How Does a Crypto Wallet Work: Hot and Cold Wallets, Which to Choose?

How Does a Crypto Wallet Work: Hot and Cold Wallets, Which to Choose?

Contents

Introduction

In today’s world, cryptocurrencies are becoming increasingly popular, offering users a decentralized and secure way to manage their finances. However, with the growing popularity of cryptocurrencies, the need for their safe storage also increases. One of the key aspects of protecting cryptocurrencies is choosing the right wallet.

There are two main types of crypto wallets: hot and cold. They differ in that hot wallets are connected to the Internet, which is, of course, convenient for frequent transactions and trading, but this is followed by higher security risks. Cold wallets are disconnected from the network, which provides increased security but requires additional actions to access funds. Choosing between a hot and cold wallet is an important decision that determines the security of your assets.

Therefore, in this article, we will look at the differences between hot and cold wallets, their pros and cons, and find out which option is best for you.

What are hot wallets?

Hot wallets are digital wallets that are connected to the Internet and provide users with instant access to their cryptocurrencies. They can be presented as mobile apps, web versions, or computer programs. This type of wallet is convenient for active traders who frequently make transactions.

Hot and cold wallets

The main advantages of hot wallets:

  • Ease of Use - Hot wallets are easy to install and use. They have an intuitive interface that makes them accessible even for beginners.
  • Fast transactions- Instant access to the blockchain network allows you to quickly send and receive cryptocurrency without delay.
  • Accessibility wallets can be used via mobile devices, computers, and web browsers, providing round-the-clock access to funds.

The main disadvantages of hot wallets:

  • Vulnerability to hacker attacks — since hot wallets are constantly connected to the Internet, they are at risk of hacking, phishing, and other cyber threats. They store private keys on internet-connected devices or servers, potentially making them vulnerable to hacking attempts or malware.
  • Privacy issues — some wallets require passing KYC (Know Your Customer), which reduces the level of anonymity of users.

In addition, problems with the services cause loss of access to funds in the event of technical failures or hacking of the platform. Despite these risks, hot wallets often create different levels of security, such as two-factor authentication and encryption, which increases asset protection.

What are cold wallets?

Cold wallets are devices or media that store cryptocurrency offline, which makes them less vulnerable to hacker attacks. They can be represented in the form of hardware devices or paper wallets, where the keys are recorded on a physical medium.

cold wallets

Advantages of cold wallets:

  • High level of security — no permanent Internet connection, which significantly reduces the risk of hacking and cyber-attacks. In other words, due to the lack of online access, for example, it is impossible to infect a wallet with malicious code.
  • Storage of funds in offline mode — private keys are not exposed to the risk of leakage via the Internet. Also, cold wallets are ideal for investors who plan to keep cryptocurrency for a long time, since the funds are in a “cold” state and are less susceptible to risks.

Disadvantages of cold wallets:

  • Less convenient for frequent transactions — transferring funds requires connecting the device to a computer or entering data manually, which can take time.
  • Risk of losing a physical device — if a hardware wallet or paper wallet is lost or damaged, it may not be possible to restore access to funds. Users must take measures to protect their wallet from physical damage, theft, or loss.

Choosing the right crypto wallet is a very important decision for your finances. It is important to understand the difference between them and what type of wallet is right for you. Therefore, we will compare hot and cold wallets at some points.

Comparison of hot and cold wallets

Let’s compare hot and cold crypto wallets in detail by the following criteria:

Security level

Hot wallets are less secure because they are constantly connected to the Internet and are susceptible to hacker attacks, phishing, and malware. If an attacker gains access to the hot wallet, they can steal the funds. Despite the presence of additional security measures, such as two-factor authentication (2FA), hot wallets are always susceptible to online threats.

Cold wallets that store private keys offline without a permanent network connection provide a high level of protection against cyber threats. However, the protection of funds inside a cold wallet depends entirely on the owner: if they lose their device or paper wallet, it may not be possible to restore access to funds.

Ease of use

Hot wallets are convenient for fast transactions and have an intuitive interface accessible via mobile and web applications. They are integrated with cryptocurrency exchanges, exchangers, and DeFi applications, which makes them convenient for trading and regular payments.

Cold wallets are less convenient, as they require connecting a device or manually entering data to perform transactions, and this can take quite a long time. For example, you need to connect a hardware wallet to a computer and use special software, and when using a paper wallet, you need to manually enter keys. This makes the process of working with cold wallets more complex and lengthy, but in turn increases their security.

Situations when it is better to use each type of wallet

Hot wallets are suitable for active traders and users who make frequent operations with cryptocurrency. Cold wallets are optimal for long-term storage of assets and protection of large amounts.

wallets

Hot wallets are best suited for:

  • Active traders who perform daily operations.
  • Users who frequently send or accept cryptocurrencies.
  • Access to DeFi platforms and Web3 applications.
  • Beginners who need a simple and convenient storage method.

