Whether you choose a hot wallet or a cold wallet, security is your first concern.
Choosing between a hot wallet and cold wallet is an important step in building your digital portfolio. Both options provide strong security but come with a few differences that you should know about before storing your cryptocurrency there.
In this article, we discuss hot wallet vs. cold wallet and the differences between each to help you make an informed decision.
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What Is a Crypto Wallet?
Most people are so familiar with the concept of a real-world wallet that they assume a crypto wallet will be exactly the same. But with cryptocurrency, you don’t technically store the coin, token, or NFT in the wallet itself.
After you purchase a digital asset, the record of it remains on the blockchain indefinitely (or until you initiate another transaction with it). That digital asset is cryptographically protected against unauthorized users by a private key that only you know.
That private key, in essence, links the blockchain entry and the value that it represents with you, the owner, and it gives you the ability to access and authorize transactions related to that value.
So, if you purchased one Bitcoin (the value stored on the blockchain), the only way to authorize future transactions (buy, sell, trade, stake, etc.) with that Bitcoin is through a combination of a private key and a public key.
The public key is public so anyone can see it and you can send it wherever you want. But the private key gives you the power to approve or deny any transactions associated with your Bitcoin.
It’s this valuable information — the private key — that you store in a hot wallet vs. cold wallet — not the funds themselves.
Storing your private key in a crypto wallet, however, essentially equates to storing your cryptocurrency in a crypto wallet, because no one — not even you — can access or use your crypto wallet without the private key.
To compare the process to a real-world equivalent, it would be like writing the password to your bank account on a slip of paper and stashing it in one of the pockets of your billfold.
You aren’t storing the currency itself there — just the way to access the currency. If someone else gets ahold of that password, they can do what they want with the money in your account. The same basic theory applies to your crypto wallet.
And, just like real-world wallets, crypto wallets come in a variety of shapes and sizes.
The two main categories of storage options are hot wallet vs. cold wallet debate.
A hot wallet is a secure storage space offered by the cryptocurrency platform through which you buy, sell, and trade your digital assets.
Hot wallets include such options as:
- Web-based storage
- Mobile storage (i.e., on a mobile device)
- Desktop storage
The key thing to remember about hot wallet vs. cold wallet is that a hot wallet is always online and accessible (with the right credentials, of course) through a web browser or mobile device.
That makes them a quick and easy solution for those just starting out in the crypto world.
But the fact that a hot wallet is always online does make it susceptible to cyber criminals and other unscrupulous individuals.
To maximize the security of your hot wallet, look for features such as:
- Multi-factor authentication (e.g., two- or three-factor)
- PIN-based authentication
- Biometric authentication
- Video verification
- User alerts
- User-defined limits on withdrawals
Partnering with the right crypto platform — one that offers robust security features, like Binance.US — makes storing your digital assets in a hot wallet a good way to protect your portfolio.
Cold wallets are similar to hot wallets but are designed to store your digital assets offline.
Because of this, cold wallets are limited to hardware and paper formats. We’ll discuss the differences in the next section.
When it comes to hot wallet vs. cold wallet, cold wallets typically offer better security for the simple fact that you can disconnect the wallet from your computer after you’re done.
However, that introduces another issue into the mix: You could lose the cold wallet and then not be able to access your digital assets.
Cold wallets are often less convenient when it comes to initiating rapid transactions because the cold wallet has a finite communication speed that depends, in large part, on how it’s connected to your computer (e.g., USB cable, Cat6 cable, etc.).
Hot Wallet vs. Cold Wallet: The Differences
The hot wallet vs. cold wallet debate comes with a number of differences that correspond to the type of wallet you choose.
As mentioned, hot wallets can be subdivided into web, mobile, and desktop formats, while cold wallets can be subdivided into hardware and paper formats.
Web wallets are a popular type of hot wallet because they work seamlessly with the platform through which you buy, sell, or trade to maximize speed and efficiency.
With a web wallet, there’s usually no need to download any software onto your computer, but you will need a strong internet connection to ensure that things work well.
As you research the different types of wallets — and the platforms that offer them — keep in mind that certain types of web wallets might give the platform with which you partner access to your private key.
If this is the case, be sure your wallet comes with multi-signature (or multi-approval) support so that you can retain control over your assets.
Mobile hot wallets create a storage space on your smartphone, tablet, or other mobile device and allow you to access your private keys on the go.
Many mobile options can even generate a QR code you can then scan to simplify and streamline whatever transaction you’re trying to initiate.
These storage spaces are very secure, but they are susceptible to anything that could go wrong with a mobile device — loss, theft, damage, virus infection, etc.
If you choose this option, be sure to protect your device as much as possible.
A desktop hot wallet is an app that you download directly to your computer. Once there, the app generates a data file to hold your private keys.
The primary benefits of a desktop hot wallet are that you retain complete ownership of your information (when compared to the web version) and that the device on which the app resides is usually more difficult to lose or be stolen (when compared to the mobile version).
A hardware cold wallet is similar to a portable hard drive or flash drive in that you can sever the connection between the storage device and the host computer whenever you want.
Plug in the cold wallet when you’re ready to initiate a transaction and then remove it when the transaction is complete.
These types of wallets are usually protected by even more security in the form of a PIN and a recovery phrase.
The PIN prevents someone from gaining unauthorized access to the wallet to steal the data. The recovery phrase prevents complete and total lockout if you forget your PIN.
With this extra security, your private keys remain both secure and accessible.
A paper cold wallet is nothing more than a piece of paper on which you write, type, or otherwise record all the data you need to access your digital assets.
While these may be the most secure in the sense that a thief cannot access the information unless they physically steal the piece of paper, there still exists the very real possibility that you could lose your private keys if you don’t store the paper properly.
In addition, initiating and managing transactions via a paper wallet can be much more time-consuming than the other options in both the hot wallet and cold wallet categories.
Choose the Right Wallet for Your Needs
When trying to make a decision in the hot wallet vs. cold wallet debate, keep in mind that they both allow you to access, and manage your digital assets as conveniently as possible.
The storage method that is right for you depends, in large part, on your individual needs and the strategy you apply to your crypto activities.
If you’re looking for maximum security as opposed to ease and speed of access, a cold wallet might be the better choice.
If you’re looking for ease of access and rapid transaction time, a hot wallet may be the way to go.
That doesn’t mean that you have to sacrifice security to get speed and vice versa — both hot wallets and cold wallets are very secure and very fast.
But if you need to hit specific price points during rapid moves in the market, you may opt for a hot wallet that is faster, has lower transaction times, and is available at a moment’s notice.
Try the different types of wallets to see which one works best for you.
Security Starts With the Crypto Platform You Choose
While choosing the right hot wallet or cold wallet for your needs and strategy is important, which crypto platform you choose to partner with is even more important.
Choose a platform with strong security features, such as two-factor authentication, as well as a wide range of cryptos, low transaction fees, and access to the tools and information that can help you make the right choices.
To get your cryptocurrency journey started today, visit Binance.US.
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