In the cryptocurrency space, protecting digital assets is of utmost importance, and understanding the differences between hot and cold wallets is important for every investor. Whether you are a daily trader or a long-term holder, knowing which wallet suits your needs is critical to your investment strategy in the volatile cryptocurrency markets.
In this article, we will explore the complex differences between the two and review the pros and cons of each.
What is a cryptocurrency wallet?
A cryptocurrency wallet is a digital or physical device that securely stores private and public keys and facilitates transactions. These digital wallets are decentralized applications (DApps) that run on a blockchain network of computers instead of relying on a single computer. It is available from cryptocurrency exchanges like Xverse offers an Android BTC wallet.
The wallet can find all cryptocurrency-related data on the blockchain and provide a summary of the assets you own on smart devices such as smartphones, PCs, tablets, etc.
Cryptocurrency wallets come in many different types. Not all wallets support all currencies. Therefore, you will need to put in some research to decide which one is the perfect fit for your preferred cryptocurrency. You will also need to decide on the wallet category between custodial and non-custodial wallets, hot wallets and cold wallets, and what type of device you should use for the wallet.
A managed wallet is a web-based, third-party digital wallet where an institution ensures the security of funds and private keys and controls the owner’s ability to send or receive transactions. On the other hand, a non-custodial wallet is like the owner managing his or her own bank. The security of keys and funds is the sole responsibility of the owner.
Hot and cold wallets
To put it simply, a hot wallet is a digital web-based online wallet connected to the Internet, while a cold wallet is an offline wallet that is nothing more than a piece of paper or metal that holds the key to access the blockchain. Every category has its pros and cons. Cryptocurrency owners should understand the differences before choosing one. Security and flexibility are the most sought-after features in cryptocurrency wallets and really make all the difference.
Hot Wallet Description
Are you wondering why hot wallets are called “hot”? This is because these cryptocurrency wallets generate and store seed phrases (secret recovery phrases to access your crypto assets) online. When you purchase cryptocurrency, the company you purchase it from provides you with a wallet where you can store your digital coins.
They are also called software wallets as they are available in mobile, desktop or web-based applications and can be used on smart devices such as smartphones, tablets, laptops, etc. There are managed hot wallets and non-custodial hot wallets provided by cryptocurrency exchanges. Some experts have found that software wallets are better than cold wallets when it comes to day-to-day transactions and flexibility. Since most hot wallets are integrated with exchanges,
Advantages:
- It is more accessible than a cold wallet, so transactions can be made anytime, anywhere as long as there is an internet connection.
- If the price falls, you can sell your cryptocurrency assets instantly from your phone.
- You can use it like a checking account for general transactions and other daily purposes.
- Seed phrases are generated online, stored online, and used online.
- An attractive and easy option for those new to the cryptocurrency world.
- No need to switch between offline and online.
- Most hot wallets are free.
disadvantage:
- An internet connection is required for access.
- Hot wallets are more vulnerable than cold wallets. Hackers can remotely control your keys.
- You need a trusted infrastructure to protect your wallet.
- It is not perfect for protecting high-value cryptocurrency assets.
Cold Wallet Description
A cold wallet is a hardware-based storage that allows you to store your private keys and transfer them by connecting them to other devices. They are also called hardware wallets and often look like USB sticks.
Other forms of cold wallets include paper wallets, physical Bitcoin, and offline computers, but they have been replaced by better quality hardware wallets and more secure online wallets. A cold wallet is like a savings account where you can park your funds until you need to spend them. To avoid high risk, most popular exchanges store most of their customers’ funds offline in cold wallets.
Advantages:
- It is extremely secure as it is immune to hacking until the physical device along with your PIN or password is stolen.
- There is value in investing in high-value cryptocurrency assets.
- Transaction signing takes place within the device, so even computer malware cannot steal transactions.
- You can store multiple cryptocurrencies in the same wallet.
disadvantage:
- It is less convenient than a hot wallet.
- Cold cryptocurrency wallets cost between USD 50 and USD 200, while most hot wallets are free.
- It is not user-friendly and requires additional steps to connect.
Both hot and cold wallets have conveniences and limitations, allowing cryptocurrency owners to find the right balance between functionality and security. For typical transactions, you can regularly store a certain amount of funds in a hot wallet and keep the rest safely in a cold wallet.