One of the first things new crypto users must learn is that there are many different ways to store bitcoin and other crypto assets, and these varying options come with different levels of security. Whether you’re storing non-fungible tokens (NFTs) in a web browser extension or running your own Bitcoin full node, it’s important to understand this sort of software at a fundamental level. Remember, you’re in complete control of the security of your crypto assets, so there’s often no one to turn to for help if there is a hack or lose your private keys.
Due to the large number of hacks and other issues that have taken place over the years, it’s important to take crypto security extremely seriously. And one of the most important aspects of crypto asset security to understand is the difference between hot and cold crypto wallets. Once you understand this key distinction, it becomes much easier to understand how crypto works more generally.
A hot crypto wallet is the type of wallet to use if you look at the majority of crypto users. This is the type of wallet that connects to the internet and is found in your laptop’s web browser or as an app on your mobile phone. In many cases, you’re able to use some combination of your web browser’s and mobile phone’s to gain added functionality and security. The reason that this type of wallet calls to as a hot wallet is because it is connected to the internet. When your wallet is on an internet-connected device, it is at greater risk because someone who is able to place malware on your computer via the internet could gain access to all of your crypto assets.
There are a wide variety of crypto hot wallets that come with their own features. Some are only useful to those who wish to store Bitcoin, while others will allow users to connect to everything from Ethereum to Solana. When choosing a crypto wallet, it’s useful to think about which crypto networks you’d like to connect to before making a selection. After all, being forced into using more than one crypto wallet can end up complicating things a bit.
Hot Wallets Continued
One should note that all crypto wallets are not equal. Especially when it comes to verifying the rules of the underlying crypto networks. Some hot wallets are full nodes, meaning they verify as much about what is happening on the network as possible. Other wallets, light clients, will make a tradeoff in terms of putting more trust in other nodes on the network to improve the user experience.
These digital financial institutions, usually come in the form of crypto exchanges, are not the same as crypto wallets. Whenever someone else takes control of your private keys, those crypto assets are effectively no longer under your control. This type of setup voids one of the key aspects of crypto in the first place. This is complete financial sovereignty for each user. This stark contrast between crypto banks and crypto wallets points to the importance of understanding how the software you use to interact with the crypto space functions at the base level.
Cold wallets are the direct opposite to hot wallets. In other words, cold storage enables users to hold their crypto assets in an offline manner. This does not mean the crypto assets are automatically secure from all potential types of financial loss. However, it’s a huge security upgrade. Someone would have to gain direct access to the private keys in physical form for something to go wrong. Someone may still break into your home and steal your private keys. However, you no longer have to worry about someone reaching into your pocket over the internet.
Due to the physical nature of cold crypto storage wallets, they come in a variety of forms. After all, the passwords that associate with your crypto holdings are nothing more than words. Words written down on a piece of paper. In fact, for added security, some people split their passwords up into many pieces of paper stored in multiple locations.
Users can even technically make use of a brain wallet. This means they simply memorize their passwords rather than store them in a physical location. Of course, you can also simply store your private keys on a computing device. Then, not connect that laptop or phone to the internet. However, one should note that cold storage wallets cannot be used to send transactions. After all, how could they? They do not connect to the internet.
So there are no way for other nodes on the networks to find out about the transactions. That said, cold storage wallets can have purpose to receive transactions, as cryptocurrency addresses can generate in offline environments.
What is a Hardware Wallet?
Lastly, another difference between the two is there is also a hybrid option. This comes in the form of a hardware wallet that connects to a hot wallet. The hardware wallet is a separate device that can attach to an internet-connected computer. It basically creates a physical firewall between the users’ private keys and their hot wallet.
Hot wallet send instructions to the hardware wallet when a transaction is ready. Then the hardware wallet can sign off on that transaction on the secondary hardware device. There are still things that can go wrong with this setup. However, it is generally the view of the best of both worlds when it comes to crypto wallets.
This disclaimer informs readers that the views, thoughts, and opinions expressed in the text/sponsored content belong solely to the author, and not necessarily to Bitcoin of America, organization, committee or other group or individual. All investments are at your own risk and should be done after careful research.