Hot vs. Cold Wallets in Crypto: What Is the Difference?

Crypto wallets act as digital vaults, safeguarding the keys to your digital currency—the choice between a "hot" or "cold" wallet depends on your needs.

The key distinction between hot wallets and cold wallets is that hot wallets are linked to the internet through your electronic device, while cold wallets are usually hardware gadgets that can preserve your data offline.

What Is a Hot Wallet?

Hot wallets are connected to the internet and allow for easy access, making them a popular choice for day-to-day transactions. Hot wallets often come in the form of mobile or desktop applications, allowing you to quickly access and send your cryptocurrencies.

There are generally three kinds of hot wallets:

1. Web-based wallets: These are accessed through a web browser and do not require any extra software.
2. Desktop wallets: These can be downloaded onto your computer for ease of use.
3. Mobile wallets: These are downloaded onto your mobile device, allowing for easy access on the go.

Pros

• Instant access This makes hot wallets ideal for smaller amounts and frequent transactions. With a mobile wallet, you can control your crypto assets anytime and from anywhere.
• Low cost Most hot wallets are either free or come with minimal maintenance costs.
• Provides custody This means that a third-party or service provider controls your private keys, which can be beneficial if you don't want to be responsible for keeping your keys safe. On exchanges like Coinbase, users also get an extra layer of security that their deposits are insured.

Cons

• Higher risk Since hot wallets are always connected to the internet, they're more susceptible to hacking and security breaches. It's relatively easy for someone to access your hot wallet, as long as they have your login information. Hot wallets are not recommended for storing large amounts of cryptocurrency for this very reason.
• Risk of asset loss One way that this might happen is in the event that an exchange or provider closes and their funds are not insured.

» Interested in using hot wallets for your crypto? Take a look at the best crypto hot wallets.

What Is a Cold Wallet?

Unlike hot wallets, cold wallets are offline. They function on USB drives and are generally considered very secure. For this reason, most crypto users with larger holdings prefer to use cold wallets.

By principle, cold wallets are only accessible to those with necessary security information, like a PIN code or recovery seed phrase.

Some examples of cold wallets are:

• Paper wallets: A physical paper with your private keys written on it.
• Hardware wallets: Physical devices (such as a USB) that store private keys.
• Physical Bitcoin: A physical representation of a Bitcoin that can be used as a cold wallet.
• Offline software wallets: A downloadable software program for your computer or mobile device.

Pros

• Better security Since they're not connected to the internet, cold wallets greatly reduce the risk of hacking and other online threats. Most high-quality hardware wallets are designed to be impervious to hacking, and may even come with added layers of protection, such as biometric authentication. Even if a hardware wallet is plugged into a hacker's computer or accessed remotely via Bluetooth, the funds held by the wallet will be almost impossible to steal.
• More reliability Offers complete control over private keys, meaning that users are not reliant on a third-party provider to control their assets.

Cons

• Less convenience Cold wallets require extra steps for sending and receiving cryptocurrency, as they must first be connected to a device before any transaction can take place.
• Higher cost Cold wallets tend to have higher upfront costs as they often must be purchased upwards of $100.
• Limited cryptocurrency support Cold wallets may not be compatible with every type of cryptocurrency, so it's best to check beforehand if your desired coin is supported.

Should You Be Using Both Wallets?

Having both a cold and hot crypto wallet is usually the best idea, as it gives you the benefits of both. You can have easy access to your coins with a hot wallet while also feeling secure that most of your assets are offline in a cold wallet. Some users even go a step further and keep their cold wallet in a bank vault or safety deposit box for added security.

There are many considerations to take into account when it comes to choosing the right wallet for your cryptocurrency. Ultimately, the decision is up to the individual to determine their level of risk and choose the wallets that work best for them.

» Keep up to date with the changing crypto scene: Learn more about Ethereum's move to proof-of-stake.