If you’re in the world of cryptocurrency, then you’ve probably heard these phrases before. You may have even traded one for another or used them interchangeably, but did you know there are differences between hot wallets and cold wallets?
Let’s get an understanding of what they are.
A wallet is simply a place where your cryptocurrency goes when you buy it. Cold storage wallets are not connected to any devices that can access the internet, while hot wallets are any type of cryptocurrency wallet that transacts on an online platform.
The main difference between hot and cold wallets is that cold storage wallets are not connected to the internet and therefore cannot be hacked.
Hot wallets, on the other hand, can be accessed from anywhere in the world, so they have a much higher likelihood of being hacked. In this article, I’ll compare and contrast the capabilities of both of these types of cryptocurrency wallets.
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The Difference Between Hot and Cold Wallets
A hot wallet is easier to hack than a cold wallet because it has constant access to an internet connection that can be exploited by attackers. Its security comes from the protections put into place by website developers and key managers for specific cryptocurrencies.
For instance, if you were using BTC-E (a cryptocurrency trading platform) as your hot wallet, you would use an encryption password and require IP identification to sign in (2-factor authentication).
On the other hand, cold storage allows users to store their cryptocurrency offline (i.e., over the air), where it cannot be hacked by cybercriminals, no matter how hard they try to get in.
This works through hardware devices that create private keys which are unreadable by hackers. If an individual tried stealing one of these bitcoins from storage, it would not be possible because the private key would not be able to be read.
These devices are protected with a personal password and PIN number, so not even the owner of the hardware can access it unless they sign in with their own 2-factor authorization.
The main difference between hot wallets and cold storage is that cold storage exists offline (hence the name), while hot wallets exist online (online meaning accessible through cyberspace).
This makes them safe from hackers because hackers cannot access anything if they do not have physical access to computer networks. Hot wallets also allow for faster transfers of currency, whereas cold storage takes 3-6 minutes per transfer due to its offline accessibility.
How Do Hot and Cold Wallets Work?
The simplest way to understand the difference between hot wallets and cold wallets is by imagining a wallet being stored in a physical safe. The owner of the USB stick can access it unless they sign in with their own 2-factor authorization.
When making transactions, hot wallets will typically require you to connect them through USB ports, while cold storage will require you to connect them through Wi-Fi or BlueTooth.
Cold storage refers to keeping your cryptocurrency offline or away from places that are connected to the internet. This makes them extremely secure against hackers because even if they have access to your computer, they can’t get into something that doesn’t have an internet connection plugged into it.
Another benefit of cold storage is that you don’t have to worry about exchanges getting hacked so long as your cryptocurrencies are stored completely offline.
However, there are a few downsides to cold storage that investors should take into consideration before deciding whether it’s the safest choice for them:
- Cold wallets also run the risk of getting lost due to damage by water, fire, heat, or simply being stolen by somebody else.
- You can prevent this from happening by encrypting your wallet; however, if your computer breaks down, and you didn’t make any backup copies of the encryption key (which is what allows you to access your wallet), you’re out of luck.
- While hardware wallets are generally considered to be extremely safe because they’re typically stored in special hardware that can’t be accessed without physical access to the drive itself, they’re also the most inconvenient to use because you need that hardware every time you want to use your wallet.
Most people use online wallets for convenience reasons, but they don’t make it easy for hackers or other third parties to steal your money either.
The only thing you have to watch out for is phishing sites, which are websites made to resemble another site’s login page in an attempt to trick users into entering their passwords on a phony login page where all of your information can be collected by the hacker who set up the fake website.
To avoid this problem, always check that the URL address bar changes when you click links and buttons inside your browser window before typing sensitive information into a form.
Hot Wallets Vs. Cold Wallets: Which is Safer?
Hot wallets and cold storage both have their pros and cons. Hot wallets allow for quick and easy access to cryptocurrency, which is very beneficial when purchasing things online or sending payments; however, hot wallets can be at risk of hacking because they are always connected to the internet.
Cold wallets are safer because they are offline; however, for transactions, cold wallets take much longer to access their information. Cold wallets offer greater security than hot wallets, but they are out of reach whenever you need to make a purchase or send cryptocurrency.
Cold storage provides safety from hackers due to its offline accessibility but can result in slower transactions. When choosing whether you want a hot wallet or cold storage, it is crucial to think about how much time you will need your cryptocurrency stored and accessible before making your decision!
The best option you have for keeping your cryptocurrency safe is choosing a combination of both hot and cold wallets. This allows you to keep some of your coins in an online wallet where they’re instantly accessible, and others locked away in offline storage for maximum security.