Hot or Cold Wallet - What's Best For Me?

March 3rd, 2018. Rhys Skellern. Security. 7 Min Read..

It’s finally happened. The crypto-verse has surfaced from the underground and become the hottest topic of conversation. Blockchain (not sure If we have a blockchain article to link to) technologies are rapidly outpacing traditional business models, leaving them in a scramble to stay relevant. However, with the worlds attention increasing, the need for adequate security of crypto-assets has never been greater. With this in mind, understanding the difference between a hot or cold wallet is not only imperative; it should be the first step you take before investing in this new market sector.

With Great Power Come Great Responsibility

With the development of decentralised networks and crypto-assets, society has reclaimed its power over personal finances. No longer requiring banks or third-party validation, we can now transport huge sums of money/value across the world in a matter of minutes, for an exceptionally low cost, to anyone with an online connection.

However! Whilst we have reclaimed ownership of our financial freedoms, we have also taken on one huge responsibility. Without the refuge of established financial institutions (namely banks), the storage and security of crypto-currencies and assets rests solely on your shoulders. Depending on your needs, the choice between a hot or cold wallet can literally be a choice between financial freedom and complete bankruptcy.

Red Pill or the Blue Pill?

Acquiring/buying crypto-assets, and their safe storage, are two separate considerations. In fact the idea of ‘storing’ your crypto-assets can be confusing in itself, after all, you don’t have a physical product to hide away, right?

When we use the term ‘store’ or ‘secure’ we are actually referring to the secure storage of your private keys. These keys are what actually allow you to transfer value (or assets) between yourself and another holder of a private key.

In essence, a private key is nothing more than a string of numbers, which is used to prove to the network that you are, legitimately, the owner of those assets. Therefore, if you do not hold your private keys, or in the event they are lost/stolen, you are effectively handing ownership of your assets to whoever does hold them. It is important to understand this concept before we dive into the difference between a hot or cold wallet, and where each may be applicable.

Hot Wallets

The term ‘hot wallet’ refers to any means of storing a crypto-asset that has been, or is currently, connected to the Internet. That is to say, if you are able to directly access your wallet through an online connection e.g. on an exchange, or through your phone/computer with an online connection, it is considered a hot wallet.

Some examples of hot wallets include:

  • Desktop applications/wallets e.g. Exodus and Copay
  • Native wallets provided by exchanges e.g. Coinbase, Coinjar, Coinspot
  • Smart phone storage wallets e.g. Jaxx, My Ether Wallet

Aside from the connection to the Internet, it is important to note that hot wallets also put the control of private keys in the hands of a third party. In the case of some hot wallets, like those native to exchanges, it is likely that there are only a few private keys to cover all customers, as opposed to generating a private key for each individual. This allows for transactions to occur immediately, however does leave the exchange open to security breaches.- link to hacking article.

Desktop and mobile applications can be considered a more secure hot wallet, as they put private keys back into the hands of the operator. By requiring assets to be sent to/from exchanges, or directly to an address before value can be transferred, they are considered a step up from the wallets on exchanges.

Some desktop apps, such as Exodus, also have services such as ShapeShift built into their interface, which lets you instantly exchange currencies within the wallet e.g. Btc to Ltc or Btc to Eth.

Regardless though, by installing these onto devices that are connected to the Internet, they are also susceptible to hacking, viruses and phishing scams. Particularly in the event that private keys, or login information is stored somewhere else on the device, rendering the wallet incapable of safely storing your assets.

Cold Wallets

A cold wallet is any means of storage that has never been connected to the online world, or cannot be accessed via the Internet. Most commonly these are hand-held devices, referred to as hardware wallets, which do not have the capabilities to connect to the Internet on their own, however can extend to other means of storage. Some examples of cold storage wallets include:

  • Paper wallets. That is, private keys are generated and physically recorded onto paper, and then stored in a safe or safety deposit box.
  • Desktop wallets installed on air-gapped computers
  • Cold-storage devices e.g. the Secure Wallet, Trezor, Ledger Nano S

Cold Wallets are designed not only to store your private keys offline, but also to provide immutable protection against hacking and scams. After all, no one can hack your piece of paper, or access your computer that has never been connected to the Internet. They CAN, however, steal your paper wallet or computer if you haven’t spent the time/money to store them properly. In terms of ultimate security and convenience, some cold wallets definitely rank high above others, and those are cold storage hardware devices.

For example, let’s say you wanted to trade an asset instantly. If it is in cold storage, you need your private keys to make the trade. But your keys are stored on a paper wallet in a safety deposit box, and the bank is closed. Or, alternatively, they’re on an air-gapped computer at home, but you’re away for the weekend.

On the other hand, let’s say you own a Secure Wallet. The device is designed to be ultra portable, and interaction with it occurs wirelessly (as opposed to the Trezor or Ledger Nano S). Not only does this create the only true immutable and un-hackable cold storage wallet, it also means that you are literally carrying your safe around with you. It can be backed up, and backed up again, in case you lose the device and lets you transfer your assets between addresses, hot wallets and exchanges in the blink of an eye- and back again- without ever compromising the safety or security of your holdings.