In this post, we’ll unpack all you need to know about hot wallets and cold wallets, defining exactly what they are, distinguishing the differences between them, assessing which is best and more.
What Is A Wallet?
A wallet is any technology that is used to store value, such as money. Wallets fall under two primary categories; hot wallets and cold wallets.
What Is A Hot Wallet?
A hot wallet (also referred to as a software wallet) is a digital form of storage that is connected to the internet. An example of a hot wallet is an exchange wallet.
What Is A Cold Wallet?
A cold wallet (also referred to as a hard wallet) is a physical form of storage that isn’t connected to the internet. An example of a cold wallet is a USB ledger.
Public & Private Keys
All cold wallets have a public key which functions as an address where your money is held and a private key which functions as a password to access your money.
As an analogy, think of your public key as your bank account number and your private key as your bank account pin.
Hot Wallets Versus Cold Wallets
When it comes to storing value, there are trade-offs to both hot wallets and cold wallets.
Hot wallets are more appropriate for short-term daily transactions using money. Cold wallets are more appropriate for long-term holding of money.
Hot wallet keys are stored online which increases security risks. Cold wallet keys are stored offline which decreases security risks.
Hot wallet funds are in the control of third-parties. Cold wallet funds are in the control of the owner.
Hot wallets require less personal responsibility and therefore more trust. Cold wallets require more personal responsibility and therefore less trust.
Hot wallets generally can be recovered if private keys are lost or stolen. Cold wallets generally cannot be recovered if private keys or lost or stolen.
Hot Versus Cold Wallets Table Summary
Below is a table summarising the differences between online and offline wallets.
| Hot Wallets | Cold Wallets |
|---|---|
| Short-Term | Long-Term |
| Decreased Security | Increased Security |
| Controlled By Third Parties | Controlled By Owner |
| Require Most Trust | Require Less Trust |
Which Is Best?
Both hot and cold wallets have their advantages and disadvantages. What may work for one person may not work for another.
Therefore, storing value requires weighing up the trade-offs between functionality and security and making a personal decision about which type of wallet offers the best solution.
In short, the best wallet is the one that works best for you.
Summary
A wallet is any technology that is used to store value. There are two types of wallets; hot wallets and cold wallets.
Hot wallets are digital forms of storage that are connected to the internet. Cold wallets are physical forms of storage that aren’t connected to the internet.
Both types of wallets have trade-offs and therefore the best wallet is the one that works best for each individual.
