Whether you are a seasoned cryptocurrency investor or an absolute newbie in this area it’s important to decide where you are going to store your digital funds. Security and convenience: these are two main characteristics that you should pay attention to when making your choice. So if you look at all the digital wallets that are currently available in the market from this perspective, there are two major groups each of which has only one of these features: cold storage and hot wallets.
In this article, we’re going to compare these two types of wallets and provide you with an ultimate guide on which one you should choose depending on your goals regarding cryptos.
What is a cryptocurrency wallet
Before we get to comparing cold and hot bitcoin wallets, let’s first find out what cryptocurrency wallets are. When you hear the word ‘wallet’, the first thing that comes to your mind is most likely this small leather box where you store some cash, bank cards, discount cards of your favorite retailers and a photo of your fiancee. The main tasks that you accomplish with its help are storing your funds and paying for goods and services.
When it comes to a bitcoin wallet, the basic functions are the same, but the mechanics is different. Since BTC is a digital currency, there is no physical place where it is stored. There are no material coins that you can hold in your hand or upload to an ATM. What a crypto wallet really represents is a piece of a program that holds pairs of the corresponding cryptographic keys, the private and the public one, that are responsible for receiving and sending payments.
These keys may be kept on an offline device or within a service that has access to the world wide web, and this is exactly what differentiates the cold and the hot storage.
What is a cold wallet
According to Investopedia’s definition, cold storage is an offline wallet, a USB device that is not connected to the internet which helps to protect the wallet from unauthorized access, cyber hacks, and other vulnerabilities that are aplenty on the web.
Typically, such wallets have a rather complicated interface which makes them not very convenient for daily usage and may scare off newbies. However, when it comes to security, cold wallets have no equal since no hacker has yet invented a way to break into an offline device that is under your full control.
Examples of cold wallets
This is one of the leading hardware multi-currency wallets well-known for its enhanced security features. It supports more than 500 different altcoins including such popular currencies as Litecoin, Ethereum, Zcash, Dash, BCH, BTG and NEM. In case you lose the wallet you can always restore your funds using your personal recovery seed.
Currently, there are 5 different models available for purchase on Trezor’s official website. They differ in durability, functionality and price. The costs vary from 80 EUR up to 330 EUR including VAT.
Ledger Nano S
While Trezor wallets are made of plastic, Ledger’s producers rely on stainless steel making it much more durable and long-lasting.
Ledger Nano S offers only one model which supports only 40 different altcoins and costs USD 135. It’s hard to define which of the two hardware wallets is better, so the only thing you should consider when making your choice is whether a given wallet supports the currencies you own.
From the online security perspective, paper wallets offer the best choice since they simply cannot be plugged into any device. There are numerous services that are designed for creating paper wallets which you simply print on a paper and store somewhere safe.
However, since paper is not the most durable material, such wallets can be physically destroyed. So the best security practices to implement is to make multiple copies of your wallet, laminate them and store in different places across your apartment.
When should I use a cold wallet
The cold storage is the best solution if
- You have purchased crypto for a really significant sum of money
- You are a long-term investor
- If these two conditions apply to your case then cold wallets are the best choice for you. Note that they are not too user-friendly and require some basic technical skills.
What is a hot wallet
Unlike cold ones, hot wallets are connected to the internet. These are free wallets provided by exchange platforms, desktop software, browser extensions or mobile apps (designed for Android and iOS devices). Typically, they are much more user-friendly since they are designed for mass audience and process transactions instantly.
The downside is weak security. Hot wallets can be hacked and your funds can be stolen with no chance of recovery if you use a simple password and don’t take any additional precautions like multi-factor authentication.
Examples of hot wallets
Released in 2011, this is one of the eldest Bitcoin wallet brands. It works fine on Windows, Linux and Mac OS. If your hard drive crashes or you simply change your PC you can restore it on another device using the seed phrase. Moreover, you can use the same wallet on different machines and they will be synchronized automatically.
This user-friendly software wallet with intuitive interface supports 100+ cryptocurrencies and even has a built-in exchange option. The rates leave much to be desired, though, so it may be more rational to make a transaction via an exchange platform such as Binance.
The downside of this Exodus wallet is that it doesn’t support auto-upgrade feature and you will have to download and install the new version every time it is released. However, this should not be a problem for a person who has the minimum PC education.
This is a browser extension wallet that works fine in Chrome, Firefox and Brave browsers. It’s designed for storing Ether and ERC-20 tokens.
It has a user-friendly interface, but is a juicy target for hackers. There are multiple phishing websites that imitate Metamask interface in the pop-up windows so that an unsuspecting user would put in the password and thus provide the malicious script with the access to the funds.
This online wallet supports more than 1,000 altcoins and provides merchants with the payment tool that they can install on their websites to accept crypto payments. From the end-user point of view, this service gives not only a convenience to pay with crypto in the shops that are integrated with this wallet, but also a possibility to store almost any coin within a single panel.
When should I use a hot wallet
The hot storage is the best solution if
- You are a cryptocurrency trader
- You are new to crypto
- You want to use cryptos as regular means of payment in your daily life
It’s hard to say which kind of wallet is better, the cold or the hot one. Each of them has both pros and cons and is suits the specific type of audience.
If you are a long-term investor with upgraded technical skills who knows how to navigate in the cryptocurrency space and cares for the funds’ security, then the cold wallet such as Trezor or Ledger Nano S is your best choice.
But if you are a short-term trader or a non-geeky person who simply wants to make use of instant transactions and pay with crypto for goods and services, hot storage is something that would really ease your life.