Are you still deciding which crypto wallet to choose?

Hot vs cold crypto wallets: pros & cons explained. Source: pexels.com

Dozen years have passed since we first heard the word bitcoin. Who would have known that a vague asset worth around $1 at the time would grow to 56,5 thousand dollars in 2021? Yet, people who bought it then out of pure curiosity can become millionaires today. That is if they managed to preserve those tokens.

As you can see, buying and trading crypto is only a small part of the deal. Storing cryptocurrencies properly is not less important. After all, we’ve all heard those sad stories about the lost hardware, forgotten passwords, and even successful hacking attempts. Therefore, your crypto must be stored in both a secure and convenient way.

Whether your crypto wallet should be hot or cold is up to you. You can have both, after all. However, don’t make that choice by tossing a coin. Consider all the pros and cons to make an informed decision.

Cold wallets

A cold wallet is a USB-like hardware designated for storing crypto. They are also called offline wallets since they are not connected to the Internet.

In theory, paper wallets are also a type of cold storage for crypto funds. A paper wallet is a piece of paper with one’s public and private keys. Since they got quite outdated with the advent of hardware ones, we won’t list their pros and cons here.

What’s good about cold wallets?

• 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. You shouldn’t carry it around making it harder to steal. You can even put it in a safe or a bank vault. Moreover, you enter your password on your hardware device rather than a PC prone to malware and hacking. Most hardware wallets are encrypted with pin protection. Some of them even come with the extra layer of biometric authentication.
• Recovery. At the time of the initial configuration, you will need to write down a 12-to-24-word recovery phrase. It’s unique and generated by the device. When your hardware wallet is lost, damaged, or stolen, you can get a new hardware wallet to recover your crypto assets or import your recovery data into a software wallet(s) and receive your assets back immediately.

Warning! The recovery phrase is configured by the device itself. It shouldn’t be provided in a written form or gotten from third-party sources. Some unscrupulous sellers may forge the recovery seed to access your funds. It’s best to buy cold wallet devices from manufacturers directly.

On the downside, cold wallets have

• Delays. Even if the transaction itself takes the same time, you’ll need more time to access the cold wallet device. Moreover, you probably won’t use it in a public place and can’t use it on the go. Hence, it’s not suitable for day traders and quick transactions.
• 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.

Hot wallets

A hot wallet is a software tool that allows users to store, send, and receive various cryptocurrency tokens. This wallet works online and must be connected to the Internet in some way. Examples of hot wallets include exchange wallets, web wallets, mobile wallets, and desktop wallets.

These crypto wallets have many advantages too.

• Instant access. If you make frequent transactions, you have no time to fumble with USB-connection. Mobile wallet apps will allow you control over your crypto assets 24/7 in any circumstances.
• Ease. They are user-friendly, easy to install and operate. In addition to a very simple user interface, many of them are connected to some kind of exchange or have an exchange built-in.
• Flexibility. In most cases, hot wallets allow storing a great number of various cryptocurrencies. Being a type of software, it gets upgraded and can continuously improve user experience.
• Low cost. Hot crypto wallets are either available for free or bear symbolic maintenance costs.
• Custody. Some crypto investors prefer not to bear the full responsibility for safekeeping their digital assets. They use the services of third-party custodians instead. With a custodial wallet, another party controls your private keys. Thus, you have fewer chances to lose all your assets along with the lost keys. For instance, most web-based crypto wallets are custodial wallets. By using the hot wallets provided by exchanges like Coinbase, users also get their deposits insured.

However, hot wallets are not perfect.

• 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. Despite sharing responsibility for assets safety, you also can’t conduct any transactions without an intermediary. Thus, you never have full control over your funds.
• Asset loss. If the exchange or resource that provides a hot wallet closes, and your funds are not insured, you’ll lose everything. The same happens if the wallet gets hacked.

Bottom line

Both hot and cold wallets have their advantages and disadvantages, making them better suited for a particular purpose.

For instance, cold wallets are not a variant for day traders. Since extra steps and time is required, active trading in an environment where prices fluctuate by the minute is impractical with hardware. Moreover, this can have a profound negative effect on your gains. Nevertheless, their utmost safety makes cold wallets a must-have for HODLers, long-term investors, and all those possessing large amounts of crypto. Even exchanges that provide users with hot wallet options use cold storage to keep most of their customers’ funds.

Hot wallets, on the other hand, are very convenient. They have intuitive interfaces, synchronize across multiple platforms, and do much more to facilitate your burden as a trader. We can’t say that they’re unsafe altogether. There are multiple protection layers to keep your funds secure. And yet, they are the first target for hackers.

Crypto crime hit $4.5 billion globally in 2019. That year, a record number of twelve crypto exchanges were hacked. In total, almost $293 million worth of cryptocurrency and 510,000 user logins were stolen from crypto exchanges in 2019. Although losses from cryptocurrency thefts, hacks, and fraud declined in 2020, hackers started exploring new targets like the hot “decentralized finance” sector. As you can see, fraudsters never relax. Neither should you neglect your asset safety. Hence, keeping large sums of crypto in a hot wallet for a long time is unreasonable and reckless.

All in all, it is common for owners of cryptocurrency to have both hot and cold wallets. The best strategy is to keep the crypto meant for long-term storage in a cold wallet and transfer the amount needed for active trading to a hot wallet.

However, if you prefer rare, non-mainstream coins, you may be disappointed to see them not supported by trusted cold wallet providers. In that case, hot wallets will become your only option. Looking for those offering at least some insurance or extra security measures can help protect your crypto funds in the online environment.

SEE ALSO:

• How to convert Bitcoins to USD and EUR
• How to pay with crypto in 5 easy steps
• How to register, buy, and spend cryptocurrencies on Binance