“Mobile was Internet 2.0. It changed everything. Crypto is Internet 3.0”

So, the time has come when individuals are more interested in crypto investing and the crypto wallet. Just like securing the value of any physical item, crypto investors must start practising good digital security habits to secure their cryptocurrencies. 

When storing crypto, you can choose to move it into a crypto wallet. You have two options here; you can either move it into a hot wallet connected to the internet or to a cold wallet, an offline hardware device. 

The article below will define and demystify the concepts of Hot Wallets and Cold Wallets (a.k.a. Cold Storage).

What is a hot wallet?

A hot wallet does not require any form of human involvement. In other words, it can operate automatically and is cloud-based by nature. Internet connection is mandatory to ensure the proper functioning of any hot wallet because private keys are necessary for signing transactions. This is only possible with a proper internet connection. Next, every transaction you make automatically gets created and recorded in the blockchain. 

However, the private keys of a hot wallet share a single center location. Consequently, its approach is highly vulnerable and prone to theft. The security of the private keys in a hot wallet is easier to hack and is thus somewhat insecure. Hitherto, crypto experts suggest that if you have massive amounts of cryptocurrencies, especially customer funds, it is best not to keep significant portions in a hot wallet. The best practice is to transfer your cryptocurrencies to a hot wallet every time you procure a low balance. 

What is a cold wallet?

A cold wallet is an offline crypto wallet. It offers maximum security, compromising only on its access speed. The cold wallet is "that cryptocurrency wallet” which no one can hack or steal from due to its practically complete absence from the internet. Cold wallets are quite popular by other names like cold storage, offline wallet, and hardware wallet. This crypto wallet type guarantees maximum safety as the users' address, and private key operates only when in conjunction with any compatible software on the computer. 

However, in a cold wallet, human involvement is very necessary for digitally signing each transaction and recording it in the blockchain. Hacking a cold wallet is near impossible as it will require physically accessing the wallet device. Also, the one stealing needs to know the password or pin (if any) to unlock it. The only drawback of a cold wallet is that it is too slow enough to support frequent asset trading. It can take around 24 to 48 hours to transfer funds. Crypto experts suggest that a cold wallet is not the best option when global offices require 24/7 funds transfer. 

Pros and cons of a hot wallet

All types of mobile wallets, web-based wallets, and desktop wallets are the different types of existing hot wallets. Although hot wallets are unsafe and vulnerable to cyber attacks, web-based wallets carry the least security. The most attractive advantage of using a hot wallet is its easy-to-use feature. No transition from online to offline is necessary for making crypto transactions for its consistent online presence. You can perform crypto transactions from anywhere, which is near impossible and inconvenient when using a cold wallet. 

Speaking of the disadvantages, the biggest drawback of using a hot wallet is its security factor. If you hold a large sum of cryptocurrencies, then it is advised that you do not store these in a hot wallet. However, do not confuse a hot wallet with an analogue wallet. Apart from its common factor, the way a hot wallet function is completely different from that of an analogue wallet. 

To this date, most crypto players choose to save major portions of their exchanges in a cold wallet and store only the minimum sum required for carrying out withdrawals in a hot wallet. However, if you still choose to save it all in your hot wallet, do be aware of all necessary details about your chosen exchange wallet. 

Pros and cons of cold wallet

All hardware-based wallets are cold wallets. Other cold wallet options include secondary offline wallets, paper wallets, and physical bitcoins. Cold wallets are considered the more secure storage option, while hardware wallets of higher quality are accessible for reputable exchanges.

In general, a cold wallet stands out for its security factor and is the prime reason behind its popularity and reliability. A cold wallet is designed in a way that makes it hack-proof. One will need physical access to the cold wallet and knowledge of the associated pins and passwords to extract the funds from it ultimately. Even if someone plugged in your cold wallet or connected it via Bluetooth to their device, they will still be incapable of stealing the stored funds. 

The signing of each transaction happens on the device, and it broadcasts on the network only after connecting to the internet. This particular "signature" determines your ownership of cryptocurrency transactions. When using a cold wallet, your private keys will never leave your device. Now you may say that what if maliciously signing a transaction occurs through malware? The transaction will not go through as the signature won't be correct. 

The only disadvantage of using a cold wallet is that it is less convenient than a hot wallet. A cold wallet must first be turned on and connected to the internet, and only then can you make a cryptocurrency transaction. This process requires effort and is a lot more time-consuming. Additionally, hot wallets are mostly free, while a cold wallet costs around $50 to $200. However, if you have significant funds in crypto, invest in purchasing a cold wallet and secure your assets. 

Best of both worlds

On understanding the pros and cons of both the crypto wallets, an ideal choice is to use a combination of both hot and cold wallets. Moreover, to get the best of both worlds, a perfect crypto wallet offers the cold wallet’s security and a hot wallet’s accessibility. The most commonly available options include hardware cold wallets, mobile hot wallets, or exchange account hot wallets. 

You can use a crypto wallet to fulfil one purpose only: store your crypto assets. Thus, create a balance of convenience and security, and then choose accordingly. 

Final word

Try understanding the pros and cons of using either crypto wallet and make a call accordingly. Try to strike the right balance between security and functionality whilst also keeping in mind that cryptocurrency is one of the most valuable assets you own. Moreover, experts today are mainly aiming at making hot wallets more secure and increasing the accessibility of cold wallets. Therefore, as a crypto player, try acknowledging if your priority is easy access to funds or maintaining secure personal custody and choose accordingly.