Liminal secures FSP license from FSRA in ADGM   Read more

What is a Hot wallet and Cold Wallet?

| November 17, 2023

Share this article

Every digital/ crypto-asset owner out there would and should always prefer the safest storage solution that helps them strike the right balance between usability and security. 

No matter the type of digital asset you own or have fractional ownership of when it comes to securely store those holdings, investors and owners have to choose between a “hot wallet” or a “cold wallet” cryptocurrency wallet or use a combination of both. This post helps you (the owners and investors) to understand the hot and cold cryptocurrency wallet better. 

The key forces at play:

Security:

There is always a risk of being compromised by malicious actors associated with cryptocurrency wallets connected to the internet. 

Functionality:

Not all keys are in use when interacting with the blockchain. There are some sets of keys quite frequently used to participate in the web3.0 ecosystem, whereas there are other sets of keys that are used infrequently and act more like a backup.

Hot cryptocurrency wallet:

Some of the prominent examples of hot cryptocurrency wallets are web-based wallets, mobile wallets, and desktop wallets. 

Even if you use the best crypto wallet, especially the hot wallets, if the wallet is connected to the internet, then it is not secure and extremely vulnerable to online attacks. 

Ease of use is one of the biggest reasons cryptocurrency holders prefer hot wallets over cold wallets. 

Hot crypto wallets help eliminate the need for transferring from an online medium to an offline medium just to conduct a single cryptocurrency transaction.  

Conducting trades and purchasing emerging digital assets is inconvenient with cold wallets, which makes hot wallets an attractive option. 

As most of the best crypto wallets are mobile-based, experts still suggest that it is a bad idea to hold high-value digital assets on your personal online/ web wallets.  

The most secure way to utilise a hot cryptocurrency wallet is to send a tangible amount of crypto to your wallet when the balance runs low.

Cold cryptocurrency wallet:

Cold cryptocurrency wallets are considered to be astronomically more secure than hot wallets. By design, compromising a cold wallet is difficult. 

To seal funds stored inside a cold cryptocurrency wallet, one needs to acquire physical possession of the cold wallet device as well as be required to know the appropriate PINs or passwords associated with the device – which is highly unlikely. 

When the hardware wallets are connected to the computing devices, irrespective of the type of connection, still, it is impossible for the malicious actor to steal the digital assets of the asset holders. 

The reason why cold wallets are considered to be the best crypto wallets is the fact that the signing of the digital asset’s transaction is performed “in-device,” which means the private keys never leave the devices.

After successfully signing the transactions, it is broadcasted to the blockchain network in order to update nodes.

No malicious software would be able to get access to the private keys or sign a transaction.

Institutional investors leveraging the crypto asset and investing substantial amounts have always preferred cold cryptocurrency wallets with high-grade security over hot wallets.

Cold wallet to hot wallet

To transfer funds from a cold wallet to a hot cryptocurrency wallet, first, you need a computing device, be it a laptop or computer, to plug your cold cryptocurrency wallet. Once plugged in, the owner needs to complete the authentication and security procedures to transfer the requisite cryptocurrency to the hot cryptocurrency wallet in order to further perform purchases over the blockchain network.

Ways to use cryptocurrency wallets

As an investor or crypto-asset owner, you should leverage the best of both by combining the accessibility of the hot cryptocurrency wallet and the enhanced security of the cold cryptocurrency wallet. In order to operate with ease across the wallet infrastructure, you need to set up a verified exchange account, a mobile-based hot wallet, and a hardware-based cold wallet. 

Other than that, investors and crypto-holder can also start using a second phone which will act as a cold wallet. To transfer funds from a second phone to your primary phone, you just need to connect them using Wi-Fi or Bluetooth. After transferring funds, you can turn off the Wi-Fi and Bluetooth connection of your secondary phone and shut it down.

Even well-known exchanges normally store a significant amount of customer funds offline using a host of cold wallets. On the other hand, a smaller portion of the funds and assets that frequently experience withdrawal by the clients are stored using hot wallets.

Frequently Asked Questions (FAQ’s):

What is the difference between a hot wallet and a wallet?

A hot wallet is a type of cryptocurrency wallet that is always connected to the internet, while a cold wallet is offline. Hot wallets are used for regular transactions, while cold wallets are used for secure, long-term storage.

What is the purpose of a hot wallet?

The primary purpose of a hot wallet is to provide easy access for regular cryptocurrency transactions. It is convenient for sending and receiving tokens quickly from internet-enabled devices like smartphones and laptops.

What are the different types of hot wallets?

Different types of hot wallets include mobile applications like Coinbase Wallet, ecosystem-specific wallets like MetaMask, noncustodial wallets and software wallets like Liminal Wallet. Each type caters to specific user needs and preferences.

What are the risks of a hot wallet?

The main risks of a hot wallet include vulnerability to online attacks, potential hacking, exposure of private keys to cyber theft, and the security implications of storing private keys online. Storing a large number of digital assets in a hot wallet can pose security threats.

Can you transfer from a hot wallet to a cold wallet?

Yes, you can transfer cryptocurrencies from a hot wallet to a cold wallet. To do this, you would need to initiate the transfer from your hot wallet to your cold wallet address. This process involves moving assets from an online, internet-connected wallet to an offline, more secure storage solution.

Related Articles:

More on Crypto

Liminal Custody received initial approval for a VASP license from Dubai’s VARA, paving the way for secure institutional custody services. Learn more. ……
May 27, 2024
As we move toward standardized and regulated usage of digital assets, it is remarkable to see more jurisdictions develop improvised versions of compliance with laws to help individuals and institutions stay safe and resilient. ……
May 23, 2024

Find out what is the Ideal Custody Solution for you