Cold wallets are best suited for:

  • Long-term investors who hold large amounts of money.
  • Those who want to protect their funds from online threats.
  • Owners of cryptocurrencies that do not make frequent transactions.
  • Users who want to minimize the risks of cyber attacks.

Many crypto owners use a hot wallet in conjunction with a cold one. This provides an optimal combination of convenience and security when conducting transactions and storing cryptocurrencies.

Cost and Availability

Hot wallets are usually free. Applications such as MetaMask, Trust Wallet, and others can be downloaded without paying for use. However, some centralized wallets may charge withdrawal fees.

Cold wallets, especially hardware devices, require additional costs but provide more reliable protection. Paper wallets are technically free, but their security depends on proper storage and protection.

How do I choose a wallet based on my needs?

The choice of a cryptocurrency wallet depends not only on the user’s goals but also on the level of experience, the frequency of transactions, and the required level of security. In this section, we will analyze which type of wallet is suitable for different situations.

For beginners and active traders: hot wallets

If you are just starting to understand cryptocurrency or are actively trading, hot wallets are the best option for you. Next, we will analyze why.

Advantages of hot wallets for beginners and traders:

  • Easy to use - installation takes a few minutes, and the interface of most wallets is intuitive, even for beginners.

Unlike cold wallets, you don’t have to spend a lot of time entering data to make transactions if you are a trader. There are also no special knowledge requirements if you are just starting to understand cryptocurrencies.

  • Fast transactions – instant access to the blockchain network. there is no need to connect additional devices, and you can instantly send and receive transactions.
  • Mobility – you can use it via your smartphone, computer, or browser, which is convenient for everyday use.

However, do not forget that hot wallets are less secure, so it is important to use additional security measures, complex passwords, and two-factor authentication (2FA) and avoid storing large amounts.

wallet

For long-term storage of funds, cold wallets

If your goal is to keep your cryptocurrency for several months or years without frequent transactions, cold wallets will provide the highest level of security. Why are cold wallets more suitable for you?

  • High level of protection – private keys are stored offline, completely eliminating the risk of hacking via the Internet.
  • No risk of remote attacks – cold wallets are not susceptible to hacker attacks, viruses, or phishing.
  • Ideal for long-term investments – if there is no need for frequent transactions, a cold wallet is the best option. There is also no need for a network connection.

It is important to remember that hardware wallets require secure storage. The loss of a device or recovery phrase, which is entirely up to the owner, can lead to an irretrievable loss of cryptocurrency.

Recommendations for combining two types of wallets.

The best approach to cryptocurrency security is to use a combination of a hot and cold wallet. For example:

Hot wallet - used for everyday operations, trading, and quick transfers.

Cold wallet – for long-term storage of large amounts of money, which does not require frequent access.

How to combine hot and cold wallets correctly?

  • In a hot wallet, keep small amounts needed for everyday payments or trading.
  • Connect your hot wallet only to trusted services (exchanges, DeFi, NFT platforms).
  • Keep the bulk of your capital offline using a hardware wallet or a paper version.
  • If you have accumulated a significant amount in a hot wallet, withdraw it to cold storage. Minimize the time spent storing large amounts in a hot wallet.

Security tips for storing funds in a bundle of two types of wallets:

  • Make backup copies of the seed phrase and store them in a safe place so that you don’t lose access to funds.
  • Enable two-factor authentication (2FA) for your hot wallet.
  • Use complex passwords and hardware keys, such as YubiKey.
  • Never enter the hot wallet seed phrase on third-party sites or show them to anyone.
Wallet type Amount of funds Usage
Hot Wallet 10-20% For active trading, payments, and small transfers.
Cold wallet 80-90% Long-term storage, protection against cyber attacks and hacking.

This approach will provide fast access to cryptocurrency without losing a high level of security.

There are different types of hot wallets: mobile, browser, desktop, and web wallets. Here are some of the most popular solutions, their features and benefits.

This approach will provide fast access to cryptocurrency without losing a high level of security.

There are different types of hot wallets: mobile, browser, desktop, and web wallets. Here are some of the most popular solutions, as well as their features and benefits.

1. MetaMask

Browser-based and mobile wallet that supports all major networks, such as Ethereum, BNB Chain, Polygon, and other EVM-compatible blockchains

This wallet is also available as a mobile app, or you can use it via browsers. Let’s analyze the features of this wallet:

  • A decentralized wallet – only the user has full control over their private keys, not any centralized organization or third party.
  • Flexibility and customization – you can add custom networks and tokens.
  • Deep integration with DeFi and NFT is used to interact with Uniswap, OpenSea, and other platforms.
  • Compatibility with hardware wallets (Ledger, Trezor) – additional security.

