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Hot Wallet Vs Cold Wallet
Crypto Basics For Beginners

Hot Wallet Vs Cold Wallet

By Oreld Hadilberg
Reviewed by Tony Spilotro

Table of Contents

One of the glaring features of cryptocurrency is its digital nature. Digital currencies stand out from fiat because they cannot be seen hence saving them in a physical bank or wallet is almost impossible. As a result, blockchain technology has created a means where you can store your crypto assets for trading and investing purposes.

It is important to note that storing your crypto tokens is your responsibility, unlike what we have in traditional banks, where they help you save your money. Therefore, you must choose the right crypto wallet that guarantees security and flexibility.

So if you want to know more about the best ways to store your crypto, this article will walk you through everything about hot wallet vs cold wallet. Kindly read along.

What Is A Crypto Wallet?

A crypto wallet is a digital safe that stores your passkeys. These keys serve as passcodes that give you access to your crypto assets and allow you to make transactions with other crypto traders. Additionally, backed up by the blockchain, your crypto wallet is only accessible through web devices like your mobile phone or personal computer.

When you withdraw cash from your bank account, it is customary to put your money, debit, credit or gift cards directly in your pocket or a small purse. However, keeping your funds in an offline wallet prevents theft or unnecessary loss. Hence a blockchain wallet serves the same purpose for your crypto assets.

Furthermore, a crypto wallet contains two types of keys, namely private and public keys. With a public key serving as an address, you can easily send and receive various cryptocurrencies through your wallet. Interestingly, the public key is gotten from the private key.

The private key, on the other, is your only access to your funds. Consequently, your wallet serves as your personal bank because your private key gives your possession and permission to make crypto transactions. Therefore, losing your private key could lead to losing your digital assets.

Crypto wallets are multi-chained, which means they have access to different blockchains and can store various crypto assets like Bitcoin, Ethereum, and other digital currencies. Moreover, digital wallets can take different forms, including paper wallets, hardware wallets that look like a USB, mobile apps, etc.

How Does A Crypto Wallet Work?

The crypto wallet is created to function with the help of blockchain technology. A blockchain is an advanced ledger that keeps track of cryptocurrency transactions in “blocks” and maintains transparency.

You can easily assume that your crypto wallet literally stores your digital currencies. However, the blockchain is the home of all cryptocurrencies, and with your wallet, you can access the balances held on the blockchain. Nevertheless, the wallet stores various addresses, allowing you to transact via your private keys.

Hot Wallets: Pros And Cons

Hot wallets are also known as online wallets because they are connected to the internet. Therefore, you can access your hot wallet on the internet if you have a mobile device or a computer.

In addition, because cryptocurrency transactions take place mainly on the blockchain, a hot wallet is an easy place to store your digital assets. However, while hot wallets are free and easily accessible, it is also susceptible to attacks from online hackers.

What is good about hot wallets?

  • Easy Access: Hot wallet allows you to access your funds and make transactions effectively without worrying about external devices like USB. connections. Additionally, you have total control over your digital currencies at all times.
  • Easy to Use: Most hot wallets come in app forms that provide an exciting user interface. Therefore, users can enjoy a friendly platform that allows them to store their cryptocurrencies.
  • Flexibility: Hot wallets provide access to numerous crypto coins through multi-chain features that allow them to interact with other blockchains. Additionally, hot wallets are constantly upgrading to improve user experience.
  • Cheap: You can easily access your assets for free.

Challenges of hot wallets

  • Vulnerable: Online hackers can easily target hot wallets even when your public and private keys are protected. While most digital wallets use sophisticated encryption to store your funds on the blockchain, cyber scammers often look for loopholes in the security systems of these hot wallets.
  • Loss of funds: You could lose your crypto funds if the platform providing the wallet shuts down.

Is it safe to use a hot wallet?

It is important to note that your funds are secure on the hot wallet when you only use it for cryptocurrency transactions. Furthermore, you should only put a small portion of your assets in your hot wallet to prevent total loss in case of a cyber-attack or wallet shut down.

For example, KuCoin, a hot wallet application, was attacked by hackers in 2020, with over $250 million going missing. Despite all the efforts to trace the crime, only 84% of the assets were recovered.

Therefore, while hot wallets are easy to manage, it still remains a target for online criminals who are ready to take advantage of security gaps on the blockchain.

Pros of Margex hot wallet

Margex hot wallet allows you to effectively to store and manage your digital assets in a secure platform. Unlike other forms of hot wallets that have suffered hacks in recent years, Margex provides top notch security and your assets are well secured.

Additionally, you can easily recover your accounts using the password recovery system enabling you to have access to your wallet in the advent of a device change or mishap. Margex currently offers more than 10 cryptocurrencies in its hot wallet and this includes popular coins like Bitcoin, Ethereum, USDT and Polygon.

