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Hot And Cold Crypto Wallets Defined

Hot And Cold Crypto Wallets Defined

Most people understand by now that if you own cryptocurrency, you’ll need to store it. Crypto might be digital, but it still requires safekeeping. Everyone – from intermittent users to active day traders – needs crypto wallets.

Wallets have evolved substantially over the last two years or so, offering modern crypto enthusiasts a host of new choices to secure their funds.

Much like the larger institutional investors need what is known as custody to enable them to trade digital coins and store funds securely, so too do individual users need a wallet in place before buying or trading virtual coins.

 

Various Types of Crypto Wallets and Their Terms

All crypto wallets are highly secure, with the top end dominated by cold wallets or vaults that have zero connectivity and are thus ice cold and offline, untouchable. Most modern digital exchanges nowadays store the bulk of their assets offline in a cold vault of this nature.

After Mt. Gox and a few other digital exchanges suffered severe hacks, companies have risen to the challenge of completely excluding the possibility of such disasters happening again.

Crypto wallets work on public and private keys to enable transactions, and the extent to which your private keys are secure is the extent of your funds’ safety. There are essentially five wallet types:

  • Desktop wallet
  • Online wallet
  • Mobile wallet
  • Paper wallet
  • Hardware wallet

 

In addition, among these options, there is also the option to choose a hot or cold wallet. So, what’s the difference? Put simply, a hot wallet is transactional, like a bank card connected to a bank account, whereas cold wallets are strictly for storage and act as a fixed term deposit at the bank more than anything else.

What you need to know about this choice is simply this: with a hot wallet, a firewall stands between you and the criminal fraternity. Depending on your daily needs and how that statement makes you feel, you can choose between hot and cold wallet options, but preferably employ both for maximum convenience and security.

The majority of crypto-savvy users have both a hot and cold wallet facility. The hot wallet carries daily transactional funds, whereas their cold storage safeguards the bulk of their crypto assets. A loss from the hot wallet is then not onerous, virtually impossible though it might be to effect in the first place.

 

Hot Wallets

The security provided by a hot wallet hinges largely on a user’s security consciousness and ensuing behavior and, importantly, the secure behavior of an outside party – the wallet provider. Hot wallets are only vulnerable at all because they’re permanently connected online. To make daily purchases or trade actively, you’ll need a hot wallet, no doubt about it.

As an aside, digital exchanges like Poloniex, Coinbase, and Bittrex perform as hot wallets for day traders, who transact with their funds active on the exchange, withdrawing most to cold storage at day’s end.

A desktop wallet is a wallet downloaded onto only your own machine, which must then be used to transact. The security of funds here then hinges on your personal machine’s firewall and your safety-consciousness.

An online wallet is an online storage facility you can access from anywhere with any device, using your personal info, but doesn’t require you to be on your machine.

A mobile wallet is exactly the same as a desktop wallet, but smaller in build (for mobile devices) and dedicated to your mobile phone or tablet.

You’ll need to decide and choose where and how you want your crypto wallet to perform, but all have common tight security protocols and similar attributes. Performance can vary between brands, but some great options are Exodus (that has synchronicity with ShapeShift exchange inbuilt in its design), Mycelium (that also boasts a cold storage facility and the same ShapeShift integration), Jaxx and Copay (with multi-sig protocols).

You’ll also need to determine a wallet’s capacity, and by that, we mean which coins you can store there. Some wallets are exclusively bitcoin wallets, while most remain limited in the types of coins they can store.

 

Cold Wallets

A paper wallet is a cold wallet, but for many users, the notion of writing down addresses and keys on a piece of paper that you’ll lock in a drawer seems low-tech and unappealing.

Hardware wallets are portable physical devices that have established their own attraction and trend. A hardware wallet is a cold storage facility, as it needs to be plugged into your PC before its funds can be accessed. The devices also ask you to push a button to confirm transactions, something many users find reassuringly reminiscent of legacy online banking.

Some great choices here include Treznor, Ledger Nano and KeepKey. Pushing the boundaries of what’s possible, KeepKey also has integration with the ShapeShift exchange and basically enables transactions from a cold wallet to an exchange. It remains to be seen whether this is a valuable feature for users, or whether it ultimately defeats the original purpose of a cold wallet.

 

Secure Crypto Wallet User Behavior

When trading or paying with cryptocurrency:

  • Don’t leave a glut of funds on an exchange overnight, or for extended periods. Rather withdraw to your cold wallet and disconnect.
  • Rather select a wholly cold wallet and a hot version for transacting. Allow the current fad of “cold” but transactional wallets to prove its merit before opting into this novel system.
  • Make sure that you are personally satisfied with the password or PIN protocols on any wallet of whatever type that you might choose, and employ a VPN and constantly updated antivirus and firewalls all around.

 

Crypto shouldn’t be intimidating and, if anything, digital coin transactions are actually more secure than traditional banking options. If you’re unsure of your tech’s capacity or perhaps even about the nature of crypto itself if you’d like to employ it in your pay run or simply get up to speed as an individual, chatting to an IT services company can often clarify the rather amazing benefits crypto has to offer.

For one thing, you can easily effect cross-border payments for remote workers, and save a whole lot of bank charges in so doing.

Above all, just be super secure and triple-check everything you enter – just like you would with traditional online banking – and crypto will be a lot more fun than anything else.

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