Hot Wallet vs Cold Wallet in Crypto
For example, in our everyday conduct, the ‘wallet/purse’ that we carry is similar to the cold wallet in crypto. Similarly, hot wallet can be compared to our ‘mbob/mpay’ that we used to pay the online payments.
When coming to crypto, crypto wallets are much more sophisticated – consisting of cryptographic instruments like public and private keys. Both hot and cold wallets allow us to store and manage cryptocurrencies, but their use-cases differ significantly.
What is hot wallet?
A ‘hot wallet’, also known as a software wallet, is a piece of software you install on your smartphone or laptop that provides an interface for storing and managing cryptocurrencies. These devices store the private key, and since they are always connected to the internet, hot wallets are very convenient to use.
While, hot wallets store the private keys, they are convenient to interact with web3, but this advantage leaves them prone to online attacks. Thus, hot wallets are great tools to make quick and convenient transactions, they are not really meant for storing assets of high value.
What is cold wallet?
A ‘cold wallet’ is a specific type of crypto wallet that never interacts with any smart contracts. While many considers ‘cold wallet’ and ‘hardware wallet’ as same, it is a common misconception.
A hardware wallet is only a cold wallet if it doesn’t interact with the smart contracts or blockchain apps. A paper wallet can also be considered a cold wallet. Paper wallet is a piece of paper on which the keys are written or a paper wallet can contain a piece of code that can be scanned such as QR code.
Designed as immune to hacking, even when a hardware wallet is plugged into your computer, the funds on the device are almost impossible to steal. This is because, while the wallet is connected to your device, the signing of the transactions is done ‘in-device’.
Hot Wallet and Cold Wallet difference!!
Firstly, a hot wallet is a piece of software, while a cold wallet is a physical store of private keys. Hot wallet stores private keys – the keys used to access your funds – digitally, and typically on your host device, such as laptop or smartphone. On the other hand, cold wallet stores private keys away from your internet-connected device i.e., in hardware wallet, the private keys are protected by a secure computer chip.
In terms of security, it is the place where you store your ‘private key’, matters. For example, for hot wallet, since the keys are stored in the internet-connected device, they are vulnerable to digital attacks. Conversely, since private keys in cold wallet are isolated from the remote attack vectors.
Use-Case!
Hot wallet is perfect for interacting with blockchain apps and services such as DeFi protocols, NFT marketplaces, and other blockchain apps. On the other hand, cold wallet cannot connect to a blockchain app.
When coming to the case of setup and price, hot wallet is usually free and it may take few minutes for the complete setup. On the other hand, cold wallet is typically a physical hardware, which costs money. It usually takes extra steps to setup a hardware wallet, such as connecting to Ledger Live to send and receive funds.
Which one to choose?
This would depend on your needs and preferences. Hot wallet is ideal for frequently making crypto transactions, while cold wallet is suitable for vaulting your most precious assets. For instance, if you are eager to try out different decentralized applications (dApps), you would probably need the ‘hot wallet’. Hot wallets can be used to connect to smart contracts and popular dApps.
“There’s also a way to use a hot wallet without leaving your keys on an internet-connected device. Here, you can connect your Ledger, to a third-party hot wallet to get access to your hot wallet’s interface, while you have your private key protected by the Ledger.”
Securing your valuable assets is integral to reducing risk, preventing loss, and enduring their longevity. However, a crypto wallet does not actually store your funds, rather, it stores the private keys that grant access to them. Therefore, you must keep the private keys safe from hackers and scammers.
The other way to secure the crypto assets is to set up multiple accounts on your device to segregate your crypto assets. Ledger recommends you to split your assets into three separate accounts that serve different functions viz., mining, selling, and vaulting.
Key Takeaways:
· Crypto wallets are of two types viz., software, and hardware
· Hardware and Cold wallet are interchangeably used
· Hot wallets are used for interacting with web3, while cold wallets are used for vaulting valuable assets
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