The first thing that you should decide when investing in a cryptocurrency is where you will be storing your digital funds. Whether you are a professional trader or a new investor, everyone needs a place where they can store their digital assets. Digital currencies are virtual and hence, not present in the physical form, so you need to store them online.
When learning about digital assets, you must have come across the term digital wallets. These wallets are present online, where you can store your digital currencies. When choosing a wallet, you should pay attention to two factors i.e. security and convenience. And fulfilling these needs, there are two types of digital wallets available in the cryptocurrency market- Cold Storage and Hot Wallet. In this blog, we will compare these two wallets and understand which one is better for storing your precious digital assets.
What is a Cryptocurrency Wallet?
Before comparing the two types of cryptocurrency wallets, let us know what a cryptocurrency wallet is. Wallet, as we know, is a small box or case where you store your money, credit cards, business cards etc. The main objective of a wallet is to store your funds and help pay for goods and services whenever you want.
When we talk about a digital wallet, it works the same way. A cryptocurrency wallet has the same basic function as a physical wallet but the mechanics are different. Since cryptocurrencies are virtual, there is no physical place where you can store it. So, a crypto wallet is used to store your digital funds online.
What a crypto wallet actually contains is a program that holds pairs of cryptographic keys- private key and a public key- that have the responsibility of sending and receiving payments. These cryptographic keys may be kept in a device which has access to the internet or in an offline device. This is one of the factors that distinguish the hot wallet and cold storage.
What is Cold Storage and Hot wallet?
The main and basic factor that differentiates both types of crypto wallet is internet connectivity. Hot wallets are connected to the internet and can be accessed anytime. Whereas, a cold wallet is offline and is accessible only with direct authorization from the crypto holder. And when you are storing your digital currencies, depending on your need, accessibility and security, you are required to choose between these two.
What is Cold Storage?
Cold Storage is an offline wallet or hardware wallet. They are specifically designed devices that have physical storage for digital currencies. This wallet is used by the crypto owners that do not need to access their assets frequently. Here, digital assets are stored in a USB device that is not connected to the internet. This helps in protecting it from cyber hacks, unauthorized access and other advances through the web.
Such wallets have a complicated interface that makes it inconvenient for daily use. However, when we talk about the security of cold storage, it is THE best, as no hacker can enter the offline device that is fully under your control. You can also access it only by using a secure private key.
Examples of cold storage are Trezor, Ledger Nano S and Paper Wallets
Cold wallets are available in the form of a hardware device which is similar to a USB. These are encrypted and highly secure as they are offline and have a password or PIN which acts as additional security. All you need to do is just plug the device in your computer and you are ready to store and make transactions with your cryptocurrencies.
When Should You Use Cold Storage?
You can use cold storage when:
- You are a long-term investor
- You have bought crypto for a notable sum of money
What is a Hot Wallet?
Hot Wallets are connected to the internet. These wallets are provided free by the exchange platforms, browser extensions or mobile apps. They are user-friendly as they are designed for a large audience and also processes transactions quickly. Unlike cold storage, you do not need any hardware to access your data at any time.
The negative side of hot wallets is that they lack security. Hot wallets require an internet connection and are more prone to hacks and cyber attacks. In hot wallets, there are multiple types that offer different features. They can primarily be divided into-online, mobile and desktop hot wallets.
Examples of hot wallets are Exodus, Electrum, Coinpayments and Metamask
Online wallets run on cloud servers which can be accessed on any device through a web browser. Mobile wallets are the apps that you get on your Android phone and iOS. Desktop wallets are applications that run on a computer. Any wallet you wish to use depends on your requirement and use. The only thing to keep in mind in order to use them is to have an internet-connected device.
When Should You Use Hot Wallet?
You can use hot wallet when:
- You are a digital asset trader
- A beginner to cryptocurrency
- Want to use digital currencies in your daily life
Which Wallet Should You Choose?
It is difficult to say which wallet is a better option as each has its own advantages and disadvantages, and both are perfect for a specific type of audience. Both wallets offer different advantages and most crypto users make use of both. They use hot wallets for holding coins for everyday transactions and cold storage for storing rest of their currencies.
But when it comes to choosing between these two, it should depend on the level of security and convenience you want for your trading. No one cares about availing free wallets if that will leave you empty-handed later. So, the safest and secure option for storing your digital assets is cold storage. Hackers cannot break into a cold storage device. Your funds and data are stored nowhere else but in a small device that you can safeguard yourself. Some of these cold storage devices are so secure that even if someone else would plug them in a computer having virus, your device will still be safe and secure.
Hence, we can say that these are the reasons why considering cold storage for your funds’ safety is a good choice over hot wallets. Choose hot crypto wallets only when you have to use your crypto funds on a daily basis. Hot wallets are good for short-term traders and people who want to make use of cryptos for instant transactions and pay for good and services using digital currencies.