There are two different forms of wallets. The hot wallet and the cold wallet. Which one should you choose? What are the advantages and disadvantages of both types of wallets? In this blog, I will discuss both wallets.
Hot Wallet
The hot wallet is connected to the Internet. For example, you can think of Coinbase, which is at its core a trading platform, but where users can also store their cryptocurrency. Forms of hot wallets include a mobile wallet (an app on the smartphone) and a desktop wallet (app on the computer). Advantages of a hot wallet:
- It's convenient;
- trades on platforms are fast and much easier with a hot wallet. Less steps need to be taken to buy crypto compared to cold wallet.
Disadvantages of a hot wallet:
- Safety cannot be guaranteed. Even if the systems are monitored and tested regularly, there is still a risk of a hack.
Cold wallet
A cold wallet is not connected to the Internet. Forms of cold wallets are paper wallets (where 'on paper' the public key and the private key are written down (for example in the form of a QR code)) and hardware wallets.
A hardware wallet is a physical device that looks like a USB stick. In the hardware wallet, only the private key is stored. Access to this private key is secured with a PIN code. The main difference between hot and cold wallet is that the private key in a cold wallet is stored offline, while the private key in hot wallets are stored online.
A cold wallet is generally more secure than hot wallets because if your smartphone or laptop is hacked, the private key is always stored offline. If the hardware wallet is lost, it does not mean that the crypto currency is lost because the crypto currency is not stored on the hardware wallet, but on the blockchain.
Advantages of a cold wallet:
- Cold wallets are much less susceptible to hacks and there is no risk of security. The private key is stored offline.
Disadvantages of a cold wallet
- its a more difficult task to store cryptocurrencies in the cold wallet.
- its not convenient if you are a trader.
You lost your hardware wallet?
If you have a hardware wallet (for example a Trezor or Ledger) and you lost the hardware wallet, do not panic! Your cryptocurrencies are always stored on the blockchain. If you know your your back-up phrase and your private key of your wallet, you are able to retrieve your cryptocurrency. But if your back-up phrase or private key is compromised, your cryptocurrency will be lost forever. First rule in investing in cryptocurrency is to make sure your back-up phrase and private key is stored safely. This applies to hot wallets and cold wallets. Never share your back-up phrase or private key of your wallet to anyone.
Which wallet should you choose?
This answer is more difficult to answer because it ''depends''. If you are a trader, a hot wallet should be the best choice. It is convenient and moving funds is much more easier. If you're not a trader and wish to hold the cryptocurrencies for the long term, a cold wallet should be the better choice. If you wist to hold cryptocurrencies for the long term and wish to trade, the best choice is to get both. Use your hot wallet to trade and your cold wallet to hold for the long term. There is no good or bad choice.
This blog was written on 6 August 2021.
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