Defining the Difference Between Hot Wallets and Cold Wallets


The impact of cryptocurrency on today’s world cannot be denied. PR Newswire’s report on the global cryptocurrency market notes that it’s projected to reach $4.94 billion by 2030, thanks to its high CAGR of 12.8% from 2021 to 2030. The report also mentions that the cryptocurrency market is growing at an impressive pace due to the increase in demand for operational efficiency, transparency, and data security.

The accessibility of cryptocurrencies is also a huge reason why this technology continues to thrive and grow. A Wealthsimple guide to cryptocurrencies and exchanges highlights how one can easily invest in and trade cryptocurrencies thanks to the variety of crypto brokerages and exchanges available today. These platforms can be downloaded on a number of devices and allow users to buy and sell cryptocurrencies with ease.

However, investing in cryptocurrencies is not as simple as trading stocks or forex. Because of the high value attached to them, cryptocurrencies are often the target of malicious cyberattacks. To keep your cryptocurrencies secure, you should place them inside a cryptocurrency wallet. Here, let’s discuss the two options that you have: hot wallets and cold wallets.

What are hot wallets?

Simply put, hot wallets are crypto wallets that are always connected to the internet. These are the most common types of crypto wallets because they are easy to set up and use. Creating an account on an exchange itself is an act of opening a hot wallet. Because hot wallets allow crypto users to access their assets as long as they’re connected to the internet, these wallets are meant for those who trade regularly on an exchange or use crypto to make daily purchases.

However, there is a major drawback that you should be aware of before storing your assets in a hot wallet: security. Most experts advise against putting all (or a large amount) of your digital assets in a hot wallet, because this exposes them to various security threats, such as cyber theft and hacking. In fact, a recent report notes that the data of hot wallet users who use Shopify have been recently compromised thanks to a security vulnerability present in the platform. For this reason, you should be mindful of the digital assets that you store in your hot wallet and take extra steps to make sure that they’re secure.

What are cold wallets?

Unlike hot wallets, cold wallets are not always connected to the internet and require a physical medium in order to provide access to the user. There are two types of cold wallets: hardware wallets and paper wallets. Hardware wallets use USB sticks or hard drives to store your crypto wallet’s private keys, making them virtually inaccessible to various malicious parties. Ledger and Keepkey are two DeFi companies that are known for producing highly-secure cold crypto wallets. On the other hand, paper wallets are pieces of paper that provide you details about your wallet’s public address and its private key. For this reason, these need to be stored in a secure place if you don’t want to lose your crypto assets or make your assets vulnerable to theft.

Cold wallets are considered to be the superior crypto storage solution due to their security. But despite being designed to be immune to hacking, this option may be highly inconvenient to those who need crypto for everyday usage. Transferring funds from cold wallets to hot wallets is also incredibly cumbersome, because they need to be powered on and then connected to the internet before you can access your assets.

Which should I choose?

Each type of crypto wallet has its own set of pros and cons. To gain the most convenience and security, it is ideal to have both wallets on hand. Try to find the balance between the security of a cold wallet and the convenience of a hot wallet by looking into the different kinds of crypto wallets and figuring out which ones best work for your needs.