March 28

Should You Use A Hot Or Cold Wallet To Safely Store Your Cryptocurrencies?

“Bro, do you have $20 for this meal? I don’t have enough in my wallet. I’ll do a bank transfer right now.”

Have you bought something from a shop which only accepts cash and you don’t have any in your wallet? I don’t like carrying cash, but because this has happened to me for a number of times before, I’ve made it a point to have some cash with me all the time.

Due to COVID-19, many more shops are adopting cashless payment methods. This has made payments more convenient.

In the world of cryptocurrency, payments can be as convenient, depending on the category of wallet you use – hot or cold.

And there are several types of wallets under each wallet category. Confused? Don’t worry.

First, let’s find out what a cryptocurrency wallet is.

What Are Cryptocurrency Wallets?

What do you have inside the wallet that you bring when you head out?

Do you have your credit/debit cards in it? Some cash? Your identity card and even some name cards?

Similar to the wallet/purse we are familiar with, a cryptocurrency wallet contains cryptocurrencies that we own.

There are a few notable differences:
#1 Only cryptocurrencies can be stored in a cryptocurrency wallet
#2 Cryptocurrency wallets can be fully digital
#3 Cryptocurrency wallets are encrypted (ie. you need a username and password)

With this understanding, let’s discover what a hot wallet is!

What Is A Hot Wallet?

You may have heard that you can purchase a Tesla car using Bitcoin. The easiest way to transact is through using a hot wallet.

What is a hot wallet?

A hot wallet is a cryptocurrency wallet that’s connected to the Internet.

As a hot wallet is always connected to the Internet, the cryptocurrencies you have stored in a hot wallet is easily transferrable. Think about the loose cash you carry around in your wallet/purse. I’m pretty sure you don’t carry your savings around unless you intend to purchase a big ticket item in cash.

Types Of Hot Wallets

There are 2 main forms of hot wallets
#1 Mobile
#2 Exchange

#1 Mobile

This is a wallet which can only be accessed through an app on your mobile phone or tablet.

Different mobile wallets can store different cryptocurrencies. Hence, the number of cryptocurrencies and the cryptocurrencies which you’d like to store are important factors to consider when getting a mobile wallet. Oh, remember security too.

#2 Exchange

Most cryptocurrency exchanges allow you to store your cryptocurrencies with them. You may even get paid interest.

Features of a good exchange include a wide range of cryptocurrencies, interest bearing accounts, trading volume, spread, and transaction fees. I’ve elaborated on the 9 features a good cryptocurrency exchange should have and compared 6 popular exchanges. You can read about them here.

What Is A Cold Wallet?

A cold wallet is one that isn’t connected to the Internet. This means enhanced security as hacking and other forms of cybercrimes are prevalent.

Storing your cryptocurrencies in a cold wallet is akin to saving your money in a fixed deposit (excluding the lock in period). Withdrawal or transferring your money out of your fixed deposit is more troublesome and takes more time.

A cold wallet is also known as cold storage. This implies that you won’t be touching the cryptocurrencies which you’ve deposited into your cold wallet.

Types Of Cold Wallets

There are 2 main types of cold wallets.
#1 Hardware
#2 Paper

#1 Hardware

You may have heard of this form of cold wallet where you insert your hardware wallet into your laptop (like a USB drive).

Every device is different, so you will want to keep yours in a safe place. The biggest risks are losing your hardware wallet or getting it damaged.

#2 Paper

What? I hear you.

A paper wallet is a printed document with your public and private keys. Since it is printed on paper, it is good practice to make copies of it and keep them away from water.

You can share your private keys to senders to receive cryptocurrencies.

Private And Public Keys, Wallet Address, Seed Phrase – What Are They?

If you are using a hot wallet, you’ll need to know your public key, wallet address, and/or seed phrase, You’ll not be issued a private key as your cryptocurrencies are kept in custody.

Wait a minute.

What are these keys? What are they for?

#1 Public and Private Keys

A public key in the cryptocurrency world is a string of alphanumeric code that’s unique. A public key is necessary for senders to send cryptocurrencies to you. Therefore, you can share your public key.

An everyday example of a public key is your bank address. You can reveal your bank address as only deposits can be made, not withdrawals.

A private key must never be shared with anyone. A private key is also a string of alphanumeric code which is used to prove ownership or withdraw cryptocurrencies from your account. Hence, it is good practice to write yours down on a piece of paper and make copies of it before storing them in a safe place.

Private keys are like your PIN to your bank account. Never share this with anyone.

#2 Wallet Address

Some wallets provide a wallet address. A wallet address is also a string of alphanumeric code which is a shortened form of your public key. It acts as a public key for you to receive cryptocurrencies.

As your wallet address is a shortened form of your public key, you can share this freely with your friends and senders.

#3 Seed Phrase

Seed phrases are phrases provided by some wallets. You’ll need to provide your seed phrase to recover your cryptocurrency account.

Since your seed phrase is similar to a private key, never disclose your seed phrase to anyone. Write your seed phrase down, make copies of it, and store them in a safe place.

Comparison Of Hot And Cold Wallets

Let’s compare the different hot and cold wallets!

Should You Use A Hot Or Cold Wallet To Safely Store Your Cryptocurrencies?

Like many things in life, there is no one fixed answer. It depends on the amount you are investing in cryptocurrencies and the level of convenience you require in shifting your cryptocurrencies out of your wallet.

Which wallet would you choose? Why?

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