Hot Wallet vs. Cold Wallet: What’s the Difference?

If you're new to cryptocurrencies, you've probably come across the terms 'hot wallets' and 'cold wallets.' But what is the difference, and more importantly, which is best for you?

In this blog, we will deconstruct these terms and help you make an informed decision about safeguarding your digital assets. By the end, you'll understand the difference between hot and cold wallets and know which is best for your crypto goals. Let's get started!

Important facts

• Hot and cold wallets are the primary means of storing and trading cryptocurrencies and tokens.
   
• Hot wallets are internet-enabled and available online, while cold wallets are offline and available as physical devices.
   
• The primary advantage of using a hot wallet is its ease of use.
   
• A cold wallet provides greater security because it is less vulnerable to hacking and is less vulnerable to digital asset loss.

What are hot wallets?

Hot wallets are online solutions that provide several functionalities, including storing, sending, and receiving tokens and managing and viewing all available tokens in one place. 

You can access a hot wallet through internet-enabled devices like mobile phones, tablets, and laptops. The primary appeal of hot wallets is the ease of sending and receiving crypto on demand.

A hot wallet serves as an interface for completing cryptocurrency transactions. It is in charge of recording your transactions on the decentralized public blockchain ledger.

Two critical components of a hot wallet are the private and public keys, which are made up of a cryptographic string of letters and numbers and are responsible for successful crypto deals with your wallet.

Types of hot wallets

Popular hot wallets include Binance Wallet, Exodus Wallet, Coinbase Wallet, Robinhood, Edge, Trust Wallet, and more. Hot wallets come in various forms, offering slightly different features and functionalities. Here are some of the most common types of hot wallets:

• Online wallets:
  These are wallets provided by online cryptocurrency exchanges. Users can access their wallets via a web browser, making them convenient for trading and quick access to funds. 
  However, they are susceptible to hacking attacks on the exchange platform.
   
• Mobile wallets:
  These wallets are mobile apps available for download on smartphones. They offer a convenient way to manage cryptocurrencies on the go.
   
• Desktop wallets: 
  Desktop wallets are software applications installed on computers or laptops. 
  They provide a higher security level than online wallets since they're not always connected to the internet. However, they're still susceptible to malware and hacking if the device is compromised.
   
• Browser extension wallets: 
  These are browser add-ons or extensions that allow users to interact with blockchain networks directly through their web browsers. 
  They provide quick access to decentralized applications (DApps) and web-based services.
   
• Web wallets: 
  Web wallets are wallets you access through a web browser. They store your private keys on a remote server, making them convenient for online transactions. 
  However, this also means they are more vulnerable to security breaches.
   
• Exchange wallets: 
  These are wallets that cryptocurrency exchanges provide for users to hold their funds on the platform. While convenient for trading, they are considered less secure than other hot wallet options due to their exposure to online threats.
   
• Hybrid wallets: 
  Hybrid wallets combine features of both hot and cold wallets. They keep some of the user's funds online for convenient access, while most funds are stored securely offline.
   
• Token-specific wallets: 
  Some wallets are designed specifically for a certain cryptocurrency or token. For example, wallets like MetaMask are tailored for Ethereum and ERC-20 tokens, providing easy access to the Ethereum ecosystem.

Examples of hot wallets

Popular examples of hot wallets include custodial exchange wallets such as Binance wallet, Coinbase wallet, etc. We also have non-custodial hot wallets such as MetaMask, Trust Wallet, and Exodus. These wallets are relatively simple, requiring no deep knowledge of cryptocurrency, blockchain technology, or Web3. Hot wallet’s ease of access makes them a top choice for many people.

Benefits of hot wallets 

Hot wallets, as digital wallets connected to the internet, offer several key benefits:

• Accessibility:
  One of the primary advantages of a hot wallet is its accessibility. Since they're connected to the Internet, you can access your funds from any Internet-enabled device.
   
• Instant transactions:
  Hot wallets allow instant transactions without delays, which is crucial for active traders and those engaging in time-sensitive transactions.
   
• Integration with exchanges:
  Hot wallets are often seamlessly integrated with cryptocurrency exchanges. You can quickly move assets between your exchange account and wallet, enabling swift trading activities.
   
• User-friendly interfaces:
  Hot wallets are designed to be user-friendly, making them accessible even to individuals with limited technical expertise.
   
