Hot wallets and cold wallets are the two most common type of wallets used in the crypto space. Read through to find out which one suits you the best.
If you are new to the crypto space, chances are you have been storing your cryptocurrencies on centralised exchanges like Kucoin, Gemini, and Coinhako after purchasing them off the market. But if you want to tap into decentralised finance (DeFi) or other Web 3.0 applications, then you would need a hot or cold cryptocurrency wallet to transfer your digital assets to.
What are cryptocurrency wallets?
Simply put, cryptocurrency wallets are digital versions of your physical wallet. We store paper money and coins in our wallets, and cryptocurrency wallets do exactly the same with digital assets. With it, you can send, receive, and store cryptocurrencies and non-fungible tokens (NFTs) via blockchain networks.
Cryptocurrency wallets usually come with two keys – the public key, and the private key. Public keys, also known as your wallet address, refer to the long strings of code that you paste into your exchange app when transferring cryptocurrencies and are essential to identifying your wallet.
On the other hand, your private keys are similar to your bank account PIN number. It is often represented by a 12-word seed phrase, and only you should know the phrase and no one else. Just like accessing your account from any automated teller machine (ATM), you can use this phrase to gain access to your wallet from any device.
Why do I need one?
There are two main reasons to use a cryptocurrency wallet – tapping into Web 3.0 applications, and security concerns.
A cryptocurrency wallet allows you a user to tap into different ecosystems outside of cryptocurrency exchanges; this include NFT marketplaces, play-to-earn games, decentralised finance, and so much more. Whether it’s buying an NFT artwork off OpenSea, staking your tokens on Pancakeswap, or hopping back into your game with Axie Infinity, all you need to do is link your cryptocurrency wallets and you are good to go.
Then there’s the idea of security. While cryptocurrency exchange do provide their own wallets to users, these are custodial wallets managed by the exchange. Due to their centralised nature, these wallets could be compromised when the exchange is subjected to a hacking attempt as seen with the incidents that Liquid Exchange faced in 2021, and Crypto.com in 2022. To dissociate their assets from exchange wallets, users can turn to non-custodial DeFi wallets to store their assets. These are digital solutions that allow you to have complete control over your digital assets and come in the form of mobile applications or desktop website extensions.
There are plenty of non-custodial wallets to choose from, but they are divided into two different kinds – Hot Wallets and Cold Wallets.
What are Hot Wallets?
Hot wallets are essentially software wallets linked to the internet. They come in the form of web-based wallets, mobile wallets, and desktop extension wallets.
These digital wallets allow you the same flexibility of an exchange wallet without worrying about the downsides of storing your assets with a third party. Just like an exchange wallet, you can use hot wallets to trade and swap tokens on decentralised exchanges, stake or provide liquidity in DeFi protocols, and transfer cryptocurrencies to another wallet.
The trade-off for the ease-of-use is its potential security risk. Hot wallets may not be linked to an exchange, but the fact that they are linked to the web means the potential to be hacked is always present.
A hot wallet is sufficient for your crypto use if you hold a small amount of cryptocurrencies, or if you interact with dApps often on the web. On the other hand, it is advisable to use a cold wallet if you hold digital assets of large quantities and value.
If you are looking to create your own hot wallet, check out our 2022 DeFi wallet guide for a comprehensive guide on trusted hot wallets!
What are Cold Wallets?
Cold wallets are different from hot wallets in that they take the form of hardware wallets, or physical devices that you can hold in your hand.
Cold wallets provide a physical storage outlet that disconnects your assets from the web and is virtually impossible to hack. With its secure properties, cold wallets are the perfect choice to holding digital assets for the long term.
The downside to the equipment is its inflexibility. You’ll need to boot up the wallet and input the keys before you can access it. Plus, losing a cold wallet is as good as losing an actual wallet since you would not be able to retrieve the assets elsewhere.
Which one is better?
Choosing a wallet boils down to your cryptocurrency habits and usage. If you move your assets around frequently in the cryptocurrency space, it is a good idea to use a hot wallet where you can access your tokens in an instant.
On the other hand, users who hold their cryptocurrencies for the long term should opt for a hardware wallet where they can accumulate their digital assets with a peace of mind.