Hot wallets vs. cold wallets: Differences, Pros and Cons

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Hot and cold wallets are used to store your cryptocurrencies, specifically your private keys which grant you access to your cryptoassets. They are therefore a crucial element of the cryptocurrency space.

The major difference between hot and cold wallets are that hot wallets are connected to the internet whilst cold wallets are not.

For those holding cryptocurrencies, the choice between cold and hot wallets depends on factors such as the amount of coins you hold and the frequency which you trade etc.

Click here to learn more about private and public keys.

Hot wallets

Hot wallets are connected to the internet and generally more popular.

Examples of hot wallets

Hot wallet: Enjin mobile wallet
Hot wallet: Enjin mobile wallet

Pros

  • Easy to set up and use.
  • Convenient to access funds for trading since it is already connected to the internet.
  • Free.

Cons

  • Vulnerable to hackers as seen in the numerous hacks on cryptocurrency exchanges.
  • If exchanges close, traders will be left with no recourse to recover their funds.

Cold Wallets

Cold wallets are also known as hardware wallets. They are physical offline storage devices that you plug into your computer to use.

Cold wallets
Cold wallets: Clockwise from left, the Ledger Nano X, Trezor Model T and KeepKey

Examples of cold wallets

Pros

  • Provide better security because your private keys are stored offline.

Cons

  • Can be expensive- prices can range from US$59 for the Ledger Nano S to US$170 for the Trezor Model T.
  • Extra steps required for trading. Save for the KeepKey which is partnered with ShapeShift exchange, users must first send their cryptocurrencies from their cold wallet to an exchange before they can trade. And when cryptocurrency prices fluctuate by the minute, this can have a profound effect on your gains.
  • Harder to use. They do require at least 10 minutes for initial set up, and you will need to plug in your device every time before sending your cryptocurrencies.
  • Inconvenient. Even with the Ledger Nano X’s mobile feature allowing you to connect the device to your mobile phone via bluetooth, it’s still not as convenient as a mobile wallet which is simple an app on your phone.

Conclusion

Whilst there is a longer list of cons for cold wallets, its remains highly recommended for reason of safety alone.

Numerous people have suffered from hacks and closures of exchanges. These victims have no way to get their funds back or at best, will take a very long time. For example Mt. Gox exchange was hacked in 2011 and 2014. To date none of its victims have got any of their stolen funds back.

Meanwhile, hot wallets are very convenient- if you leave your funds on exchanges you can trade with the click of a button.

We recommend keeping small amounts of cryptocurrencies in hot wallets for day to day trading or spending only. Whilst the bulk of your cryptocurrencies should be kept in cold wallets. If you obtain any gains from trading, you should also consider how much you want to retain for further trading and immediately transfer the rest to cold wallets.

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