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Apr 21

What is the difference between a hot and cold wallet in crypto

Reading Time: 3 mins

In the crypto-ecosystem, you need to find a way to securely keep your cryptocurrencies. Much like a bank account, a crypto-wallet provides you with the feasibility and security. You can store, send and receive cryptocurrency through your crypto wallet. Also, with the rapid advancement of cryptocurrencies in the UAE, these wallets can come in handy. For example before you sell your USDT in Dubai you can choose to store it in these crypto wallets. At least till you find a suitable investment. There are two kinds of wallets in the crypto-sphere, so read on to find the difference between them and select wisely.  

Hot Wallet

The most common type of crypto wallet is a hot wallet since these are easy to set up and use. If you use an exchange’s website and download a wallet on your cell phone or desktop – that is a hot wallet. Hot wallets are ideal for daily cryptocurrency users. If you trade your cryptocurrency often and make purchases using cryptocurrency, you need a hot wallet.   

Hot wallets are connected to the internet and allow you to make exchanges seamlessly using your computer or cell phone. Hot wallets are further divided into Desktop wallets, for example, Electrum and Armory; Mobile wallets, Edge and Trust Wallet and Hybrid wallets, for example, BTCPay and Blockchain. 


Cold Wallet

Contrary to being connected to the internet, cold wallets include hardware wallets and paper wallets. These are highly secure as accessing the world requires physical access and pins and passcodes. Hardware wallets are based on devices that look like small to medium-sized USB sticks. Paper wallets, physical bitcoins and secondary offline computers formulate cold wallets. These provide high-level security but are not preferred anymore.  


Pros & Cons

Although both kinds are a form of storage, the functionality and security of each are quite different. Hardware wallets (a.k.a cold wallets) are immune to being hacked. Despite being connected to your computer or through Bluetooth, the funds stored on the drive are virtually impossible to steal. Technically you may be connected to the internet because of your computer. Still, the actual signing of transactions takes place “in-device.”  

This is then broadcasted to the network through your computer’s internet access. This is known as “signature”, which gives you the autonomy to give ownership of the recipient level during the cryptocurrency transaction. Also, since your private keys never actually leave your device, any malicious software on your computer cannot sign through.  

Despite not having high security features, hot wallets are preferable by some. This is because they are easier to use. While making a cryptocurrency transaction using your hot wallet, you do not need to move forth online and offline with the hot wallet. These are already connected to the internet hence providing seamless access. If you want to purchase online through your cell phone, you can do so easily with a hot wallet.  

Making the same purchase with a cold wallet is an inconvenience because you will need to find a device (a computer) first to plug in your cold wallet. Then you will have to move your desired amount to a hot wallet and use that to make a purchase.  


What to do?

Typically users with a large amount of cryptocurrency do not keep it in a hot wallet. Although a hot wallet is not similar to a traditional wallet, keeping a lot of money on yourself is not safe. Akin to transacting money using an ATM when the need arises, you can transfer cryptocurrency to your hot wallet when the balance is low.   

Since most of the exchanges are based on the functionality of hot wallets to aid their customers, they store funds on cold wallets now. A certain amount is kept in hot wallets for instant withdrawals. So, if you are planning to store your money online, make sure to research the exchange’s reputation.  


Multi-Signature Wallets

As previously mentioned, exchanges have based their functioning on hot wallets. The downside to that is that the security for hot wallets is low compared to cold wallets. In order to rectify the situation, exchanges came up with an additional layer of security: the multi-signature wallet. Like a bank vault, a multi-signature wallet (multisig) requires two or more private keys to complete a transaction. This can also be used by two or more users to sign documents as a group.  


The ideal combination

Depending upon your choice of storage, you can opt for a hot wallet or cold. If you like to store your cryptocurrency personally, go for hot wallets. But if security is your concern for these valuable assets, opt for a cryptocurrency exchange that ensures phenomenal security. 

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 


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