Banks and financial institutions do not allow account holders to possess crypto. Cryptocurrency investors store their crypto in digital wallets.
Whether you use a crypto exchange or receive funds directly from another person, the cryptocurrency is transferred to the wallet of your choice.
All crypto wallets fall into one of two categories – hot wallets and cold wallets.
Explore the differences between hot and cold wallets to determine which option is best for your crypto.
Table of Contents
What Is a Hot Wallet In Cryptocurrency?
A hot wallet is a type of cryptocurrency wallet that remains connected to the Internet.
As it is always connected to the Internet, hot wallets are convenient for those that complete frequent transactions. Instead of needing to connect your wallet to the Internet, it is ready to go.
Hot wallets are typically software wallets or web-based wallets.
Software wallets are desktop applications and mobile applications. The application runs on your computer or mobile device but stays connected to the Internet to facilitate cryptocurrency transfers.
Web-based wallets are often maintained by cryptocurrency exchanges. Instead of installing software, you simply sign into a website.
What Is a Cold Wallet In Cryptocurrency?
Unlike a hot wallet, a cold wallet does not stay connected to the Internet.
You only connect a cold wallet to the Internet when completing a cryptocurrency transaction.
While software wallets can be cold wallets, most cold wallets are hardware-based. A hardware wallet is a physical device, typically resembling a USB stick.
The wallet may connect to a computer via a USB connection or a Bluetooth connection. As hardware wallets are physical devices, you need to spend money to get one.
Most hardware wallets cost between $30 and $200 while some software wallets are available for free.
Hot Versus Cold Wallet – Which Option Is More Secure?
Cold wallets provide enhanced security compared to hot wallets, as they only connect to the Internet when you need to complete a transaction.
When you finish a transfer, you disconnect the cold wallet, preventing anyone from accessing it.
Even when connected to the Internet, cold wallets remain more secure.
The transactions are complete on the device and then submitted to the network via the Internet connection.
Due to the extra steps involved in using a cold wallet, they are not popular among those that complete frequent cryptocurrency transactions.
However, as cold wallets are typically hardware wallets, a person with malicious intent would need to gain physical possession to hack the device.
Hot Versus Cold Wallet – Which Option Is More Secure?
Cold wallets provide increased security while hot wallets are often more convenient.
Many crypto investors use both types of wallets. For example, you may use a hot wallet to purchase, sell, and convert cryptocurrencies and a cold wallet to hold large amounts of crypto.
Both hot and cold wallets are suitable for holding cryptocurrencies. The choice between the two depends on whether you prefer security or convenience.