• Convenient for small amounts:
  Hot wallets are ideal for storing smaller amounts of cryptocurrencies you use for daily transactions. Think of them like a digital wallet for pocket change, providing a quick and easy way to make payments.
   
• Practical for staking:
  Some blockchain projects require users to participate in staking or voting processes. Hot wallets are suitable for these activities because they must be connected to the blockchain network.
   
• Regular software updates:
  Developers often release updates for hot wallet software, enhancing its features, security, and performance. This ensures that users can access the latest wallet functionality.
   
• Integration with mobile apps:
  Hot wallets are often available as mobile applications. You can manage your cryptocurrencies on the go, which is especially useful for individuals who prefer using smartphones for transactions.
   
• Ideal for trading platforms:
  Traders who frequently engage with various cryptocurrencies may find hot wallets indispensable. They provide quick access to a wide range of assets, allowing seamless trading activities.

Cons of hot wallets

While hot wallets offer convenience and accessibility, they also come with certain drawbacks and risks:

• Susceptible to hacking: 
  Hot wallets are connected to the internet, which makes them prone to hacking attempts.
   
• Phishing and social engineering attacks: 
  Users may be targeted by phishing scams or social engineering attacks. Thieves could impersonate legitimate sources to trick users into disclosing their private keys or login credentials.
   
• Higher risk of unauthorized access: 
  Since hot wallets are online, there is a greater risk than cold wallets. If a user's device is compromised or they inadvertently reveal their private keys, their funds can be at risk.
   
• Dependence on third-party providers: 
  Users rely on these wallet providers to maintain the wallet's security and functionality. If the provider experiences issues or breaches, it can impact the safety of the funds.
   
• Limited storage capacity: 
  Hot wallets are often designed for smaller amounts of cryptocurrency for everyday use. 
  They may not be suitable for securely storing large sums of digital assets, which are better suited for cold storage solutions.
   
• Unsuitable for long-term storage: 
  Due to the higher security risks associated with hot wallets, we do not recommend them for long-term storage of significant amounts of cryptocurrency.
   
• Prone to technical failures: 
  Hot wallets can experience technical glitches or failures like any software. This failure can temporarily disrupt access to funds and potentially lead to user inconvenience.
   
• Risk of phishing scams and fake wallets: 
  Users must be cautious about downloading legitimate wallet apps and avoiding fake or malicious versions.
   
• Regulatory compliance issues: 
  Depending on the jurisdiction and the specific wallet provider, there may be regulatory compliance requirements that users need to be aware of.

What are cold wallets?

Cold wallets, also known as cold storage solutions, are offline storage methods to secure cryptocurrencies from online threats. Cold wallets differ from hot wallets because they are less vulnerable to hacking. 

This wallet variety rapidly gained adoption and popularity since the collapse of FTX, the largest centralized crypto exchange that failed in November 2022, declared bankruptcy, and reported an alleged hack that allegedly left millions of user assets frozen or gone.

Types of cold wallets

Here are some of the most common types of cold wallets:

• Paper Wallets: 
  A paper wallet generates a physical copy or printout of a user's public and private keys. These keys are usually presented as QR codes, which can be scanned when needed. Since paper wallets are offline and physically stored, they are immune to online attacks.
   
• Hardware Wallets: 
  Hardware wallets are physical devices designed specifically for storing cryptocurrencies. They resemble smart cards or USB drives and come with built-in security features. Hardware wallets are the most secure options for long-term storage of digital assets.
   
• Hardware Security Modules (HSMs): 
  HSMs are also physical devices that provide secure storage and management of private keys. Enterprises and financial institutions commonly use them to protect sensitive information.
   
• Steel wallets: 
  Steel wallets are physical devices made of metal (often stainless steel) that store private keys in a tamper-resistant form. Users can etch or engrave their keys onto the steel, ensuring long-term durability and resistance to physical damage.
   
• Cryptocurrency paper banknotes: 
  These are physical notes that contain a public address and a private key, usually covered by a scratch-off material. They function similarly to paper wallets, providing a physical form of cryptocurrency storage.
   
• Deep cold storage:
  This term refers to methods that involve keeping backups of private keys in highly secure physical locations, such as bank vaults or safety deposit boxes.
   
