Hot Wallet vs Cold Storage
The ultimate safety storage comparison
An important topic to discuss is how you should safely store your cryptocurrencies and what precautions one should consider. In this article we will bring up the differences between cold and hot wallets. The goal of this article is for you attain enough knowledge about the storage of cryptocurrencies to not fall victim of the multiple hacks out there.
Before we go in-depth about the definitions of the wallets. We want to clarify the commonly mistake of people blaming the blockchain technology for the costly hacks, that sometimes highlights the news. Most recent victim of a system breach is the Japanese exchange Coincheck, the site confirmed an amount of over $500 million worth of cryptocurrencies stolen from their accounts. This makes this the most expensive cryptocurrency hack of all time, beating the Mt. Gox $450 million hack in 2011. This is a consequence of bad hot wallet management and not because of the blockchain technology.
What is a hot wallet?
It’s basically a wallet that is constantly connected to the internet, which is easily accessible from any location with an internet connection. Hot wallets are usually fast and easy to set up. They also have support for a wider number of different cryptocurrencies compared to cold wallets. However, they are more exposed for potential vulnerabilities. An example on a hot wallet would be a Coinbase wallet. Most exchanges usually only keep a small portion of their assets in hot wallets for easy and fast access for customers. Because of the potential risks of having larger amounts of cryptocurrencies on a hot wallet, it is advised to only store smaller amounts on them.
Pro’s & Con’s - Hot wallet
|User-friendly & easy to set-up||Potential vulnerabilities for hacking attempts|
|Access from anywhere|
What is a cold wallet?
Unlike the Hot wallet, a Cold wallet is not constantly connected to the internet. The Cold wallet allows you to more safely store your cryptocurrencies from the potential vulnerabilities of a Hot wallet. A hardware wallet is a perfect example of a Cold wallet, as you physically have it on you and is required to be able to access your funds. But just like the Hot wallet, the Cold wallet has flaws. Even though it is a lower risk of vulnerability for losing your funds, there is a risk for people to physically steal your private keys. Your hardware/hard drive also have the potential risk of malfunction, usually there are ways to recover this data but can be costly. The hardware wallet companies such as Ledger work constantly to improve the user experience and avoid the inconveniences that can appear. Their product Nano Ledger S is a good step in the right direction to decrease the recovery costs and for an easy and simple storage of your cryptocurrencies in Cold storage. Cold wallets can be safely kept in different deposit boxes, and only be used to deposit funds to for long term storage.
Pro’s & Con’s - Cold wallet
|Offline storage||Harder accessibility for the user|
|Able to be kept in a safe / deposit box||Can be costly, hard drive recovery costs, etc.|
|Less risk for vulnerabilities|
|Reduced stress & anxiety|
|Can be backed up (reduce recovery costs)|
As discussed in this article there are both positive and negative features with both Hot and Cold wallets. Bad management of a Hot wallet can be very costly, as seen with exchanges losing millions. But in the crypto-world today it is hard to completely avoid the usage of Hot wallets. But, with innovative companies trying to improve the user experience for hardware wallet. Might this result in a bigger demand for using cold storage in the future.
With the current technology and potential risks, we recommend only using Hot wallets for smaller amounts of funds and Cold wallets for your bigger holdings. If you haven’t bought a Cold wallet yet, check out which hardware wallet would suit you in this review and set-up guide.