Hot Wallet vs. Cold Wallet

Crypto wallets are vital for storing your funds and executing blockchain transactions. Interestingly, not all wallets serve the same purposes. Very frequently, crypto holders are faced with the puzzle of determining what kind of wallet to use.

For some users, cold wallets may be a great option, while hot wallets would be the better option for other users. The best kind of wallet for crypto users depends on an individual’s priorities and the frequency of crypto activities.

The Difference Between a Hot Wallet and a Cold Wallet

Hot wallets are digital or online wallets that must be used with internet connectivity. Web extension wallets, mobile apps, and web page wallets are all hot wallets. Also, cryptocurrency exchanges like Gate.io could serve as hot wallet providers.

On the other hand, cold wallets are offline crypto storage devices. They are physical and are built to limit interaction with the internet. They could be hardware devices or Paper wallets.

How Does a Hot Wallet Work?

Hot wallets have private and public interaction online. Every wallet has distinct public and private keys. The public key distinguishes wallets from each other and identifies which wallet should receive sent cryptocurrency.

Hot wallets interact directly with a blockchain network. The blockchain network facilitates alterations to the records stored on the ledger. For example, when Bitcoin is sent out of a hot wallet, the transaction is verified and approved on the Bitcoin network, and the record can never be altered. When a user receives Bitcoins, once the transaction is confirmed on-chain, the value reflects in the wallet.

Additionally, hot wallets can be connected to DeFi or web3 applications. Users can approve requests for third-party applications to interact with their wallets in just a few clicks.

Cold and hot wallets have their pros and cons. This makes it difficult for crypto users to choose which is superior affirmatively. What are the pros and cons of an offline and online wallet?

Pros of Hot Wallets

• Most hot wallets cost $0 to use. They can also be created and set up within a few minutes.
• Hot wallets are connected to the internet. This makes them easy to use for transferring funds, trading, and interacting with blockchain protocols.
• You can still access your hot wallet even if your mobile device is lost or stolen. If you have the private keys to the wallet, you can access it anytime. Hot wallets can also be used across multiple devices.

Cons of Hot Wallets

• Hot wallets are more vulnerable to attacks than cold wallets since they function online. Even when users keep their private keys securely, they could be subjects of hacks if they interact with malicious platforms.
• There could be restrictions imposed on users from some geographic locations. These restrictions could apply even when the wallet is decentralized because it is connected to the internet.

Examples of Hot Wallets

MetaMask Wallet

MetaMask is a decentralized hot wallet that lets individuals create and manage their identities. It is suitable for everything web3 and easily connects with Dapps and DeFi platforms. When it launched in 2016, MetaMask was originally created to support the ERC-20 tokens. However, the wallet now has support for blockchain tokens of other standards.

MetaMask can be used to send, receive and swap tokens. MetaMask offers users a seamless direct swap option from its home page. Notably, the direct swap can be more costly than going through DEXs.

Trust Wallet

Trust wallet is another famous hot wallet used by millions globally. The hot wallet is available on Android and iOS devices and is non-custodial. Trust wallet supports up to 160,000 assets and is very suitable for staking cryptocurrencies.

The wallet has a decent user interface and integrates modern features like fingerprint unlock to improve user experience. One other strength the hot wallet boasts of is an active support team. Trust wallet’s customer support team typically responds swiftly to complaints. Aside from that, users can fix many issues from the resources provided in the Help Center and FAQ section.

How Does a Cold Wallet Work?

A cold wallet verifies blockchain transactions in an offline environment. How is this possible? For cold wallets to work, they need to be connected to a computer. However, their connection to a computer is moderated and kept in check. The private keys of a cold wallet are not linked to any online platform.

When a transaction is initiated from a cold wallet, it is signed offline before it is transmitted online. Cold wallets’ extra protection restricts their private keys from interacting with the server. However, this makes asset transfer twice as complicated but could be worth the security. The most common types of cold wallets are hardware and paper wallets.

Hardware Wallet

The hardware wallet is a storage device that can be connected to a computer. Easy examples of hardware wallets are the Trezor and Ledger wallets. They look like flash drives and can be inserted into a PC or CPU. Hardware wallets should be kept in a safe and dry environment. As small as they are, thousands or millions of Bitcoins could be stored in them.