But, like any other solution, this wallet has its drawbacks. The main drawbacks of the MetaMask wallet are that it only supports EVM-compatible blockchains. Users are also susceptible to phishing attacks, which means that users can accidentally approve fraudulent smart contracts.

However, this wallet is more suitable for DeFi and NFT users who actively interact with decentralized applications.

metamask

2. Trust Wallet

This is a mobile crypto wallet that supports more than 70 blockchains, including Bitcoin, Ethereum, Binance Smart Chain, Solana, Polkadot, etc. Available for both iOS and Android

Trust Wallet Features

  • Support for a huge number of tokens – more than 4.5 thousand cryptocurrencies.
  • Full control over private keys – keys are stored on the user’s device and are not available to anyone else.
  • There is a function for buying cryptocurrency from a bank card, which greatly facilitates the process of allocating capital.
  • Integration with DeFi and NFT – a convenient built-in Web3 browser allows you to interact with decentralized applications (DeFi platforms, NFT markets, etc.).

You should also keep in mind that if you lose a seed phrase, you can’t restore your wallet. The wallet itself is free, but transactions are charged a standard network fee.

The main disadvantages of this cryptographic wallet are that there is no support for the computer version, there is no additional two-factor authentication, and the main security measure is password and biometrics protection.

Who is Trust Wallet suitable for?

  • For beginners – it is easy to use and supports many cryptocurrencies.
  • DeFi Users-Integration with dApps makes it easy to interact with DeFi platforms.
  • It is suitable for investors who want to store long-term cryptocurrencies due to decentralization and staking support.

Trust Wallet is a powerful, convenient, and secure wallet that is ideal for mobile cryptocurrency management.

3. Exodus

A desktop and mobile wallet that also supports the main networks of Bitcoin, Ethereum, Solana, Binance Smart Chain, Litecoin, Cardano, etc. This hot crypto wallet is available as an app for Windows, macOS, Linux, iOS, and Android.

Some of its features are:

  • Built-in cryptocurrency exchange: one of the main advantages of Exodus is the built-in cryptocurrency exchange function. Users can exchange one cryptocurrency for another right inside their wallet, using exchange aggregators such as ShapeShift.
  • No registration required: to start using Exodus, you don’t need to create an account, which makes it convenient for users who value anonymity.
  • Security: Exodus uses secure cryptographic methods to store keys and protect users ’ private data. However, users are responsible for their keys, as the wallet does not provide data recovery via third-party services.
  • Hardware Wallet Support: Exodus can be used in conjunction with hardware wallets such as Trezor, which provides an additional layer of security.

But, unfortunately, Exodus does not provide access to decentralized applications, which limits the ability to use DeFi, or participate in other decentralized services. This requires other wallets, such as MetaMask. Also, when exchanging cryptocurrencies through Exodus, there may be high commissions, since the wallet uses aggregators for the exchange.

Who is Exodus for?

Exodus is ideal for:

  • Beginners: The simplicity and convenience of the interface make it a good choice for those who are just starting to work with cryptocurrencies.
  • Users who do not need to use dApps: For those who do not plan to actively participate in decentralized applications or DeFi protocols.
  • Those who appreciate a beautiful and intuitive interface: Exodus offers a stylish design that many users like.

However, for advanced users, especially those who are actively working with DeFi or need full control over their wallet, it may be useful to consider other options.

Cold wallets are devices or methods of storing cryptocurrencies that are not connected to the Internet, which makes them more secure from hacker attacks. Here are some popular cold wallets:

cold wallets

1. Ledger Nano S / X

Ledger Nano S is one of the most popular and affordable cold wallets. It supports more than 1,800 cryptocurrencies.

Ledger Nano X is an improved version that allows mobile devices to connect via Bluetooth.

The main advantages are:

  • Support: Works with various operating systems and supports many cryptocurrencies, including Bitcoin, Ethereum, and many altcoins.
  • Durability, support for multiple cryptocurrencies, mobile app for ease of use (in Nano X).

However, the disadvantage may be the price, as well as some limited features for users who are not suitable for physical devices.

2. Trezor One / Trezor Model T

Trezor One is one of the first hardware wallets known for its security and reliability.

Trezor Model T is a more expensive and functional version with a touch screen and improved support for coins and tokens.

