Hot and Cold
At some point, you will have to ask yourself the following question, where do I want to store my cryptocurrencies?
What are the options, you might ask? Well… you have a couple of them and maybe one more if we are taking paper wallets into consideration. Which we are not as it is just a printed version of the private keys and we are all aware of the advantages and disadvantages of holding a quite significant part of our funds on a piece of paper.
The most basic distinction between hot and cold wallets is access and storage. You must be aware of the fact that you do not have any Bitcoin per se in the wallet. What you have is the key or, in other terms, the location of your Bitcoin in the Bitcoin’s blockchain and the key that verifies that you are the owner.
After having identified what you truly have in your wallet, let’s go into the differences between the wallets.
In short, the hot wallet has a constant connection to the internet. The cold wallet does not.
That is why you should think about what is your time horizon, do you want to trade and have quick access to your coins, or do you want to invest and keep your coins safe for a longer period of time.
Hot wallets are easier to set up and offer quick access to your coins. However, due to being constantly connected to the internet, those are prone to being the subject of hack attacks that might happen.
On the other hand, you have cold wallets that are working off-line, and the only time they are connected is when you are using them to send the coins to or from it.
You have to remember one very significant phrase “not your keys, not your coins”. The wallet on an exchange that allows you to store your funds is in the possessions of the keys. So in case anything happens, say goodbye to your coins and your money.
Among many types of different wallets, we might distinguish a few major types. Those are as follows
Software wallets
Web wallets
Desktop wallets
Mobile wallets
Hardware wallets
Paper wallets
Software wallets
Web wallets
Wallets in this category allow you to manage your coins and have access to the blockchain via the browser without the need to install or download anything. Web wallets might come in a form of plug-in extensions or exchange wallets that you are using while storing your coins on an exchange. The most significant distinction is whether you are allowed to be in charge of your keys or not.
Desktop wallets
A desktop wallet is software you download and use locally on your device. Desktop wallets might be hot or cold wallets, depending on their design. The important thing to remember here is that this wallet is as safe as your device. Never forget about it. Desktop wallets allow you to take care of your own keys and pass/seed phrases that you should write down on a piece of paper and NEVER in a file on your device.
Mobile wallets
Mobile wallets work very similarly to desktop wallets but are designed as smartphone applications. Just as desktop wallets, mobile wallets allow you to take care of your keys and seed phrases and are mostly considered to be cold wallets.
Hardware wallets
In contrast to software wallets, hardware wallets are physical wallets that use RNG (random number generator), allowing you to generate the confidential recovery phrase and store your keys on your own device, along with the unique recovery phrase.
Hardware wallets might be less user-friendly than software wallets and might take slightly more time to access your funds. However, it is still the difference between plugging the device and authorizing the access instead of opening an app. You can also integrate your hardware wallet with the MetaMask wallet and access your funds a lot quicker and easier.
However, remember that, to some extent, it might pose a threat to your funds, just like the use of a software wallet. The most popular ones are Ledger and Trezor wallets, and it is up to which one you will choose.
One thing to remember; it is never a bad idea to invest in the safety of your funds.
Paper wallets
As the name implies, the paper wallets are just the printed version of the QR code or your keys. While the paper wallet might be considered very safe, the danger comes with the fragility of the paper itself. One more disadvantage is that quite often you cannot send a part of your coins, but you have to send the whole balance at once. In the case of sending just part of your funds, the rest of your funds will be sent to UTXO address, and you will lose access to your funds. A similar thing would not happen in the case of any other wallet, as you will still have the access to your UTXO address’ coins.
Taking everything into consideration, the safety of your funds should always be the most significant factor at play. Once lost funds cannot be retrieved. All it takes might be the one malicious link that you click. Most people in the crypto world are using hardware wallets as secure storage for most of their funds, while software wallets are used to manage a small part of their portfolio to make it more flexible.
Build a solid foundation, both for your knowledge and the safety of your money, not only in the crypto world.
Remember, “not your keys, not your coins”.
Speaking of… how about your money in a bank account? Are you sure you are the one in charge?
Till next time!
~ M.E.