Hot Wallet vs Cold Wallet: What are the Key Differences?

When it comes to cryptocurrency wallets, there are two main types: hot wallets and cold wallets. Hot wallets are connected to the Internet, while cold wallets are not. This makes hot wallets more vulnerable to attacks, but they're also easier to use. Cold wallets are more secure, but they're also more difficult to access.

If you're looking for security and convenience, you may consider using a hot/cold wallet combo. In this article, we'll discuss what hot and cold wallets are, their vulnerabilities, and how you can choose a combination of both if that's what you need.

What is a Hot Wallet? 

Hot wallets are the most common type of crypto wallet because they are easy to set up and use. Once you make an account on an exchange, download a mobile wallet, or download a desktop wallet, you are actually making a hot wallet.

Hot wallets like ATAIX Wallets are designed for everyday cryptocurrency users who want to make regular transactions. As they are connected to the Internet, you can easily make crypto transactions with just a few clicks.

However, there is one major downside: security. Storing many digital assets in a hot wallet exposes your funds to potential cyber theft.

Therefore, it is advisable to hold a small amount of crypto in hot wallets and store most of your investment in a cold wallet.

Advantages and Disadvantages of Hot Wallets

Hot crypto wallets have several advantages that make them a convenient and popular choice among crypto investors. Some of the main benefits include:

•  Instant access: If you make regular transactions, you need a way to access your crypto assets without fumbling with a USB connection. Mobile wallet apps will allow you to control your crypto assets 24/7 in any circumstances.
• Low cost: Hot wallets either come for free or have a very low maintenance cost.
• Reliable Custody: Some crypto investors prefer not to take full responsibility for safekeeping their digital assets and use the services of third-party custodians in their place. With a custodial wallet, an alternative party controls your private keys, which reduces the chances of you losing all your assets if something happens to them. For example, most web-based crypto wallets are custodial wallets.
• Ease of Use: Hot wallets are user-friendly and easy to install and operate. In addition, many are connected to some exchange or have an exchange built-in. ATAIX Wallet is one such perfect example.
• Flexibility: In most cases, hot wallets allow storing a significant number of various cryptocurrencies. They also get upgraded frequently, which means that users can continuously improve their experience.

Despite these benefits, there are also certain risks associated with hot wallets that investors should be aware of the following:

• Chances of Theft are High: Hot wallets are vulnerable to theft because public and private keys are stored on the Internet.
• You become dependent on Third-Party Safety Protocols: Most hot wallets provided by exchanges do not give you access to your private keys. You only get a login and password to connect to your account. Despite sharing responsibility for assets' safety, you can not perform any transactions without an intermediary. Thus, you never have full control over your funds.
• Complete Loss may occur: If the exchange or resource that provides a hot wallet closes and your funds are not insured, you may lose all. The same transpires if the wallet gets hacked.

What is a Cold Wallet?

There are a few different types of cryptocurrency wallets, but cold storage wallets are generally considered the most secure. This is because they are not connected to the Internet, so there is no way for hackers to access them. You only need to link your cold wallet to the Internet once you want to make a transaction.

Hardware wallets and paper wallets are both cold wallet preferences. However, hardware wallets tend to be more popular because they are easier to use and come with customer support from the manufacturer.

Cryptocurrency wallets come in many different forms, each offering advantages, and disadvantages. One type of wallet that has become increasingly popular in recent years is the hardware wallet.

Hardware wallets are physical devices that keep your private keys offline, making them immune to hacker attacks. To send crypto from a hardware wallet to another address, you must connect the wallet to the Internet and sign the transaction with your private key.

Paper wallets are another popular type of wallet that offers similar security features as hardware wallets. However, instead of a physical device, paper wallets are simply pieces of paper that contain your public and private keys. These wallets must be stored securely to avoid theft.

The private keys must be imported into a hot wallet to spend the coins therein, to direct coins from a paper wallet. While cold wallets offer enhanced security for storage, the main drawback is that they are not as practical for everyday crypto usage due to the increased difficulty in sending crypto from a cold storage wallet.

Advantages and Disadvantages of Cold Wallets

Like everything, cold wallets also have their benefits and risks.

The advantages of Cold Wallets are as follows:

• Good security Measures: The security and recovery features of hardware wallets are two of the main reasons they are a popular choice for storing cryptocurrencies. Security is ensured because the wallet is not connected to the Internet, meaning it cannot be hacked. In addition, most hardware wallets come with pin protection and biometric authentication.
• Easy Recovery of funds if stolen: If your hardware wallet is lost, damaged, or stolen, you can use the 12-24 word recovery phrase to access your funds on a new hardware wallet or in a software wallet. This makes hardware wallets a very secure option for storing cryptocurrencies.

On the other hand, some drawbacks of using cold wallets are as follows:

• Long transaction time: The main disadvantage of using a cold wallet device is that it can often take longer to complete a transaction. Even if the time it takes to complete the transaction is the same, you'll need more time to access the cold wallet device. Additionally, you're not likely to use a cold wallet in a public place, and it's not as convenient for on-the-go transactions. Therefore, it's not suitable for day traders or quick transactions.
• Hefty Price tag: Another downside of cold wallets is that they often come at a higher price than many online crypto wallets. The average cost for a cold hardware wallet is around $100. Furthermore, they don't usually accept as many cryptocurrencies as most hot wallets do. So, if you're looking for a crypto that isn't yet very popular, cold wallets may not support it.

How to Combine Hot and Cold Wallets

Most people find that a combination of both is ideal, as it provides the best of both worlds in terms of security and ease. A hot wallet is more accessible but less secure, while a cold wallet is more secure but harder to use. Usually, people will have several versions: an account on an exchange for hot storage, a mobile hot wallet for easy access, and a hardware cold wallet for long-term storage. Each type of wallet can be used for specific purposes, balancing security and ease of use when using cryptocurrency.

Another prevalent trend is using a second phone that functions only as a mobile crypto-cold wallet. This means that you would only turn it on when you want to make a transaction. The secondary phone, acting as the cold wallet, would be connected to your primary phone via Bluetooth or WiFi. Funds would then be transmitted to your hot wallet for the transaction. Subsequently, the transaction is made, the WiFi or Bluetooth connectivity would be turned off, and the secondary phone would be powered down.

There are a few different ways to use your secondary phone as a cold wallet for cryptocurrencies. One of the most convenient methods is using an app like ArcBit or Coinomi. These apps allow you to store your cryptocurrency in a secure, offline environment. Another option is to use a service like MyCelium, which enables you to create a "watch-only" account that can monitor your balances and transactions without being able to spend any of your funds.

Using an ancillary phone as a cold wallet is less secure than using a dedicated hardware wallet. Still, it is more convenient and offers the peace of mind to know your cryptocurrency is safe and secure. This method would typically store an intermediate amount of cryptocurrency, which would be less than what you would keep on a hardware wallet but more than what you would keep on a mobile hot wallet. Using a secondary phone as a cold wallet, you rest easy knowing that your investment is protected from online threats.

Conclusion

Hot wallet vs Cold wallet: so what is the better option? There is no one-size-fits-all answer for storing cryptocurrency. Every individual has to decide on the right balance of security and convenience. Over time, there has been a union of sorts as different storage methods become more secure or opportune.

For those who want to maintain personal custody of their cryptocurrency, the trend is increasingly toward using hardware cold wallets. These wallets are not connected to the Internet, making them much more secure than hot wallets. However, they can be less convenient to use.

Suppose you are using a crypto exchange wallet like ATAIX Wallet to store the majority of your funds. In that case, you need to make sure that you follow its security recommendations to make the most of it.