Crypto Storage: Hot vs. Cold Wallets

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The main purpose of cryptocurrencies is to offer an unbanked, peer-to-peer solution to finances. This means that individuals will need to learn how to manage their finances independently, and crypto storage wallets are central to this premise. Choosing where to store your crypto will depend on whether you plan on trading it again in the short or long-term. Different storage solutions also offer varying levels of security.

What is a hot wallet?

“Hot” refers to wallets that are still connected to the Internet.

Examples:

  • Smartphone apps
  • Desktop apps
  • Exchanges

There’s several smartphone apps available that offer a convenient way to store your crypto and access web3 platforms online. Exodus, Trust, and Coinbase Wallet are a few of the more popular smartphone apps. For desktop computers, Exodus also offers a version, as does Electrum, Atomic Wallet, and many more.

Non-custodial wallets are on the rise, with MetaMask being the most popular. MetaMask can interface with the most web3 platforms and also has multi-chain support.

Different blockchains often have their own native non-custodial wallets. These include Binance Wallet for the Binance Smart Chain (BSC), Phantom for Solana, and Temple for Tezos. Non-custodial wallets are usually offered as browser extensions on traditional web browsers.

Most crypto exchanges act as client wallets too. But they are custodial, meaning that the exchanges themselves are the ones holding your crypto. So goes the saying “not your keys, not your crypto”.

What is a cold wallet?

“Cold” refers to wallets that are disconnected from the Internet.

Examples:

  • Paper wallets
  • Hardware wallets

Paper wallets are literally printed pieces of paper that contain QR codes and printed wallet addresses. They’re an analog way of storing crypto that, in a way, mimics fiat paper bills. Users can scan the QR code or input the wallet address into a computer program to add or extract crypto.

Hardware wallets are devices that use hard drives to store crypto offline, such as USB sticks or air gapped external hard drives. Some hardware wallets such as Trezors and Ledgers (<– $25 discount link) have built-in software apps that allow users to interface with desktop apps and web3 platforms when connected to a computer. The built-in apps offer additional features such as staking, swapping and transferring.

Owning a paper or hardware wallet grants crypto holders more freedom in how they secure their funds. For example, you can place cold wallets in standalone safes or safe deposit boxes. Most importantly, owning a cold wallet reduces the chance that hackers can access your funds.

Hot vs. Cold Storage

For short term storage, crypto investors prefer hot wallets due to the convenience of being constantly connected to the Internet and blockchain. With hot storage you can quickly access and trade coins. The downside is that hot storage is more susceptible to being hacked.

For long term storage, it’s best to use a cold wallet. With cold wallets you are less susceptible to hacking and you have more control over security. You can increase the security of your cold storage by placing hardware or paper wallets in safety deposit boxes, for example.

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  1. Pingback:Self-custody is the only way crypto survives

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