Hot Wallets vs Cold Wallets: What's the Difference?

Introduction

With the widespread use of Bitcoin, Ethereum, and other kinds of cryptocurrencies, the security trading, storage of these kinds of cryptocurrencies have become more and more important. This article will show you the differences between Hot Wallets and Cold Wallets, teach you to choose the wallets that are suitable for you.

What Is a Cryptocurrency Wallet?

A cryptocurrency wallet is one kind of digital wallet that you can use to store your Bitcoin, Ethereum, and other kinds of cryptocurrencies. It is not like the real world physical wallet( to store real paper fiat) but records your public and private keys which can be used to send and receive money. It is well-known that Bitcoin or most of the other cryptos are records on the blockchain, the ownership is established through digital keys, addresses, and digital signatures. The digital key is not stored in the network but is generated by the user and stored in a file or simple database, that's what we called a wallet. Cryptocurrency wallet storage information of crypto, crypto address( like a bank account ), digital keys. The digital key combinations by a public key and private key are used to control the acquisition of cryptocurrency. A public key is used for receiving cryptocurrencies like a username, and a private key is a digital signature for trading, like a password, you will use it to send cryptos to others. A private key is used to protect your wallet. If the private key is lost, you will lose the cryptos forever.

Hot Wallets VS Cold Wallets

Let's compare the two concepts with a real-world example. Hot wallets are like the wallets that you carry around in your pocket. Because of the decentralization of blockchain, there is no central bank in charge of the storage of money. In this case, The cold wallets are somewhat akin to your savings bank account. So if you want to use your cryptos frequently, it is convenient for you to use a hot wallet. in converse, if you want to store your money for a long time or you want to secure a large sum of money, you should use a cold wallet.

What Is a Hot Wallet?

A hot wallet is a tool that allows a cryptocurrency owner to receive and send cryptocurrencies that connect to the Internet. Since it is connected to the Internet, it's easy to access funds on a hot wallet, you can make payments and receive cryptocurrencies with it anytime and anywhere. Although they are convenient, they are easy to be hacked, compare to cold wallets.

How Many Types of Hot Wallets?

• Online centralized wallets: Online centralized wallets are wallets that you can visit through a PC or Mobile browser from random devices. You will basically get a wallet account on the online exchange service. The centralized exchanges play the role of a third party that monitors and secures the assets on behalf of the buyer and the seller. Since your private key is saved on the online server, though it is the fastest to complete a transaction and offers 2FA and other kinds of security methods, it is not 100% safe and sometimes vulnerable to cyber threats and is attractive to hackers.
• Full wallets. It is a wallet that runs a full node and implements all the functionalities of a specific cryptocurrency and blockchain. For example, the Bitcoin Core wallet is a full wallet. It is a node on the decentralized Bitcoin blockchain, and each of these full nodes separately follows the exact same rules to maintain the validity of the Bitcoin blockchain. When you need to use the full wallets, you have to download the whole blockchain data, it is not convenient to use for mobile devices.
• Light wallets: It is a software or app download and installs on a PC or mobile phone. These wallets allow users to access cryptocurrencies through mobile devices and carry out daily activities. They are connected to a server that contains a full node, and no need for downloading the entire blockchain. The private keys are kept by the users only. Light wallets are not linked or affiliated to any exchanges. It is pretty convenient to use because all you need to do is to download an app into your phone.

Is Hot Wallet Safe?

Technically, any digital assets stored in a hot wallet are vulnerable to attack because the public and private keys are stored on the Internet, no matter what type of hot wallet you have chosen. As for the centralized wallets, being hacked by the hacker or shut down may cause loss of your property. Also, if your devices are hacked, and hackers get full access to your device and find your private key, a full wallet of light wallets is still vulnerable. So

it is suggested that you can only keep a small portion of your holdings in your hot wallets, you can just keep a little amount of money you plan to spend in a hot wallet and store the rest of the assets in a cold wallet.

What Is Cold Wallet? Or Cold Storage?

A cold wallet refers to a wallet where your private key cannot be accessed from the Internet, it is the wallet that is totally offline. It is the safest option for cryptocurrency storage, especially for those long-term holders. But they don't accept as many cryptocurrencies as do many of the hot wallets and are difficult to setup for beginners and not for quick transfer and payment.

How Many Types of Cold Wallets?

• Paper wallet: It is simply formed by using a program to randomly generate a public and private key offline and you can print them on a piece of paper, which you then store and save in a secure place. The keys are printed in the form of QR codes which you can scan in the future for all your transactions.
• Hardware cold wallet: Hardware wallets are physical devices where you can store your cryptocurrency. Your crypto addresses and keys can be kept in a USB drive device, and only the person who possesses the USB drive can access the assets.

Conclusion

Let's make a comparison between Hot Wallets and Cold Wallets by Pros and Cons: