Cold vs. Hot Wallets: Which One Should You Pick?

Cryptocurrencies are all the rage nowadays, with just about everyone looking to get their hands on them. Nonetheless, if you’re looking to start investing in crypto, you need to know how to store your assets.

Unlike fiat currencies, digital assets can only be stored on specialized crypto wallets, which, according to Tezro, can hold multiple currencies. These are divided into two categories; hot and cold wallets.

Types of Crypto Wallet

Let’s take a look at the types of crypto wallets you can use:

What Is A Hot Wallet?

Hot wallets are online services that store your cryptocurrencies on a server. These types of wallets do not have a tangible form and exist only in cyberspace. Because of this, such wallets are highly favored by those who regularly transact with cryptocurrencies.

Risks of Using a Hot Wallet

A hot wallet gives you easy access to your crypto tokens and lets you send/receive coins with minimal fuss. However, because these wallets are 100% online, they are a favorite target of cybercriminals.

These individuals employ a variety of tactics to try and access your cryptocurrencies, from hacks to phishing scams. In fact, studies show that an estimated $1 billion worth of crypto assets have been lost to cyber attacks since 2021 alone.

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Wallet providers have taken steps to protect users and their crypto assets. Such measures include implementing multi-factor authentication, using non-custodial storage, i.e., storing crypto keys locally on the user’s device, and regular security updates.

While hot wallets have definitely become a lot safer over the years, I cannot recommend storing large quantities of cryptocurrency on them. Given the decentralized and unregulated nature of crypto assets, tracking down lost or stolen cryptocurrencies is next to impossible.

Consequently, if your wallet gets hacked, chances are the authorities will not be able to do much to help you recover your lost funds. For this reason, I recommend that you make use of a cold wallet in conjunction with a hot wallet.

When you’re on the lookout for a good hot wallet, keep the following in mind:

  • Check for multi-factor or biometric authentication
  • Make sure that the wallet is non-custodial
  • Take a look at the wallet provider’s past history
  • Check whether the wallet offers insurance
  • See what type of data encryption the wallet uses
  • Is the wallet compatible with cold storage wallets?
  • Does the service provider hold the bulk of its assets in cold storage?
  • Does the wallet have a recovery/seed phrase?

What Is A Cold Wallet

Cold wallets are the direct opposite of hot wallets, and unlike their counterparts, a cold wallet stores your crypto keys offline on a data storage device. This makes it nearly impossible for hackers to steal your cryptocurrencies.

As an added plus, cold wallets can also be physically secured, which adds an extra layer of security and stops it from getting stolen by thieves.

Where hot wallets are free-to-use services, a cold wallet must be bought from specialized manufacturers. There are plenty of companies that offer cold wallets of all shapes and sizes. Most resemble thumb drives which make for easy storage.

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If you’re in the market for such a device, check that it has hot wallet compatibility. This gives you the benefit of both security and convenient access to your crypto tokens.

A testament to how cold wallets can be seen by how major crypto exchanges and wallets store the bulk of their deposits in cold storage.

Risks Of Using A Cold Wallet

Although cold wallets are a safe and secure way to store cryptos, they are not without their fair share of risks.

For one, there is always the chance that your device can get lost or stolen. When that happens, it is impossible for you to recover any lost assets. This is why I recommend that you regularly create backups of your crypto portfolio.

Secondly, cold wallets can still be hacked if they are connected to a computer with internet access. When funds are being transferred, a hacker can intercept data and possibly access your cold wallet to steal your crypto tokens.

To prevent this, you should only perform transactions when you are connected to a secure internet network. Never use public Wi-Fi and never connect to a network that you’re not familiar with.

Which One Should You Pick?

When it comes down to it, you should use both types of wallets as each has its own unique benefits. Relying only on a hot wallet exposes you to numerous security risks, while using a cold wallet alone is not exactly realistic.