Hot Wallets vs Cold Wallets: What's the Difference?

Cryptocurrency wallets are necessary for interacting with blockchain networks, sending and receiving cryptocurrency, and safely storing your digital assets on the blockchain using your private keys. There are however different kinds of crypto wallets and, depending on your needs, you may gravitate to one or another.

There are two main categories of cryptocurrency wallets: hot wallets and cold wallets. 

Hot wallets are software based: meaning they can be installed and used on your mobile device, computer, or browser. Popular examples include Jaxx, Trust Wallet and Coinbase Wallet. 

Cold wallets, on the other hand, are generally either physical devices or paper wallets. The most popular examples of these include the Ledger, Trezor, and COLDCARD.  However, a software-based wallet can be used as a cold wallet as well if it is installed on a standalone machine not connected to the network.

In general, hot wallets are connected to the internet, while cold wallets are offline. These differences create a couple of key tradeoffs which we’ll cover more below.

Although hot and cold wallets typically serve the same functions, there are a number of key differences to be aware of, especially with respect to security. 

Key Differences Between Hot and Cold Wallets

Hot wallets and cold wallets both serve the following main functions:

1. Store your private keys.
2. Sign cryptocurrency transactions with your private keys.
3. Broadcast transactions on your behalf to the blockchain.

However, this is where the similarities end and differences begin.

Key Difference #1: Level of Vulnerability

Because hot wallets are connected to the internet, they are inherently susceptible to malware and hackers. They also integrate with computers, which adds complexity and attack vectors that cybercriminals can exploit. Conversely, cold wallets are not connected to the internet, only have very simple functions, and never expose your keys outside of the device – making them much safer.

Key Difference #2: Level Of Convenience

If you trade and spend crypto often, hot wallets provide a convenient and user-friendly interface to do so. You don’t need to transition offline to interact with the blockchain and they can easily integrate with mobile devices, computers, and browsers.

Hot or Cold Wallet: Which Should You Use?

The crypto wallet you use will end up being a matter of preference and needs. Hot wallets can be more convenient, and hardware wallets more secure. Because of the convenience they provide, hot wallets are more widely used, especially with people who aren’t as technically savvy. However, if you prioritize security over convenience, then you should consider a cold wallet. Popular options available include the Ledger and Trezor devices because they do a good job of balancing security with usability. 

Furthermore, you’re not just limited to either a hot wallet or cold wallet as you can easily use both as part of a multisig solution or use both types separately depending on your needs. 

Reach out to our blockchain security experts at halborn@protonmail.com for more information on what kind of cryptocurrency wallet solution would best fit your organization’s security needs.