Digital you can use, but ultimately they all serve with the key purpose of keeping your digital assets safely and securely stored on the blockchain.
When storing your Crypto, you want to keep it safe while striking the right balance between functionality and security. If you buy any amount of Crypto and you want to store it yourself, you have to choose between holding your Cryptocurrency in a “hot” wallet, a “cold” wallet, or using a combination of the two.
What is a ‘Hot’ and ‘Cold’ Wallet?
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Hot (Software) Wallet
A hot wallet is a type of digital wallet that stores private keys on a device connected to the internet, such as a smartphone or PC.
Hot wallets are generally very convenient and are perfect for actively participating in decentralized finance (DeFi) protocols, minting non-fungible tokens (NFTs), and interacting with smart contracts. Hot wallets usually come in the form of a browser extension or a smartphone application.
This makes them very similar to traditional banking applications but comes with its own set of risks. Being connected to the internet means that hot wallets are a perfect target for malware and hackers.
These risks can be decreased by using antivirus software and generally being careful around the internet, but they are never completely eliminated.
For those who want extra protection from potential risks, cold wallets are suitable alternatives.
Cold (Hardware) Wallet
A cold wallet usually comes in the form of a dedicated device that isn’t connected to the internet. Private keys are stored on the cold wallet device itself and never leave it. This means it is at a far lower risk from potentially being hacked and having the assets stolen.
The drawback is that Cold Wallets make interacting with decentralized protocols and transferring assets more difficult, since it can’t be done with just a phone or a computer. Cold Wallets are often used as long-term storage options due to their security.
Ledger and Trezor are the most popular cold wallets. They connect to a computer through USB and require users to physically approve each transaction on the device.
Should I choose Hot or a Cold Wallet?
Both hot and cold wallets have strengths and weaknesses. Both types provide good baseline security if used properly, but cold wallets come with an additional layer of protection. Cold Wallets however, make a trade-off in convenience for defi use-cases.
The final choice between cold and hot wallets will be up to you and will depend on your needs and preferences. The general recommendation is to use both approaches in tandem, for maximum convenience without sacrificing security.
Closing Thoughts
The opposite of hot wallets, a cold wallet is a device that can’t connect to the internet, or can only connect manually. A hot wallet is connected to the internet and could be vulnerable to online attacks—while, Cold wallets are crypto wallets that are responsible for storing private keys in an offline environment.