Hot vs. Cold Crypto Wallet: Explained

If you are unfamiliar with crypto wallets are or have questions on how they work, we recommend you read this article first: A Simple Introduction to Crypto Wallets

Hot Wallets

  • A hot wallet is connected to the internet and could be vulnerable to online attacks — which could lead to stolen funds — but it’s faster and makes it easier to trade or spend crypto.

Pros:

  • Ease-of-use. Because they are always online, there’s no need to transition between offline and online to make a cryptocurrency transaction
  • Convenient to access funds for trading since it is already connected to the internet.
  • Free. Hot crypto wallets are either available for free or bear symbolic maintenance costs.
  • Shared Responsibility of Security: Most web-based crypto wallets are custodial wallets. By using the hot wallets provided by exchanges like Coinbase, users also get their deposits insured.

Cons:

  • Prone to theft. Any items stored in a hot wallet are vulnerable to attack because the public and private keys are stored on the Internet.
  • Third-party dependence. Most of the hot wallets provided by the exchanges don’t give you access to your private keys. You only get a login and password to access your account.

Cold Wallets

  • A cold wallet is typically not connected to the internet, so while it may be more secure, it’s less convenient

Pros:

  • Security. You don’t entrust any third party with your private keys. The wallet is not connected to the Internet, so it cannot be hacked. Stealing from a cold wallet usually would require physical possession of or access to the cold wallet, as well as any associated PINs or passwords that must be used to access the funds
  • Recovery. At the time of the initial configuration, you will need to write down a 12-to-24-word recovery phrase. You can use this recovery phrase to recover your wallet in any software wallet and receive your assets back immediately

Cons:

  • Inconvenience. Even if the transaction itself takes the same time, you’ll need more time to access the cold wallet device
  • High price. Whereas many online crypto-wallets are available for free or have low fees, cold hardware wallets cost about $100 on average.
  • Limits. They usually don’t accept as many cryptocurrencies as most of the hot wallets do. Hence, if you prefer crypto that’s not yet very popular, cold wallets may not support it.

Recommendation

  • Use a combination of a cold wallet and a hot wallet.
  • Keep a cold wallet like a bank account stored in a secure location at home. The cold wallet is where you should store majority of your funds
  • You can store your crypto wallet in multiple cold wallets. This way one cold wallet can act as a backup of your primary in case your cold wallet becomes defective.
  • Keep a paper record of your recovery phrase in an extremely secure location. This can be a personal safe at home or a safety deposit box at the bank. If anyone gets access to this phrase, they also have full access to your funds.
  • If you need to sell or transfer crypto, you can withdraw from your cold wallet to your hot wallet

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Ricky Young

My belief is that financial freedom cannot be obtained by just a 9-to-5, but a combination of smart investing and passive income. This is my journey to achieve financial freedom.

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