Those new to the Crypto Space that are about to or have bought Bitcoin, have definitely wondered at some point on how to safely store a Digital Currency and may have encounter 2 terms that are often debated on the internet, usually over the argument of which ‘’Hot or Cold Wallet’’ to use?
Please note that all Cryptocurrency wallets are classified as either ''Hot or Cold''. One that is connected to the internet or is online is said to be a ‘Hot’ Wallet. On the other hand, a ‘cold’ Wallet implies it is offline or disconnected from the internet
Hot Wallet
A Hot wallet is basically a wallet that is loaded up, private keys and all, to be used for any transactions.
Considered to be less secure because of the risk internet access poses to your privacy and security, but tend to be better in design as usually third-party application focus more on usability rather on security
Hot Wallet refers to the method by which most Cryptocurrency exchange keep a certain liquidity just in case there is a massive influx of withdrawal requests. That’s because accounts within digital asset exchanges like Poloniex and Bittrex are considered Hot Wallets because a third-party service is actually holding your funds in their infrastructure and servers
Online Wallet are typically used for everyday use-cases, ideal for holding small amounts just like having a real wallet; it’s a common practice to not carry too much money around on a day-to-day basis as it poses risk of you getting robbed but a Wallet is used for convenience of holding Paper Money/credit cards just in case you need to use them
It is considered "unsafe" because hackers have easier access to this than a cold wallet, making it vulnerable to theft because Hot Wallets are often accessed through a connection to the Internet.
Cold Wallet
Using a Cold storage to store Cryptocurrency is basically keeping Digital Currencies on a offline wallet, avoiding any sort of connection to the internet, thereby, protecting the wallet from unauthorized access, cyber hacks, and other vulnerabilities that a system connected to the internet is susceptible to
Cold wallets are used for the “cold storage” of Cryptocurrencies, it is unloaded (and the computer probably isn't even connected to the internet) so that hackers have a harder time to access all of your stored coins for improved security. They’re more like a real-world safe or a vault than a leather wallet you carry with you for day to day transactions
Hardware Wallet like Ledger Nano S, Trezor or KeepKey are some of the most secure devices available on the Market to hold Cryptocurrencies, as it will prevent hackers from gaining access to them plus these devices generate cryptic private keys in an offline environment, away from the internet but will come at a hefty price tag
A free alternative to Hardware Wallets are Paper Wallets, deemed to be the cheapest form of cold wallets available. Paper wallet are free for everyone to use and contains a pair of private/public keys printed on a piece of paper.
User will have private keys which need to be generated but are instead stored offline so you don’t need to worry about security
When storing Cryptocurrency via the expectations are is keep a Digital Currency from being exposed to an Internet connection, essentially just keeping it completely offline.
Which one to use?
Before deciding on how to store a valuable Digital Currencies, please do some research before using any third party application, as it’s important to find out what exact type of Wallet you’re dealing with, this can be done by determining whether it’s a Hot or Cold Wallet
Using a Hot Wallet should be more like checking accounts whereas a Cold wallet are like savings accounts.
The security of Hot wallets is dependent upon the security habits of individuals and third parties. As long as something is connected to the internet, it is vulnerable to attacks.
It’s therefore advisable to use a Hot wallet, only if you’re planning on holding small amounts of a Digital token intended for day-to-day spending but when it comes to life-saving amounts, it’s best to use a Cold Wallet by storing a Cryptocurrency offline