Other benefits include:

  • Simple user interface for cryptocurrency newbies.
  • Low cost of transactions
  • Access to a large number of digital assets.
  • Strong security and encryption.

Cold Wallets: Pros And Cons

Unlike Hot wallets, cold wallets provide more security and stability to users. In addition, these sets of wallets offer a crypto storage mechanism that is not 100 per cent online, making it difficult for hackers to trace your funds. Therefore, no one can steal your cryptocurrencies without having physical possession or passwords to your wallet.

Cold wallets are mostly offline hardware devices like a USB stick. Other types of cold wallets include paper wallets or an offline computer. So if you prefer to keep records in written form, cold wallets can allow you to save your private keys on paper.

An example of a hardware wallet is the Trezor wallet. Interestingly, cold wallets are more expensive to purchase than hot wallets.

Additionally, these offline wallets can store addresses and private keys without connecting to the internet. It also comes with software that allows you to view your portfolio without exposing your private keys.

What is good about cold wallets?

  • Better Security: Cold wallets provides better security for you because your private keys cannot be accessed online. Furthermore, you do not need to rely on a third-party platform to keep your assets safe. Hardware wallets provide heavy encryption with an extra layer of biometric authentication.
  • Easy Recovery: Every crypto wallet has a password with about twelve unique phrases that allow you to access your digital assets. So when your cold wallet gets compromised through theft, damage or loss, you can retrieve your crypto assets with a new hardware wallet and a private key.

What are the downsides of cold wallets?

  • Inconvenient: Unlike hot wallets that are easy to use, especially for new crypto investors, cold wallets are more complicated because of their inefficiency in blending digital assets with offline storage. You need time to install your device before making transactions with cold wallets, which could be unsuitable for active traders.
  • High cost: While hot wallets do not require any fees from you, cold wallets are pretty expensive, ranging from $50 to $100.
  • Maintenance: Offline wallets require adequate care because it is prone to corruption and reading failure, leading to temporary loss of assets.
  • Limited cryptocurrencies: Cold wallets only accept a limited number of crypto assets compared to hot wallets.

What is the safest cold wallet?

Ledger nano X

Ledger Nano X is one of the leading cold wallets that allows you to manage, exchange and make cryptocurrency transactions even with your mobile device. It is also available for Android and iOS users.

Additionally, the cold wallet has Ledger Live software that gives you access to your balance and accessible trading functions, with over 1,800 cryptocurrencies at your disposal.

Trezor model T

This cold wallet is one of the safest wallets that allows you to access other exchanges from the Trezor platform. The cold storage wallet also comes with various USB cables to help you connect with other devices, including a smartphone or a desktop.

Paper wallets

This are unique form of wallets where the public and private keys are printed on a piece of paper. They are not as popular as in the early days of cryptocurrencies but are still an effective way of storing digital assets and they minimise risk of hacks.

Can cold wallets be hacked?

In the hot wallet vs cold wallet review, cold wallets are considered safer from hacks than hot wallets because of their minimal presence on the internet. Additionally, cold wallets are resistant to malware because they do not have unnecessary functionalities except storing keys and signing transactions. Therefore, there are no loopholes to exploit by hackers.

However, your cold wallet can be compromised by the following:

  • Phishing scam: This occurs when scammers devise means to access your private keys illegally.
  • Altered cold wallets: An offline storage wallet can be compromised when fake devices are distributed to crypto traders from scammers.

What if I lose my cold wallet?

It is okay to lose your cold wallet, however, do not lose your password for no reason. With your recovery seed, you can still access your funds when you get a new hardware wallet or when you try to move them to a hot wallet.

What do you do when you cannot access your cold wallet?
For security reasons, you can transfer your tokens, using your recovery phrase, to another wallet, preferably a hot wallet, till you get a new hardware wallet.

FAQ

Are cold wallets better than hot wallets?

The hot wallet vs cold wallet debate has shown that both can store crypto assets effectively. However, while the hot wallet is easy to use and cost-effective, cold wallets are more secure because of their resistance to malware.

Can crypto be stolen from a cold wallet?

A cold wallet can be compromised when the hardware device gets damaged or stolen. Nevertheless, it is rare for your crypto assets to get stolen from your cold wallet, especially if your private key is well secured.

Can you back up a cold wallet?

The best way to back up your offline wallet is to securely keep your private key or 12-24 word phrase. You can put your pass key on paper and deposit it in a bank for further security measures.

Which crypto wallets have been hacked?

As the blockchain advances, cyber attacks on crypto wallets have recently occurred. For example, Binance was attacked in 2019 by a hacker who withdrew 7,000 Bitcoins by breaking into the security system and stealing vital information, including two-factor codes, APIs, and other data.