Hot and Cold crypto wallets explained

October 24, 2022

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There is a lot of innovation in the world of crypto-currencies, and wallets (the programs that allow you to manage your crypto-currencies) are no exception.

Introduction:

When you're just starting out as a user, it can be difficult to choose which wallet to use because there are so many different options on the market. However, by understanding the different types of wallets available, you can narrow down your choices and find the right one for you.

There are two main considerations when it comes to buying and owning cryptocurrency: acquiring the coins themselves, and then storing them safely. Many people new to cryptocurrency can be confused by the concept of storing their coins, since there is no physical product to keep track of. However, it is still important to take measures to ensure the safety of your digital assets.

When we talk about "storing" or "securing" your cryptocurrencies, we're really talking about securely storing your private keys. Your private keys are what allow you to transfer value (or assets) to another person who also has a private key.

A private key, also called a secret key, is a number used with a cryptographic algorithm to encrypt and decrypt data. Secret keys should be shared only with the key's generator or with parties authorized to decrypt the data. So if you don't have your private keys or they are lost or stolen, you are giving the owner of those keys control of your assets.

We can divide all wallets into two categories: hot wallets and cold wallets.

Hot Wallets:

A hot wallet is any cryptocurrency wallet that is online. Hot wallets are generally easier to set up and use, and they accept more tokens. However, they are also more vulnerable to hacker attacks and other technical vulnerabilities. Hot wallets are software that is connected to the internet and stores a set of private keys. This makes it easy to use for everyday transactions. Cold wallets are not connected to the internet and typically store private keys offline.

If you regularly use the Internet, this type of wallet gives hackers a much bigger chance of attacking it and stealing your money. It is advisable to only keep small or medium amounts of money in this kind of wallet, depending on the wallet you use. Hot wallets include different types of wallets: native wallets, lightweight wallets, browser extensions and web wallets.

Types of Hot Wallets:

Native wallets provided by exchanges (Coinbase, Binance …)

There are several cryptocurrency exchanges that offer wallets for their users. However, this option can be quite risky because hackers can target the exchange and penetrate the wallet.

Web wallets:

Unlike exchange platforms, web wallets for managing funds allow you to keep control of your private keys. These keys are managed by your browser and are never revealed to others.

Lightweight wallets:

Lightweight wallets are nodes that don't download the blockchain and instead use simplified transaction verification that requires fewer computing resources. They're often called SPV wallets, with SPV standing for Simplified Payment Verification.

Web browser extensions:

Web browser extensions that take the form of wallets can be useful for interacting with decentralized applications, but they may not always verify transactions. The best-known example of this type of wallet is Metamask, which works on the Ethereum platform.

Cold Wallets:

Cold storage wallets are usually quite secure. Cold wallets are solutions for storing private keys without any direct access to the Internet. This storage reduces the attack surface and therefore the risk of theft by hackers. However, they can be stolen if you haven't taken the proper precautions. In terms of security and convenience, some cold wallets are better than others.

The best way to keep your crypto assets safe is to store them in cold storage. This is especially important for large amounts of cryptocurrency. Exchange platforms often use cold storage to protect their users' funds from hackers.

There are two types of wallets that are popular for storing cryptocurrencies offline: hardware wallets and paper wallets. Hardware wallets are physical devices that store your private keys and keep them offline. A paper wallet is a private key printed on a piece of paper.

Hardware Wallets:

Hardware wallets are devices that generate and store private keys in an isolated way, allowing transactions to be signed offline. This is the safest way to hold cryptocurrencies today.

Keep your assets safe even when the computer you're using isn't secure by using a hardware wallet. Using a hardware wallet gives you an extra layer of protection against cyber attacks, phishing sites, and malware.

With a hardware wallet, you can manage multiple blockchains at the same time. This allows you to keep track of Ethereum, Bitcoin and more, all on the same device. Backing them up is easy too, just use a single recovery phrase.

Paper Wallets:

A paper wallet is a type of cryptocurrency wallet that consists of a private key and its corresponding address printed on a sheet of paper. Paper wallets are considered to be a type of cold storage, meaning that they are not connected to the internet and are therefore less vulnerable to hacking.

Your private key should never be exposed to outside parties as it would provide them with access to your funds. A paper wallet is a better way to keep your money safe than storing your private key online. This type of wallet, which can be created offline using a software program that generates public and private keys at random, is a safer way to store your money. Once you're done, you can delete the program to get rid of any trace of the keys.

Unlike hardware wallets, paper wallets are single-use and do not allow you to sign transactions. However, they can be very useful, for example when giving cryptocurrency to someone who does not have a wallet.

Conclusion: What type of wallet should I Use ?

Cryptocurrency investors must carefully consider where and how to store their digital assets. The decision of whether to use a hot wallet or a cold wallet depends on the individual needs of the crypto user.

When it comes to storing cryptocurrency, you'll need to decide how to best keep it secure while still maintaining functionality. It's all about striking the right balance. If you want to store your cryptocurrency safely, a cold wallet may be the best option. If you want convenience and don't mind the risk, hot wallets are also an option. Since you are the only one responsible for your crypto-assets, you should take precautions and use multiple wallets if necessary.

Whatever your choice is, it's certain that you'll have plenty of options to choose from because of the rise of blockchain technology.