• Time-locked cold wallets: 
  These cold wallets have a mechanism that enforces a waiting period before any withdrawals can be made. This mechanism adds an extra layer of security, preventing immediate access to the funds in case of a compromise.
   
• Multi-signature wallets with offline signers: 
  This involves creating a wallet that requires multiple signatures to authorize a transaction. Some of the required signatures can be held on offline devices, providing an added layer of security.
   
• Sound Wallet:
  Sound wallets keep your private access keys secure as encrypted audio, whether on CDs or 7-inch vinyl. A spectroscope app can extract information from the track, even though your encrypted login key is converted into a sound file less than a minute long and sounds like white noise to anyone listening.

Examples of cold wallets

Some well-known cold wallets include Tangem Wallet, Ledger, and Trezor. These wallets come in various forms, such as hardware devices that resemble smart cards, USB drives, paper wallets with printed QR codes, and even steel wallets that protect your private keys from physical damage.

Pros of cold wallets

Cold storage solutions offer several significant benefits for securing cryptocurrencies:

• High-security level:
  Cold wallets are highly resistant to online hacking attempts and cyber threats, providing an extra layer of security for stored assets.
   
• Protection from attacks: 
  They are immune to phishing attacks and malware. This makes them an ideal choice for long-term storage of significant cryptocurrency holdings.
   
• Immunity to network vulnerabilities:
  Cold wallets are unaffected by network outages, congestion, or other issues that sometimes impact online wallets or exchanges.
   
• Reduced risk of unauthorized access:
  With private keys stored offline, there is a significantly reduced risk of unauthorized access.
   
• Long-term storage:
  Cold wallets are well-suited for storing cryptocurrencies over extended periods, providing peace of mind for users who want to hold onto their assets as a long-term investment.
   
• Tamper-evident design:
  Some cold wallets have physical elements that help you detect if they have been tampered with. This feature provides an additional layer of assurance for users.
   
• Control over private keys:
  With cold wallets, users have complete control over their private keys, which are not shared with any third-party service or platform. This aligns with the principles of true ownership and autonomy in the cryptocurrency space.
   
• Independence:
  Cold wallets operate independently of third-party services or providers. Users do not need to rely on the security practices of external companies, which can sometimes be a source of vulnerability in the crypto space.
   
• Protection from exchange failures:
  If an exchange or online wallet service is experiencing technical issues, bankruptcy, or other operational problems, cold wallet users are not affected.
   
• Safe backup and recovery options:
  Users can create multiple backups of their cold wallet, allowing for secure recovery of their funds if the original wallet is lost, damaged, or compromised.

Cons of cold wallets

While cold wallets are highly secure and effective for long-term storage of cryptocurrencies, they do come with some drawbacks:

• Limited accessibility:
  Since cold wallets are typically offline, users may need to go through extra steps to access their assets, making frequent transactions less convenient.
   
• Not ideal for active trading:
  People who need quick access to their funds may find cold wallets impractical due to the extra steps involved in transferring assets.
   
• Risk of physical damage or loss:
  Unlike hot wallets, physical cold wallets (like paper wallets or steel wallets) can be susceptible to physical damage, such as fire, water damage, or misplacement.
   
• Steep learning curve for new users:
  Setting up and using a cold wallet may be more complex for beginners. It requires a good understanding of private keys and addresses and securely storing and accessing digital assets.
   
• Less versatility for DApps: 
  Cold wallets may not be well-suited for interacting with decentralized applications (DApps) or executing smart contracts, often requiring more immediate access to funds.
   
• Price of hardware wallets:
  Hardware wallets, one of the most secure forms of cold storage, come with an initial cost. While this expense is often considered a worthwhile investment for security-conscious users, it is a factor to consider.

Cold wallet vs. hot wallet: Comparison table

This table is a quick reference guide for comparing the characteristics of cold and hot wallets.

Key differences between hot and cold wallets

Now that we've covered the basics of hot wallets and cold wallets let's examine their key differences.

Security
Cold wallets are safer than hot wallets because they are not internet-connected. Hot wallets are less secure because they are always connected to the internet, so there's a higher chance that someone could hack into them.

For example, when you set up your Tangem Wallet, the special chip in the card creates a secret key that keeps your wallet safe. This key is only stored on the cards, and there are no other copies anywhere else in the world. On the other hand, if you use a hot wallet, your money could be stolen if the company that made the wallet gets hacked or if someone hacks into your phone or computer. 

