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Hot wallet vs cold wallet in cryptocurrency storage

Is it better for you to store your cryptocurrency tokens in a hot or cold wallet? What is the difference between the two? In this, we explore.

Written by Becky Leighton Published on

Before we look at the different types of storage methods available for Bitcoin and other cryptocurrencies, we should define what a “cryptocurrency wallet” is exactly.

What is a cryptocurrency wallet?

A cryptocurrency wallet is a method of ‘storing’ cryptocurrency. Kind of. The term “wallet” might be a bit deceptive, as it doesn’t house cryptocurrency tokens in the same way that a normal wallet – or even regular bank account – does for your money. You can’t “get Bitcoin and put them in your wallet” but you can get Bitcoin and hold them securely using your wallet.

Essentially, a wallet doesn’t keep your tokens safe, but it does look after the key you use to get your tokens.

How does a cryptocurrency wallet work?

A cryptocurrency wallet stores both the private and public keys of a cryptocurrency user to a point of safety that no-one can gain access to their tokens without permission. This means that if you have lost access to your own key, you will be locked out and will not be able to access your tokens at all. This is both great but also possibly detrimental. Depending on which wallet you choose, this results in a secure system which leaves no room for a central figure to have access to your tokens (such as a bank accessing your funds) but also leaves you vulnerable as there is no “Forgot your password?” option.

What are the types of Bitcoin wallets?

There are different types of wallets available to store your cryptocurrencies, such as:

  • Desktop wallets
  • Mobile wallets
  • Hardware wallets
  • Paper wallets

For more details on the types of Bitcoin wallets, read here.

What is a hot wallet?

A hot wallet is used online through platforms who offer the storage services. In hot wallets, the user entrusts their private and public keys to the platform who then manages and secures both keys. It is not recommended to leave large amounts of cryptocurrencies in a hot wallet as the systems could be vulnerable to hacking. It is also advised that you do thorough research into the wallet provider before signing up – there are malicious scam projects which are looking to steal funds from vulnerable users.

Many cryptocurrency exchanges offer a wallet service to make trading convenient for the user. For example, if you sign up to Coindirect, you immediately receive a wallet from where you can trade, sell, and store your cryptocurrencies.

What is a cold wallet?

A cold wallet, on the other hand, is entirely offline. Generally, a cold wallet can come in software forms such as apps which are used on a computer or smartphone, or as a hardware device, which is plugged in but remains offline. Cold, hardware wallets are considered the most secure method of keeping your cryptocurrencies safely stored.

Hot vs cold wallets

While both methods of storage have pros and cons, which one you choose depends on what you are looking for. For example, if you are hoping to house a small amount of cryptocurrency in an easy, convenient location, then a hot wallet is probably your best bet. If you are storing a huge amount of Bitcoin, though, you might rather opt for a cold wallet.

Advantages of a hot wallet:

  • It is convenient
  • Trades are instantaneous and much easier with an online wallet

Disadvantages of a hot wallet:

  • It cannot guarantee safety, even if systems are tried and tested, there is still a risk of hacking

Advantages of a cold wallet:

  • It is much less susceptible to hacks and there is no risk of security

Disadvantages of a cold wallet:

  • It is much more of a task to store cryptocurrencies on a cold wallet
  • It is highly inconvenient for trading purposes

What is a paper wallet?

A paper wallet, as the name implies, is a wallet which is usually made of paper or a material which can be printed or written on. A paper wallet is a material which simply has a private and public key printed on it – thus making it both offline and impossible to hack if created online too. Of course, while it is secure from hacking, it is not secure from the physical issues that a wallet might face such as theft or destruction from flooding or fires.

How to create a paper Bitcoin wallet

An easy, although not completely absent from hacking, method of creating a paper wallet is through a website such as Bitaddress.org or Walletgenerator.net. These sites are open-source sites which randomly generate keys using the JavaScript engine on your browser. Although the internet isn’t used to send the keys to your computer, there is a slim risk attached as your computer has “seen” the keys and is therefore not totally secure. To combat this, Mycelium has found a way to create paper wallets offline which are sent straight to a USB plugged into your printer. This means the keys have never been on your computer and are therefore secure from hacking.

Start trading cryptocurrency with Coindirect.

Written by

Internet writer looking to find the right piece. Also presents things on radio and happens to be a chip off the old blockchain. @BeckyRLeighton

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