Congratulations! You purchased your crypto and it's just sitting in your exchange wallet (ie Coinbase or Binance). You are excited watching your investment increase in value all throughout the day. Then, you read an article saying that you need to store your crypto in a wallet for your funds to be secured. This is true, as you own the keys to your crypto when you store them in a wallet separate from a crypto trading exchange platform. You start to do some research and can't decide which type of wallet you want to secure your funds with.
There are various different crypto wallet apps to choose from. Primarily, you want to choose between holding your crypto in a "hot" wallet, a "cold" wallet, or maybe even a combination of the two. In this article, I will be discussing the differences between hot and cold wallets! Hopefully, this helps you make your decision a bit easier and allows you to make a confident decision on how you want to store your valuable crypto.
Hot Wallets
A benefit to hot wallets are that they are generally easy to use. They come in the form of web-based (attached to your browser), mobile apps, and desktop versions for your PC. Hot wallets are more vulnerable to online attacks. Do not fear though, as advanced encryption makes hacking into these systems difficult. Hot wallets are always online, meaning there is no need to transition between offline and online to make a crypto transaction. Individuals with hot wallets utilize the wallet to either trade or make purchases with their crypto with ease.
The role of hot wallets is to help facilitate any changes to the record of transactions stored on the decentralized blockchain ledger. For the crypto investor small or large, cryptographic public keys and private key are the most important elements of any wallet. Public keys can be compared to usernames. They identify the wallet so a user can send or receive crypto without revealing their personal information. Private keys are like pin numbers which allow users to physically access the wallet and check balance, initiate transactions, exchange crypto, etc. Without the usage of these keys, the wallet is generally useless.
Cold Wallets
Cold wallets (also referred to as "Cold Storage") are offline wallets used for storing crypto. Using a cold wallet, crypto is stored on a platform that is not connected to the internet. This protects the wallet from unauthorized access and cyber attacks, as the wallet is offline and cannot be accessed through the internet. When you transfer your crypto to a cold wallet, you store the digitally signed keys on either a USB drive, CD, hard drive, paper, or offline computer. If you want to access these funds, the crypto will be digitally signed once again before it is transmitted to the online network. Even if a cyber attack happens, the hacker will not be able to access any of the private keys used for it.
The most common types of cold wallets are paper and hardware. Paper wallets are simply documents that have the public and private keys written on it. Generally, there are tools that allow you to document and print these keys with a QR code embedded onto it that can be easily scanned and signed to make a transaction. The drawback on paper wallets is that if the paper is lost, illegible, or destroyed, you will never be able to access you funds. Hardware wallets refer to an offline device that stores the private crypto keys. USB drives are the most popular vehicle for storing offline cryptos. Similar to paper wallets, they encrypt the crypto keys in an offline environment so your funds cannot be access by anyone besides yourself. Like the paper wallet, if the USB becomes lost, damaged, or destroyed, you will not be able to access your funds.
As you can tell, there are great benefits and risks to both hot and cold wallets. At the end of the day, it's up to you to decide which wallet will work best for your investment style. If you're looking to trade and make purchases using crypto, then a hot wallet would work best because it's easily accessible and easy to use. If you are in it for the long-haul and want to forget about your investments for a period of time and keep them fully secured in the process, then a cold wallet might be your go-to pick. Both wallets serve great purpose, but you need to be cautious.
Look out for the hot wallet cyber attacks and stay up-to-date on any updates or news from the wallet provider. Never, ever, ever lose your cold wallet storage drives or software... and keep it in a safe location where you (and ONLY you) know where it is. Some wallets offer APY% for just holding onto your crypto, so keep an eye out for ways you can maximize your investment(s). Always stay vigilant and proactive with your finances if you want to be a successful crypto trader/investor!
Here's a list of some popular hot and cold wallets that you can take a look at:
Hot Wallet - Exodus
Hot Wallet - Trust Wallet
Cold Wallet - Trezor
Cold Wallet - Ledger