Hot vs Cold Crypto Wallets Explained

Web3 is already here and changing our world every day! Information about cryptocurrencies, investment opportunities, and exchanges is coming at us from all sides, but this is not surprising, since everyone wants to be part of this trend. You should start your journey into crypto consciously and safely, understanding the basic concepts and differences. Today, Icon.Partners will lift the veil and help you understand the topic of crypto wallets, including how are cryptocurrency hot wallets different from cold wallets.

Understanding Crypto Wallets 

Definition of hot wallets

So, before we move on to hot wallet vs cold wallet, let's take a look at everything in order. So, what is a hot wallet? These are applications or services that are directly connected to the Internet. This means that you have quick access to your cryptocurrencies, which is very convenient because wallets are integrated with exchanges and other applications, transactions are carried out instantly, etc. However, this is also where the main vulnerability lies — connecting to the Internet creates the risk of hacker attacks, phishing schemes, etc., and therefore additional protection must be created. 

Definition of cold wallets

The opposite is a cryptocurrency cold wallet. A cold wallet meaning that it does not have access to the Internet, i.e., it is offline storage of currency on hardware media. The lack of connection to the internet reduces the risk of hacking and theft, but it is more difficult to use cryptocurrency quickly in this case. That is, cold wallets benefits for long-term investments and large sums, since the level of protection against cyber threats is maximum. 

Key differences between hot and cold wallets

We have answered the main question: what is a hot wallet and cold wallet. It turns out that the main difference is the balance between convenience and security. A hot wallet is the best solution for active trading, quick access to assets, etc. A cold wallet is best for long-term, reliable, and secure storage of crypto assets. The answer to the question “where should I store my crypto” directly depends on your goals.

Hot Wallets 

How hot wallets work

Hot wallets operate through a constant connection to the internet, allowing users to interact with the blockchain in real time. This includes mobile applications, services, software clients, etc. The main thing is that user keys are stored in a specific environment with Internet access. This means that all transactions are instantaneous, you can quickly send and receive currency, interact with DeFi services, etc. 

Benefits of hot wallets

The advantages of hot wallets stem from their features. The main advantages are convenience, speed, and mobility – transactions are carried out quickly, there are no additional complicated procedures, and therefore you can quickly buy or sell cryptocurrency, make payments, etc. Such wallets are often integrated with various types of tokens, blockchain applications, etc., making them the best option for active trading. 

Risks associated with hot wallets

However, convenience comes at the expense of security. Constant access to the Internet poses the risk that the service will be attacked, data will be stolen, and assets will be lost. In addition to problems at the central level,users may fall victim to account hacking, malware, phishing, and other cyber threats. And two-factor authentication does not always save the day, because the connection to the Internet is constant. And don't forget that system problems or platform failures can limit your access to crypto assets. 

Cold Wallets 

How cold wallets work

Now let's answer the question, “What's a cold wallet?” Remember that these wallets work offline and without constant access to the internet. To store assets, they use, for example, hardware devices (such as specially designed USB drives or hardware wallets). User actions are performed in a secure wallet space, after which such a transaction must be transferred to the network using another device. Thus, a cold wallet does not connect to the internet, which essentially blocks access by attackers. 

Benefits of cold wallets

High security is the main advantage. That is, if you need to store crypto assets for a long time, there is no need to make transactions, or if we are talking about significant amounts, a cold wallet is your choice. In addition to not being connected to the internet, hardware devices often offer additional levels of protection (PIN codes, biometric login, etc.). So a cold wallet can give you peace of mind for years to come and become the basis for storing your investments!

Risks and limitations

Advantages for some are limitations for others! Fraudsters will not steal your assets by connecting to the network, but at the same time, you are limited by the lack of connection. With a cold wallet, you cannot make a transaction by pressing a couple of buttons on your smartphone or laptop and running away, because the device must be connected to others and a series of actions must be performed. In addition, the device can be lost, and then it is almost impossible to recover your assets, and devices are more expensive solutions than software wallets.

Choosing Between Hot and Cold Wallets

Factors to consider when storing crypto

Cryptocurrency wallet comparison should always start based on your needs. Be sure to consider how often you need to use your assets, how large your portfolio is, and how much risk you are willing to take. If you don't have too many assets, you need to use them often and without unnecessary complications — this is what a hot wallet is for. If you have a lot of assets and they are just waiting for their time to come, then you need a cold wallet. Or you can combine the two and keep your main assets in cold storage and your cryptocurrencies for active use in a hot wallet. 

Most popular crypto wallets

Here are a few examples of the most popular crypto wallets. Hot wallets include MetaMask, Coinbase Wallet, Edge Wallet, and others. They are easy and intuitive to use, support DeFi, and offer many other features. Cold hardware wallets include Trezor, Ledger Nano, and Keystone, which are valued by investors for their stability, compatibility with various blockchains, and integration capabilities. Each case is unique, and at Icon.Partners, we help you choose the best solution for you!

Best practices for wallet security

Whatever your cryptocurrency wallet, security must come first! We recommend using all available protection options, including two-factor authentication, backups, seed phrases, etc., which are securely stored (preferably offline). Avoid connecting to unsecured networks, public Wi-Fi, etc. Cold wallets should have backup devices, copies of keys, etc. Also, do not download questionable applications to avoid creating unnecessary risks.

FAQ on Crypto Wallets 

What is a hot wallet?

These are crypto wallets with access to the Internet.

What is a cold wallet?

These are wallets that do not have direct access to the Internet and require separate connection devices to perform transactions.

How are hot wallets different from cold wallets?

Network access and the ability to quickly execute transactions.

Where should I store my cryptocurrency?

If you are looking for convenience, operate with small amounts of crypto assets, and trade frequently, a hot wallet is the right choice for you. For long-term storage and large amounts of cryptocurrencies, it is better to choose a cold wallet. Or combine both types. 

Which wallet type is safer?

Both cold and hot wallets usually provide several layers of protection for users. However, without constant Internet access, it is more difficult to hack a cold wallet.