Hot wallet or cold wallet? Which is best to store and protect your cryptocurrencies? Let’s see what these tools are and what differences there are between them.
Cold wallet or hot wallet? What is the best way to protect your cryptocurrencies?
Recent events in the crypto world have prompted many people to wonder if the place where they keep their crypto is safe or not.
The declaration of bankruptcy of FTX before, and now the difficulties encountered by Crypto.com users in withdrawing their crypto, are making savers doubt, who now more than ever want to protect themselves and not risk losing their asset.
Many users of this asset will probably want to know what the best way to store cryptocurrencies is, so as to be sure not to encounter events similar to those that have occurred recently, in which many people have lost their wealth or have saw their crypto assets depreciate enormously.
The main types of wallet, that is the tools for storing your cryptocurrencies, are two, namely cold wallet and hot wallet, let’s see what they are and what differences exist between them.
What is a hot wallet and how it works
A hot wallet is a digital wallet that is always connected to the Internet. This can be of two types: "custodial" and "non custodial", in the first case the private keys, necessary to access your cryptocurrencies, are also held by the company providing the service.
In the second case, however, it is the user who directly controls their private keys, which makes them able to access their tokens at will.
Hot wallets can be of several types, here are some examples:
- Wallet linked to a cryptocurrency exchange: this type of wallet is linked directly to the profile of a user who has opened a profile on a crypto exchange platform, such as Binance. Hot wallets of this type are used above all by those who only ever use a single platform to sell and buy cryptocurrencies.
- Wallet online: this type of wallet is accessible from the browser, as is the one connected to a cryptocurrency exchange. To access it, you need to register on the provider’s site, which in turn provides all the access keys necessary for the use of the wallet.
- Wallet software: this type of wallet works like a normal software, to use it you need to download it from the Internet.
- Wallet desktop: this type of wallet can be accessed directly from your desktop, like any other application.
- Wallet for mobile: this type of wallet is optimized for use on smartphone, so that the user can use it from wherever he is.
Hot wallet: advantages and disadvantages
The advantages of using a hot wallet can essentially be summarized in two points: it is easy to use and is suitable for less experienced users. Being always connected to the internet, making transactions or buying and selling cryptocurrencies is quick and easy. Furthermore, if you decide to rely on a service managed by a third party, it is possible that they will provide support service in case of problems, such as the loss of access keys.
However, there are also possible disadvantages: being always connected to the Internet, these wallets can become prey of hackers on the hunt for cryptocurrencies. Furthermore, if a custodial-type hot wallet is used, it will be the service provider you rely on to keep the private key, so it is necessary to hope that it will keep it with due confidentiality.
What is a cold wallet and how it works
A cold wallet or hardware wallet is a digital wallet in which cryptocurrencies are stored and which, unlike the hot wallet, does not require an internet connection for access. With these wallets it is possible to store your private key, necessary for access, offline, that is, away from prying eyes.
To use a wallet of this type it is necessary to connect it to a PC and download the manufacturer’s software. Compared to a hot wallet it has several differences, let’s see which ones.
Cold wallet: advantages and disadvantages
A cold wallet is first of all generally safer than a hot wallet, this is because, since it is never connected to the Internet, it is very difficult for a hacker to access it. Furthermore, compared to a hot wallet, especially those of the custodial type, it is only the user who has the access keys and who has control over the contents of the wallet.
Another issue, especially important for those who own many valuable cryptocurrencies, is privacy: cold wallets, in fact, allow to remain anonymous and unknown, which can be very important for those who want to keep the their privacy intact.
However, there are also some big disadvantages, which may be of particular interest to less experienced users. Being non-custodial, ie totally under the control of the owner, if the owner of a cold wallet loses his access key, he will be condemned to no longer be able to use those cryptocurrencies.
It is also necessary to emphasize that it is not enough to have the hardware available to access cryptocurrencies, it is also essential to have software installed on a PC, which can make transactions with your wallet less agile than those made with a hot wallet.
Hot wallet and cold wallet, which one is best
So which is better to use between a hot wallet and a cold wallet? The answer is, as in most cases, "it depends".
Both have advantages (ease of use, security, portability) and disadvantages (less ease of use, risk of losing the access password).
The best thing to do is ask yourself about your priorities: if you want to have complete control over your cryptocurrencies, perhaps a cold wallet is better; while if you are less experienced and want assistance in case of need then a hot wallet is better.
In general, a good solution may be own both, keeping a certain amount of cryptocurrencies on a hot wallet and another on a cold wallet, so as to mitigate possible risks of management.
Original article published on Money.it Italy 2022-11-14 13:06:45.
Original title: Criptovalute: le differenze tra hot wallet e cold wallet