Main advantages:

  • Security: Private keys are stored in a secure chip on the device. To access the wallet, you must enter a PIN code. A 24-word seed phrase is used for recovery.
  • Cryptocurrency Support: Trezor One supports over 1,000 cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and more.
  • Trezor Model T touch screen: The main feature of the Trezor Model T is the presence of a touch screen, which allows you to more conveniently and intuitively control the device and enter the PIN code.
  • Compatible with mobile devices via the Trezor app in the Trezor Model T version

Main disadvantages:

  • Depending on your computer/mobile device: To make transactions, you need to connect your wallet to the device, which may not be as convenient as using a mobile wallet. And if the wallet is lost or damaged, you can lose access to cryptocurrencies if no backup is made.
  • Limited support for some cryptocurrencies: Although the support is quite extensive, not all cryptocurrencies may be available.
  • Less convenience for beginners: The process of setting up and using it can be difficult for those who are not familiar with cryptocurrencies.

3. Coldcard

This is a hardware wallet focused exclusively on Bitcoin. It is designed with an emphasis on high security and is an excellent choice for users who value control over their funds and protection from hacker attacks. Here are its main features and disadvantages:

Advantages of Coldcard:

  • Maximum security: Coldcard uses a secure element to store private keys, which makes them inaccessible to hacking. Transactions can also be signed without an Internet connection, which minimizes the risk of theft of funds through Internet threats.
  • Complete independence from third parties: There is no need for third-party services or cloud solutions to work with the wallet. All operations are performed on the device without transmitting data to the network.
  • You can restore your wallet and create backups via an SD card, which provides additional protection in case of loss or damage to your device.

Disadvantages of Coldcard:

  • Limited Support: Coldcard only supports Bitcoin. This can be a disadvantage for users who want to store various cryptocurrencies.
  • Difficult to use: The device is aimed at experienced users, and its interface can be difficult for beginners.
  • No mobile device support: The device requires a PC to use, which may not be as convenient for users who prefer mobile solutions.

Coldcard is ideal for bitcoin maximalists who want to store only bitcoin with maximum security, as well as for experienced users who appreciate the ability to customize the device for more complex cases.

How to secure your cryptocurrency funds?

However, cryptocurrencies are in digital form, and if they are handled incorrectly or if they are not properly protected, you can lose access to your assets. Here are recommendations for protecting both hot and cold wallets:

secure

How to secure your cryptocurrency funds?

However, cryptocurrencies are in digital form, and if they are handled incorrectly or if they are not properly protected, you can lose access to your assets. Here are recommendations for protecting both hot and cold wallets:

Protecting hot wallets

  • Two-factor authentication (2FA): Enable 2FA for all services that support this feature. Use apps like Google Authenticator or Authy to add an extra layer of security beyond your password.
  • Use Strong passwords: Create complex passwords with at least 12 characters, including numbers, letters, and special characters. Use password managers to store unique passwords for each service. This will help you avoid reusing passwords on different sites, which can lead to data leaks.
  • Regular Software Updates: Keep your hot wallet software updated at all times. Developers often fix security vulnerabilities, and using the latest version will help protect against known threats.

Be wary of emails, links, and applications that may be used for fraud to obtain your data.

Also, be careful when using public Wi-Fi networks, and don’t make transactions over insecure Wi-Fi networks. If you need to use the public Internet, you can use a VPN to protect your connection.

Protection of cold wallets

  • Secure storage: Keep your cold wallet in a safe place where it won’t be physically damaged or stolen. This can be a safe or other secure location that is accessible only to you.
  • Backup and storage of seed phrases. Create multiple copies of your backup key (seed phrase). This can be a paper copy or a metal carrier with 12 or 24 words written on it to restore access to your wallet.
  • Using the device for offline signing: Offline signing of transactions helps to avoid the risk of data leakage over the Internet. Many cold wallets, such as Coldcard and Trezor, allow you to sign transactions without an internet connection.
  • Regular checks and updates for devices with firmware: If you have a hardware wallet with firmware like Ledger or Trezor, check for updates regularly and install them to avoid using vulnerable versions.

Also, don’t forget to use secure backup devices. Use metal backups such as Cryptosteel or Billfodl to record your seed to prevent it from being damaged in the event of fire or water.

If possible, use multiple hardware wallets for multi-signing. This will make your cryptocurrency even more secure. And never share your private keys or seed phrases with other people, even if they claim to be from an official support service.

Conclusion

In conclusion, the choice between a cold and hot wallet depends on your goals and the level of security you want to provide for your cryptocurrency funds. Hot wallets are convenient for everyday use, quickly providing access to cryptocurrencies for frequent transactions, but they are more vulnerable to online threats. Cold wallets that store keys offline offer a high level of security, which makes them ideal for the long-term storage of cryptocurrencies and protection against external attacks.

If your goal is frequent exchanges and use of cryptocurrency, a hot wallet will be convenient. However, if you hold significant amounts of money or want to protect your assets for the long term, it is better to choose a cold wallet. In any case, the key is to adhere to security standards such as two-factor authentication, the use of complex passwords, and secure backup storage.