Michaël van de Poppe - 23 March 2022
Crypto wallets: They’re hot and cold
They’re yes and they’re no. Let’s stop there before we really break out in song. As paper money is to the wallet, cryptocurrency is to, well a wallet as well. The difference is the crypto wallet is digital.
Before you start to trade or invest in crypto, having a wallet to put all your coins is very important. This article will give an explanation of what a crypto wallet is, the different kinds of wallets and their privacy level.
Crypto wallet: Simplified
Before we go into the different types of wallets and their security, we will define the terminology of what is a crypto wallet. If you have cryptocurrencies the only way to store them is in a crypto wallet.
The crypto wallet stores your private keys which in return keeps your crypto safe and accessible. Private keys are long character strings that mathematically unlock access to your wallet. When you get your private key DO NOT SHARE these with ANYONE. Keep them safe where only you know where they are. Additionally, the wallet allows you to send, receive, stake and sometimes exchange the cryptocurrencies that you own.
There are two types of wallets: hot wallets and cold wallets. The main difference between the two is how the private keys are stored. Your private keys are what grants access to your crypto holdings. As we mentioned earlier keeping your keys stored safely is of great importance. In addition, one has better security than the other which we will explain later in the article.
Hot Wallets: Software wallets stored on a computer (Connected)
Hot wallets are connected to the internet and pose more risks to security, meaning they can easily be hacked if your computer gets a virus. However, the good side is they are user-friendly.
Traders use them more specifically for daily transactions as they are quickly accessible. The main idea is that there is only a small percentage of their cryptos on the hot wallet.
Now let’s break down the types of hot wallets that are there. Simply put, there are three.
A software that can be installed on your operating system. One of the main important factors to mention is that an anti-virus program is needed for security. Tip: Backing up your computer on a regular basis is necessary.
Just as the desktop is for your computer the mobile wallet is for your smartphone. As smartphones are really developing with the technology they use QR codes to make transactions even easier. The only downfall, just like most hot wallets is being prone to viruses and malware.
The main playing field here is the internet browser. The biggest issue is that private keys are prone to attacks. Please bear in mind that although it is considered a hot wallet as it is connected to the internet they are solely targeted for small investments and is considered of the least secure wallets around.
Cold Wallet: stored on a separate device (Disconnected)
Calling all HODLers! This wallet is for you. Why? It is a wallet that you can actually carry around like the real deal. A cold wallet which is technically a hardware wallet stores all your crypto in a device, which is offline. To top it off, your private keys are on the device itself.
Cold wallets require the internet to access your holdings and make transactions. Your keys are stored offline, which makes it safe for storing cryptocurrencies as outsiders aren’t able to hack the wallet. The reason we mentioned the term HODLer is because this hardware wallet is a way to store your long-term investments in crypto.
Let’s summarize both wallets. A hot wallet is mostly used for daily transactions. On the other hand, a cold wallet can best be viewed as a safe, storing long-term investments in the safest way possible.
Will you be using cryptocurrency daily and are active on-chain? A hot wallet would be the answer. Do you want to move your holdings off exchanges and keep them safe? This is where the cold wallet will be best.
At the end of the day, it’s about preferences and usage. There is no best wallet for a beginner, unless the person starts investing $200k then a cold wallet would be the best option.