Convenience
Hot wallets are easier to use than cold wallets. With a hot wallet, you can quickly access your money and make transactions whenever you need to without any extra steps. This makes them a good choice for people who trade a lot or use their crypto to buy things daily.

Cold wallets take a little more work to use. Since they're not connected to the internet, you must connect them to your computer or phone whenever you want to transact. This extra step can be a little annoying if you need to get to your money quickly. 

But setting up and using a Tangem Wallet only takes about 2 minutes, so it's not too much of a problem for the extra security you get. Plus, you can always carry your Tangem wallet with you; you don't need to charge it or use any cables. The cards can fit in a little bag with your other credit cards, so you can use them to make transactions wherever you are.

Cost
Another thing to think about is how much it costs. Most hot wallets are free to use, but cold wallets usually cost some money to buy. Hardware wallets can cost anywhere from $50 to $200, depending on the type and special features they have.

But it's important to remember that buying a cold wallet can be a good investment in the long run, especially if you store a lot of crypto. The extra security and peace of mind that cold wallets give you can be worth a lot. For example, a set of two Tangem Wallet cards costs $54.90. Not only is it simple to use, but it is also IP69K dust and water-resistant and comes with a 25-year warranty.

Choosing the right crypto wallet for your needs

Now that we've discussed the main differences between hot and cold wallets, you might be wondering which is best for you. Let's look at some things to think about for different kinds of users.

Considerations for beginners
If you're new to cryptocurrencies, hot wallets are easier to use. They're usually simpler to set up and use, and many of them have easy-to-understand interfaces that help you send and receive crypto.

Popular hot wallets like MetaMask and Trust Wallet are great choices for beginners because they work with many different cryptocurrencies and have built-in features that make them easy to use. Just remember that you should only keep a small amount of crypto in a hot wallet, and make sure to turn on any extra security features, like two-factor authentication.

Considerations for advanced users
If you've been using crypto for a while and have a bigger portfolio, you might like the extra security of a cold wallet. Hardware wallets are popular among more experienced users because they offer the best protection for your digital assets.

Cold wallets are also a good choice if you want to store cryptocurrencies that are less well-known or less popular and might not be supported by the big hot wallets. Some cold wallets, like the Tangem Wallet, support over a thousand different cryptocurrencies, giving you many options.

Considerations for long-term storage
If you plan to keep your crypto for a long time, a cold wallet is definitely the way to go. Because it keeps your private keys offline, it is the best choice for long-term storage.

When choosing a cold wallet for long-term storage, look for things like a strong design (some wallets are waterproof and fireproof), a lot of storage space, and the ability to make multiple backups of your private keys. The Tangem Wallet is an excellent choice with its special chip that is as secure as the chip in a passport. It has maximum resistance to dust, water, and extreme temperatures (–25° to 50°C). We believe that using your Tangem Wallet the right way will stay safe for at least 25 years. 

Ultimately, the best wallet for you will depend on what you need and what's most important to you. If security is your top priority, choose a cold wallet. A hot wallet might be better if you care more about convenience and ease of use. And if you plan to store your crypto for a long time, choose a wallet with strong security features and the ability to make multiple backups.

FAQS

— Are hot wallets better than cold wallets?

No, not really. Most people would say that your needs and preferences determine the best type of wallet for you. But cold wallets today can be as convenient as hot wallets and are appropriate for people who conduct crypto transactions regularly.

— Which is more secure, a hot or cold wallet?

Since your private and public keys are connected to the internet and thus more vulnerable, hot wallets are less secure than cold wallets. A cold wallet, on the other hand, gives you complete control over your private and public keys.

— Can I use a hot and cold wallet at the same time?

Yes, you can use both. You can hold a more significant portion of your digital assets in a cold wallet and a smaller percentage in a hot wallet. This way, you can better protect your digital assets while benefiting from the flexibility of having both crypto wallets.

Conclusion

Each type of crypto wallet has its own set of advantages. While cold wallets are offline and take the form of a physical item, like a smart card or USB stick, hot wallets are internet-enabled and online. The only benefit of using a hot wallet is its sheer convenience. It can offer simplicity of use and a user-friendly interface. However, using both wallets to recognize and prevent flaws is a good practice.