Securing your assets is one of the first things you should think about when investing in crypto. Knowing the difference between a cold wallet vs. hot wallet will help you decide which option is right for you and set you up for success as you continue your crypto endeavors.
In this article, we’ll discuss the most important things you should know about cold and hot wallets so you can make an informed decision and build wealth for many years to come.
What Is A Crypto Wallet?
Crypto wallets are a safe and secure method of storing private keys to your assets. Since crypto is never stored within the actual wallet (they exist solely on the blockchain), your keys are essentially passwords that grant access to your crypto.
Whether your investments are a few diversified coins or a few thousand dollars worth of Bitcoin, keeping your crypto protected is a top priority.
Why is crypto storage so critical? Unlike FDIC-insured banks that cover your funds in the event they’re stolen, losing your crypto means it’s gone for good. Crypto wallets can help prevent that from happening.
Depending on your preferences, crypto wallets can either be hot or cold. This simply means that your assets are either stored via the internet or offline.
To fully understand the differences between these two storage methods, let’s take a deeper look at the way each one works as well as the different types of each.
Cold Wallet Vs. Hot Wallet: How They Work
The main appeal of a hot wallet is that it’s conveniently accessible via an internet connection. Your keys are stored using specific software or an application. Trading, selling, or simply accessing your crypto is as simple as verifying your information.
Hot Wallet Safety
While hot wallets are convenient, seamless, and user-friendly, it’s important to remember that they do exist online. This means that they are susceptible to cybercriminals and bad actors.
For optimal safety, look for security features such as:
- Biometric and pin-based authentication
- Multi-factor authentication
- User alerts
- Video verification
Other options include safelisting measures that allow you to place limits on designated token withdrawals. Even if your account is compromised, your funds are protected.
With the right crypto exchange and the proper safety measures in place, storing your assets using a hot wallet is a great way to protect your investments.
Opposite to hot wallets is cold wallets. This storage method does not require a connection to the internet, keeping your assets protected from unauthorized users who might gain access to keys online.
With a cold wallet, any online transaction is transferred offline through your preferred means of storage. Once it’s placed here, it is signed electronically and then directed back online.
Cold Wallet Safety
Eliminating the need for your private keys to connect to an online server significantly reduces the possibility of your assets being hacked. Although this chance will never be zero, cold wallets help you come close to that.
Cold Wallet Vs. Hot Wallet: Different Types
Between hot and cold wallets, there are further options depending on how you prefer to keep your assets stored. Under the category of hot wallets are different software wallets, each achieving the same task in a different way.
To obtain a desktop wallet, simply research which app you prefer and download it to your computer desktop. The primary benefit of these wallets is that you have total ownership of your keys.
While the app you choose generates a data file that holds your keys, not every option will automatically assist you with creating an access password. That’s why it’s important to set up a password, as well as any other optional safety features, yourself.
The features of a mobile wallet are similar to everything offered by a desktop wallet. The main difference is the way in which you access your keys.
Important benefits of mobile wallets over desktop wallets are that you can access your keys while you’re on the go and can oftentimes generate a QR code that streamlines the transaction process.
The disadvantages of a mobile wallet are essentially the same as anything that could go wrong with your phone. They are susceptible to viruses, theft, and damage, making it even more important to protect your device.
The most popular choice for hot wallets is the web wallet due to its speed, efficiency, and seamlessness while selling or trading. Plus, there’s no need to download any software onto your computer.
Web wallets combine the benefits of desktop and mobile wallets since you can access your keys wherever you have a device and an internet connection. However, choosing a web wallet might give ownership of your keys to the exchange that you partner with.
To avoid the limitations that come with not owning your own private key, multi-signature wallets provide you with more control over your assets.
At Vauld, our segregated multi-signature wallets are secured by BitGo, so we have strict safety protocols in place to ensure that your wallets are protected with military-grade security, and your private keys are generated and stored offline.
For cold wallets, there are two common types depending on whether you want your information written down on paper or stored on a device similar to a flash drive.
Paper wallets, true to their name, are actual pieces of paper. For this type of wallet to function properly, it needs to have all of the correct data required for you to access your crypto.
The major downfall of paper wallets is that they are easily lost if not stored in a safe place. Losing all of your cryptocurrency due to a missing piece of paper can sometimes feel even worse than having it stolen.
Managing transactions via paper wallets can also be very time-consuming. So, if you need to quickly access your funds for a trade, paper wallets might quickly become inconvenient.
Hardware wallets also avoid exposing private keys to the internet. In terms of appearance, these devices are similar to flash drives. They store your keys for more immediate access than a paper wallet.
Along with added efficiency, hardware wallets help ensure that your private keys never leave your device. They’re also protected by a PIN and often have a recovery phrase. Even if your wallet is stolen or you forget your PIN, your keys remain protected.
Cold Wallet Vs. Hot Wallet: Which Is Best?
If you’re stuck deciding between a hot wallet vs. cold wallet, then it helps to determine your comfort level with storing your keys online and how often you’ll need to access your wallet.
Hot wallets are ideal if you plan to regularly and quickly access your funds, whether you’re trading or selling. If you don’t plan to access your crypto very often, then a cold wallet can provide you with the peace of mind that no one else can come across your information.
It can also benefit you to have a combination of both wallets. Any large assets that you plan to hold for the foreseeable future might be best kept offline using a cold wallet, while funds that you actively plan to trade will be easier to access using a hot wallet.
Safely Store Your Assets With Vauld
No matter how you decide to protect your crypto, finding a way that works best for you is important for keeping your assets secure.
As a Vauld customer, your cold wallet is insured up to $100 million so you can recover your funds even in the event of a serious platform breach.
Plus, partnering with Vauld means receiving competitive crypto interest rates on a long list of crypto options for you to choose from. Not only will you start earning as early as your first deposit, but you’ll also experience:
- Quality customer service
- An arsenal of security features
- A knowledgeable community of like-minded crypto users
- A seamless user interface
- Transparent business practices
- And so much more.