodial wallet. This will allow you to have complete control over your funds since only you will be holding the private keys.
If you choose a cold wallet make sure that security is your topmost priority. Also make sure that the wallet is easy to use.
It should not come with a steep learning curve and come with an intuitive and user-friendly user interface.
Lastly, consider the size and compactness of the design of the wallet. It should preferably be small and light so that you can carry it with you anywhere easily.
On the other hand, if you want to go for one of those hot wallets, there is not much you can do since all these wallets come with in-built features.
However, you should still look for the security features, the usability and convenience, the interface, and, most importantly, the reputation of the exchange by going through several reviews posted in neutral third-party review sites.
There is also one specific thing that you should remember when it comes to choosing your crypto wallet. That is, no two wallets are the same.
Therefore, you should be very selective about the crypto wallet you wish to use. This is important because choosing the wrong one may result in a significant amount of loss in some way or the other that may be irrecoverable.
Therefore, there are some tips that you should follow in order to make the right choice.
Firstly, check the features of the crypto wallet, every single one of them. This will allow you to know what the hot or cold wallet is able to do and not able to do.
This means that it will help you to discern them depending on the flexibility, functionality, security, utility, and reliability.
When it comes to choosing a non-custodial cold wallet, check that it comes with exchange functionality built-in along with the bundle of transactions it supports.
Also, do not forget to check the transaction fees and its adjustments, whether or not it allows replacing transactions that are unconfirmed with higher fees and air gapping as well as supports passphrase, seed phrase, and two-factor authentication.
On the other hand, if you want to stick to the custodial hot wallets, make it a point to go for one with a centralized entity.
This will ensure that the security aspect is taken seriously by the exchange. Add to that make sure that the fees charged for making transactions are quite reasonable.
Ideally, the best way to go ahead before you finalize on a particular one is to look up for past scandals and scams, if any.
Remember that even the most reliable and established exchanges will have had a fair share of bad phases and press. It is not always necessarily true that the scams involve loss of funds or private keys due to data breach.
Digital wallets and exchanges may also fall victim to other incidents such as exposure of the email addresses due to such breaches.
Also, check the technology since none is perfect as well as the shortcomings and fixes before depositing your funds into the wallet.
Be knowledgeable about the risks involved as well as the physical dangers.
Now that the different points of view of hot wallets versus cold wallets are covered, choosing one for you will be easy. However, research always no matter whichever option you choose so that it serves all your purpose for years to come.