Cold Wallets are like a normal Wallet or purse in which one stores currency. Similarly, in cryptocurrencies wallet, cryptocurrencies like Bitcoin and Ethereum are stored. Crypto wallets interact with blockchain by interacting with a special algorithm, this algorithm generates keys for the wallets. Every cryptocurrency wallet has a public address(key) and a private key. The public address is used to store cryptocurrencies and the public address is visible to everyone and the private key is only known to the user/ owner. If the private key gets lost one will not be able to access the tokens.
Hot Wallets
Hot wallets otherwise known as software wallet is a cryptocurrency wallet that is always connected to the internet and cryptocurrency network. A hot wallet is easy to use on an exchange and is meant for everyday cryptocurrency transactions. It is used to send and receive cryptocurrency with a few clicks on the phone or computer.
Pros:
- These wallets are online and easy to use and they require no physical storage and no transition between offline to online for the transaction.
- Hot wallets are accessible as they can be traded from hands-on devices.
- These wallets can accept the various types of tokens and are ideal for traders and users with a good portfolio.
- These wallets are available for free and can be created within a minutes.
Cons:
- Security is an issue, therefore, storing a large number of digital assets in a hot wallet is not advisable.
- It leaves your funds exposed to hackers to potential security threats such as cyber theft.
- Another issue is the security of the private key, which is stored on the internet and the wallet browser.
- Users may lose their funds if the service decides to stop access to the service without warning.
Cold Wallets
Cold wallets otherwise known as Cold Storage, are responsible for storing private keys in an offline environment. They are not connected to the internet. Crypto transactions with cold wallets generally involve a signing process. The transaction in the cold wallets starts online and then shifts to the offline process and after completion of the signing process, the complete information of the transaction goes back to an online network. Cold Wallets have options such as hardware wallets and paper wallets.
- Hardware Wallets are designed to theft-proof that even when plugged into, the computer funds cannot be stolen.
- Paper wallets function similarly to hardware wallets however paper wallets are pieces of paper that contain a public wallet address and a private key.
It is found that cold wallets are expensive and they can store only selected cryptocurrencies others they don’t store.
Pros:
- Cold wallets have a large storage capacity.
- Most respected exchanges store the majority of the funds in the offline mode in the cold storage.
- Stealing from cold wallets is a bit difficult as they require physical possession or access to cold wallets.
- Most cold wallets are encrypted with pin protection thus providing an extra layer of security.
Cons:
- Cold wallets are less convenient than hot wallets because they require power and then to be connected to the internet.
- These wallets are a bit expensive if someone wants to invest in crypto he also invests in these cold wallets to secure their funds.
- These wallets are not suitable for trading online purchasing.
- These wallets do not accept as many cryptocurrencies as most hot wallets do.
Best of Both Types of Wallets
As both the wallets have their advantage and disadvantage. So, they work for a suitable purpose.
- Hot wallets are for the day traders since fewer steps and less time are required when the prices fluctuate by the minute which can be easily achieved by the hot wallets. These wallets are very convenient as they have intuitive interfaces and can give better performance on multiple platforms.
- On the other hand, safety makes cold wallets a must for the holders and long-term investors as they can possess a large number of cryptos. But, in case the cryptocurrency funds are excess in the amount it is recommended to be stored in cold wallets. Another point for cold wallets is to safeguard the private keys, there is no option but to use cold wallets that only you can control.
At last, it is common for the owners to have both the wallets and the best practice is to keep the long-term storage in cold wallets and short-term cryptos in hot wallets. The only issue with this practice is that many of the non-mainstream coins are not supported by cold wallets. So, in that situation, only hot wallets will be the only option.
Is There a Need For Any Wallet?
A wallet is not as such necessary to trade with cryptocurrency as many of the platforms provide the facilities of storing their digital asset as well as maintaining those wallets. This option is convenient as could reduce the chance of losing information that would be necessary for using crypto assets.
But on the other hand, exchanges say that they will safeguard their investment but they can also be the target of the hackers. So, if someone wants to have full control of their crypto-asset they have to store it in the wallet.
Is One Type of Wallet More Secure Than the Other?
Since cold wallets are offline in nature they are considered to be more secure than hot wallets. But, if you are the person who wants to track the physical item then better switch to the hot wallets. Hot wallets are more user-friendly and give a smooth experience for the crypto exchange.
Lastly, it depends on the user to go for hot/cold wallets both the wallets are not complete in themselves. So, some compromises have to be done in any of the wallets you choose.
Hot Wallet vs Cold Wallet
Below are some of the differences between a hot wallet and a cold wallet:
| Basis | Hot Wallet | Cold Wallet |
|---|---|---|
| Connectivity | They are always connected to the internet and all the transfer take place via the online mode there. | There is a switch between the online and offline modes with the transfer of coins taking place. |
| Security | They are less safer as the crypto is stored on the exchange itself. | They are safer as the cryptos are stored in the offline mode. |
| Price | Hot wallets are cheaper as they store crypto on the exchange itself. | Additional hardware is to be purchased for storing coins making it expensive. |
| Acceptance | All cryptocurrencies accept hot wallets for storage. | Only reputed cryptocurrencies can be stored in cold wallets. |
| Asset Loss | If the exchange is closed then you will not be able to access your coins. | Even if the exchange closes, the coins are safe in the cold wallets. |
| Access | Hot wallets are suitable for trading making them accessible for the instant exchange of coins. | Not suitable for trading as it is not much faster than the hot wallets. |