Crypto Cold Storage vs. Hot Storage: 3 Must-Know Facts
Cold and hot storage wallets are special tools that help you use and maintain your cryptocurrencies. But did you know that…
- They do not store cryptocurrency but only allow you to interact with your coins on the blockchain.
- Both rely on unique private and public keys to carry out transactions.
- They both cannot complete transactions without an internet connection.
Are you planning to invest in cryptocurrency? You should first understand some important concepts used in the world of cryptocurrency. Among them is how to store your digital coins.
Remember, virtual currency does not enjoy similar protection as physical currency. Hence, if you purchase any crypto, you must keep it in safe storage. You’ll have to decide whether to hold it in a cold or hot wallet.
Choosing where to store your cryptocurrency is a personal decision. Both are secure methods of storing cryptocurrency, but “cold storage vs. hot storage” is a popular discussion. This guide looks at how these two options compare and which is better.
Let’s jump right in!
Crypto Cold Storage vs. Hot Storage: Full Comparison
Hot storage refers to any crypto wallet constantly connected to the internet. Such wallets offer enhanced convenience, meaning you can instantly access your digital coins anywhere. However, these wallets can easily be compromised.
Cold storage refers to wallets that hold cryptocurrency in an offline environment. They are often physical devices, hence less prone to technical vulnerabilities.
Both hot and cold wallets come with two types of keys: private and public keys. These keys are what you need to sign transactions on crypto. The public key is your mailing address, or you can think of it as your transaction account number and routing number. Anyone can seek it out and use it to send you coins, but it can’t give them access to your digital assets.
The private key is like your password. It is a secret key to your crypto wallet. You cannot transact your digital coins without this key, and only you should have access to it. If anyone gets hold of your private key, they can use it to access all the cryptocurrencies in your wallet.
In hot storage wallets, private keys are digitally encrypted and stored online, which makes these wallets risky as hackers can get into the system and steal your private key. You can employ some strategies to mitigate such a risk. But, it would be reasonable not to store large amounts of cryptocurrency on a hot storage platform.
On the contrary, in cold storage wallets, private keys are stored in a backup device and remain offline unless the physical device is connected to the internet during a transaction. Therefore, you must keep your private key safe and secret. Write it on a piece of paper and place it securely. Ensure you have several copies in different places because it is irreplaceable, meaning there is no way to regenerate it if it falls into the wrong hands or is lost. To reduce potential cyber-attacks, keep your private key away from the virtual environment.
Crypto Cold Storage vs. Hot Storage: A Side-by-Side Comparison
Before purchasing your cryptocurrency, ask yourself critical questions like:
- How accessible will your digital assets be?
- Can you keep your keys safe?
- What would be your ideal contingency plan?
- What is the possibility of your currencies being confiscated?
As you build your assets, you want to store your crypto in a secure infrastructure. Depending on your preference and financial goals, this can be in cold storage, hot storage, or both. But how do these two compare?
|Refers to any cryptocurrency storage system where the user’s crypto wallet is not always connected to the internet
|Refers to any digital asset storage platform where the user’s crypto wallet stays online throughout
|Who Should Use It?
|Individuals looking to store their crypto assets in a safer and more secure environment
|Anyone who wants to trade cryptocurrency regularly or seeking to make quick online payments using their crypto
|How Does It Work?
|To use a cold storage wallet, you first have to hook it up to an internet-enabled computer. Then, choose your preferred transaction. For instance, select the receive option to receive tokens, and your device will generate an address that the sender will use to initiate the transaction. You can then sign off on the transaction and disconnect your wallet, which will set it back to offline mode.
|A hot wallet will be ready to carry out transactions anytime, provided it has access to the internet.
|Hardware wallets, paper wallets
|Desktop wallets, web-based wallets, mobile wallets
|Typically between $100 and $200
|Most are free
|Less convenient. Requires you to first connect to the internet every time you want to use them to send, receive or store your crypto
|Tend to be more convenient because they are always connected to the internet
Crypto Cold Storage vs. Hot Storage: What’s the Difference?
Cold and hot storage wallets will give you access to your digital assets. But, they offer different levels of security and interaction.
Unfortunately, there is never a one-size-fits-all crypto storage wallet. Each has its distinctive strengths and weaknesses, regardless of the category.
To help you understand better, let’s look at what sets cold storage wallets and hot storage wallets apart.
Hot wallets offer instant access to your cryptocurrency and allow faster transactions, while cold wallets take a long time to connect to the internet and complete transactions.
Hot wallets are faster to set up as they are constantly exposed to the internet. But, cold wallets would take several minutes, as you only need to connect them to the internet on a need basis.
When it comes to susceptibility to cyberattacks, hot wallets take the lead for an apparent reason: constant internet connectivity.
Cold wallets are offline except for when carrying out a transaction, which makes them less prone to hacking. Also, it takes a malicious link for one to steal from your hot wallet, but physical access to your cold wallet device and a private key to steal from your cold storage wallet.
In terms of virtual currency recovery, it is possible to recover funds if the cold wallet device is stolen, damaged, or lost. However, if the resource or exchange that provides the hot wallet stops offering access to crypto services, your funds are lost forever unless insured.
Crypto Cold Storage vs. Hot Storage: Which is Better?
Are cold wallets superior to hot wallets or vice versa?
Considering the benefits and downsides of each method, the option you settle for should highly depend on what you are looking to achieve, both short-term and long-term.
If security is a paramount concern, or you want to store a huge amount of crypto, a cold wallet may be an apt choice. However, you may have to invest in a hot wallet if you want to transact anytime from anywhere with ease. Alternatively, you may leverage the best of both worlds by using one or several versions of each method; for instance, a hardware cold wallet and a mobile hot wallet.
However, whatever your mode of crypto storage wallet, back it up often.
Some important considerations include:
- Keep your crypto investments confidential; it will help keep hackers out of your life.
- Watch out for emails, ads, and schemes from con artists intending to trick you into providing personal emails.
The security of your cryptocurrency is on you. Safekeeping of virtual currency is a whole new set of obstacles, even to most financial experts.
Take your time to understand the platform and technology you will use to store your cryptocurrency. Be mindful of the new opportunities for fraud. Most cryptocurrency threats and hacks will emanate from where and how you store and handle your cryptocurrency. Thus, protect yourself from vulnerabilities.
Learn about the pros and cons of each storage option available and develop a well-laid risk management plan before you invest in crypto. Remember that you could lose some of your digital assets, if not all, and you can never hold anyone or any entity responsible.
Interested in more crypto-related articles? Click on the links below:
- Kraken: A Guide to One of the Original Crypto Trading Platforms: It’s the fourth largest crypto exchange in terms of volume. Here is all you need to know about one of the oldest trading platforms for virtual currency.
- How to Sell Bitcoin: A Step-by-Step Guide: Where should you sell it? What will you need? What procedure will you need to follow? Find out in our guide on how to sell the world’s most popular cryptocurrency.
- The 6 Best Crypto Wallets Today: They’re essential for storing your virtual currency and processing transactions. Here are the most secure and efficiently designed of them all.
The image featured at the top of this post is ©stockphoto-graf/Shutterstock.com.