Hot Wallet vs. Cold Wallet: What's the Difference, And Why You Should Be Using Both
- animenigma415
- Nov 28, 2022
- 4 min read
Updated: Aug 15, 2023
Crypto Wallets: Your Ultimate Guide to Hot and Cold Wallets and Why Both Are Important To Your Crypto Journey.
Crypto wallets are essential when considering the buying, trading, and long-term holdings of cryptocurrencies. We want to keep our digital assets safe while still being able to transfer these assets off cryptocurrency exchanges conveniently. It is a good idea to have access to both a hot and cold wallet because where one lacks in a specific area, the other makes up for it and visa versa.
Hot Wallet vs. Cold Wallet
As you're starting your journey into cryptocurrency, you may have heard of the terms "hot wallet" and "cold wallet". Both are types of crypto wallets that enable you to store, receive, and send cryptocurrencies on the blockchain ledger. They are your digital bank accounts for all your cryptocurrencies and NFTs as you navigate into Web3.
As we move into Web3, the human collective is wanting to create ownership over the things that are theirs. With the majority of cryptocurrencies being decentralized, we now have the ability to become our own bank and are able to take complete control and ownership of our money and investments. When I first started out, I had a single hot wallet. Fast forward to today, I have several wallets that act as an individual bank account and each have their own purpose for my trading and investing goals.
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Hot and Cold: Balance is Beautiful
Hot and Cold: Balance is Beautiful
Hot wallets connect to and are stored on the internet through your computer or phone to create convenience. Cold wallets are hardware devices that keep your crypto keys offline to create security.
Both types protect your public and private keys, and when used in conjunction with each other, we create a harmony between the ease and convenience of transferring our crypto off the exchange platform and then into the most secure place for our holdings. The use of each wallet type depends on how much crypto you, security preferences, and how easily accessible you need your funds to be.
Yin and Yang: Pros and Cons
Each wallet type has it pros and cons and in order to create balance in our crypto banking, we need to understand the good and bad.
We've come to understand that hot wallets create the most convenience for us because they live online and make for the easy transferring of our cryptocurrencies off of crypto exchange platforms, but this is also the case when we are looking into the purchasing and minting of NFTs. Another plus, hot wallets are free of charge and some will pay interest to you when you have crypto staked in the wallet. While convenience and the free price tag of hot wallets make them attractive, the good must be balanced out with the bad. Since, hot wallets are stored on the internet, they are left vulnerable to potential hacking which can lead to the draining of your assets from your wallet. Thus, hot wallet cybersecurity is average. To prevent a potential hack, never share your password or seed phrase for your wallet and do some research on the wallets loss protection policies and what support they offer.
Some popular hot wallets are; Metamask, Phantom, and Keplr
Cold wallets on the other hand live offline, therefore they are the winners in keeping our crypto assets the safest. Cold wallets are physical, hardware devices that plug into your computer or mobile device. Some devices come with a bluetooth feature. Once you have the device set up, you are ready to start using to store your cryptocurrencies and NFTs. Cold wallets, depending on brand, can also cost anywhere between $60-$300, and since they require the extra steps of plugging into a internet connected device to complete transactions, their use isn't very convenient. And while most cold wallet devices have a backup and recovery option for a lost password, if you lose your device you will need to buy a new device.*I have a hack for this if you lose your cold wallet device. More to come in another blog post. TBD*
Some popular cold wallets are; Ledger, Trezor, and Ryder(releases TBD,specific to NFTs)
Opposite Energies Create Balance
So how do we create a balanced crypto banking system between these two types of wallets? We use each wallet for their strengths because where one lacks in a specific category the other makes up for it. Hot wallets provide us with ease and convenience of transferring our crypto assets off crypto exchange platforms. But, since they don't provide us with a solid sense of security, we then transfer a large portion of our holdings to our cold wallet to keep safe and secure, only keeping a small amount in our hot wallet for ease of transfers or purchases. So instead of worrying yourself in choosing convenience over security, why not balance yourself out and use a combination of both.
This is my personal preference! As the human collective moves into a Web3 world, we should not have to compromise the ease of convenience and the feeling of security. Keeping a small amount of funds in a hot wallet in order to trade or earn interest, while keeping larger, long term holdings in a cold wallet will help bridge the gap and create balance between hot and cold. And while we shouldn't have to choose between the two, knowing the difference between them, the yin and yang of each, helps us better understand the type of investor we want to be.
Disclaimer: This editorial content was created for the sole purpose of education and is not financial advise. Please seek financial advise from a trusted financial consultant or advisor
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