What Are Hot Wallets, and What Is Cold Storage?
In this quick read, we’ll take a look at exactly what Hot Wallets are, and demystify the Blockchain concept of Cold Storage.
If you’ve been reading up on Cryptocurrencies, Bitcoin and Blockchain or paying attention to news outlets, you’ll likely have heard the terms “Hot wallet” and “Cold Storage”. They’re both related, but what exactly are they?
What is a Hot Wallet? – Explained
Put simply, you could think of a Hot Wallet as like having cash in your pocket, and Cold Storage as like having cash in a safety deposit box or bank vault.
The big difference here though, is that the ‘cash’ we’re talking about isn’t coins or bank notes, it’s digital cash in the form of Bitcoin or other Cryptocurrencies.
Regardless of whether the cash is in your pocket (the Hot Wallet), or in the safety deposit box (the Cold Storage), it’s still your money, and you are the one with access to it.
With the Hot Wallet, your access is quick and easy, like pulling it out of your pocket.
But over in the Cold Storage, it’s a little more difficult to get at. It takes time and effort to go and get, but as you might expect – that offers more security. Similar to how your cash is safer in a Bank Vault, than in your pocket – your digital cash is safer in Cold Storage rather than in a Hot Wallet.
So what’s with the names?
Well the “Hot” in Hot Wallet, and “Cold” in Cold Storage, refer both to how easy it is to access, and how vulnerable it might be to being stolen if a thief attempted to steal it.
Having a Hot Wallet containing Cryptocurrency means that you have internet-accessible money, which is very convenient and quick to use, but also poses some vulnerabilities. Because a Hot Wallet is always connected to the Internet, it is always live, or ‘hot’, and can frequently be a hot target for online cyber-criminals to try and steal.
Protecting your Crypto funds
To counter or mitigate against this, most people typically keep a relatively smaller proportion of their Cryptocurrency holdings in a Hot Wallet, and keep the rest in a Cold Storage facility. This means that they have digital cash (cryptocurrency) easily available on hand to purchase goods and transact with, but the majority of their savings remain hidden away elsewhere.
This is very similar to how you might hold enough cash for your day in your wallet, but the rest of your salary and savings sits in a Bank somewhere else.
Using a Hot Wallet is akin to keeping your cash in your pocket where it’s easy to get at, but could be pick-pocketed. Whereas Cold Storage is keeping your cash in a money box in your house, or in a safety deposit box or a vault provided by a third party like a Bank.
Most people tend to go with some combination of the two.
Using a Hot Wallet for Crypto Storage
In terms of what a Hot Wallet actually looks like and where you can access them, the most common Hot Wallets are pieces of software. You can either download the software to your Laptop or PC, or more commonly, exchange platforms like Binance and Coinbase will have an in-built Hot Wallet facility in their platforms, ready for you to use.
These will be free to use and benefit from being both directly connected to your trading account, and from being wrapped in all the cyber-security and defences which are built into well established and trusted platforms such as Binance and Coinbase.
Another alternative for Hot Wallets are the range of Mobile Apps which let you download the wallet software to your mobile device, and access it through an App.
These are quick and easy to use, and some of the best examples are the Blockchain App, Coinbase App, and Electrum.
In terms of what a Cold Storage device might physically look like, they’re typically just flash memory drives which contain your Cryptographic keys (the code which grants you access to your Cryptocurrency and other Blockchain Assets).
Many well trusted and established businesses now offer consumer-grade Hot Wallets which look and function just like common USB memory sticks.
Some of the best in the market currently include the Ledger Nano, and the Trezor X. Both are relatively inexpensive, and a great investment to safeguard your Cryptocurrency holdings and keep them safe from cyber thieves.