Pros of Cold Wallets

• Cold wallets are less susceptible to hacks and phishing attacks since they are offline. When cryptocurrencies are stored entirely offline, even the most experienced cyber attacker in the globe will lack access to steal assets in the wallet.
• Cold wallets are tangible and can be owned by anyone. Restrictions placed on citizens of some jurisdictions do not apply to cold wallet users.
• Cold wallets eliminate interactions with DeFi applications. This gives users full custody of their funds and eliminates the possibility of signing blockchain transactions blindly.

Cons of Cold Wallets

• They are hardly free. It costs a minimum of $50 to acquire a cold wallet.
• The tangibility of cold wallets is a double edge sword. Since cold wallets are tangible, they could be lost or damaged. Once damaged, crypto stored in the wallet cannot be regained.
• Cold wallets restrict freedom of interaction. Cold wallets are unsuitable for active traders as transfers between devices could be very complex.

Examples of Cold Wallets

Ledger Wallet

The ledger wallet can be used to store Bitcoin, Ethereum, and thousands of other cryptocurrencies. Ledger has a crypto community that annually proposes additional support for new cryptocurrencies. The portable hardware has USB-A and USB-C connection points for linking the device to a mobile phone or PC.

Trezor Wallet

The Trezor wallet is almost identical to the ledger wallet in shape and functionalities, but the former has extra features that are absent in the latter. On the Trezor wallet, users can access centralized exchanges.

The third-party accessibility option enables individuals to fund their wallets directly using credit or debit cards. Recent productions of the Trezor wallet also have an SD card slot. With an SD card in the device, users can encrypt their PIN and shield the wallet from malware.

Should You Use a Cold or Hot Wallet?

The kind of wallet you should use depends on what you need a wallet for. A hot wallet is the best option for active Bitcoin and altcoin traders. More than just owning a hot wallet may be required for traders.

Futures and margin traders still need to own a hot wallet in a centralized exchange (custodial wallet). With a wallet in a centralized exchange like Gate.io, users have access to multiple cryptocurrencies, making trading activities easier.

For large financial institutions, the priority should be storing funds securely and reducing the possibilities for hacks. Cybercriminals usually target big crypto institutions. Thus, using a cold wallet would be a more secure option. If the institution holds some crypto assets that need to be utilized from time to time, a combination of a hot and cold wallet will do. Many centralized exchanges use this combination to balance asset security and accessibility.

Deciding whether to use a cold or hot wallet would depend on how long you want to hold cryptocurrencies, how often you’ll need to transact, and how much cryptocurrency you own.

How Gate.io Maintains Wallet Security

For centralized exchanges, wallet security is even more paramount. One of the best ways to secure cryptocurrencies in the pool is by adopting a multi-sig wallet. A multi-sig wallet ensures that multiple wallets sign or approve a single transaction.

Multi-sig wallets could be 1-of-2, 2-of-3, 3-of-3, 3-of-5, and so forth. A 1-of-2 multi-sig wallet has weaker security as just one of the two wallets can approve transactions. The most common multi-sig structure is the 3-of-5. The 3-of-5 wallet structure means three of the five wallets must sign the transaction before it is approved.

Gate.io uses an institutional-level multi-sig wallet and a combination of cold and hot wallets to protect users. The exchange’s hot wallet is protected by professional service provider HSM, and its cold wallet uses the multi-sig system to ensure optimal security. Gate.io’s systematic model of maintaining wallet and fund security has proven effective with zero compromises. To learn more about Gate.io’s security model, click here.

Conclusion

Wallet security is a crucial subject for individuals and crypto trading exchanges. For individual users, the first step is to guard your private keys jealously. No one else should have access to your private keys and seed phrases.

Further, cautiously approve transactions or connect your wallet. Your wallet could be connected to sites run by fraudulent owners hiding under the umbrella of a DApp. Airdrop hunters are usually exposed to these fishy platforms and sites. From time to time, run routine checks on your wallet to revoke it from online outlets you do not often interact with.