There are a number of hurdles to jump on the path to becoming a hodler. Perhaps one of the most daunting comes towards the end of the journey: where do you store your newly bought cryptocurrency and what's the difference between a hot wallet and a cold wallet?
There are so many different options to choose from when it comes to securing your digital assets, it can be a confusing and even a worrying process trying to decide which method to use. It is your money, after all.
When you are making your storage decision it is imperative you consider your hot wallet vs cold wallet options. Each one comes with pros and cons, so make the choice that is right for you.
Hot wallet vs cold wallet: what does it mean?
The basic distinction between the two is that hot wallets are connected to the Internet, while cold wallets are kept offline. Therefore, funds stored in a hot wallet are much more accessible in comparison to funds in a cold wallet. This has pros and cons.
When you are evaluating hot wallet vs cold wallet, you need to consider the balance of accessibility and security that you require. It’s worth keeping in mind that you don’t have to definitively choose either a hot wallet or a cold wallet solution, you can store a percentage of your funds in each to mitigate risk while maintaining accessibility as required.
For any cryptocurrency assets that you don’t need instant access to, it’s best to store them offline in a cold wallet. Maintaining high levels of security is key in crypto.
There are different choices of cold wallet, such as a hardware wallet or a paper wallet. A hardware wallet is an external device like a Ledger Nano S or Trezor that stores your private keys. You must push a button to complete a transaction, so hackers cannot take control. Hardware wallet access is locked behind a password or pin. In general, the funds stored on a hardware wallet are fairly accessible, as long as you have access to the wallet.
A paper wallet is a print out of the private key and pubic address on a sheet of paper or another material. This is generally regarded as a risky form of cold storage, because you can lose the paper or someone could easily find it and access your funds.
Another cold storage option is to utilize a secure crypto exchange like Liquid, where all customer funds are stored in cold storage, so if you don’t want to manage the cold storage process for your funds, you can look to Liquid to ensure your funds are completely safe, kind of like a custody solution.
Hot wallets are more common, but they are higher risk. There are a number of popular hot wallets for the Ethereum network which work on your web browser, such as MyEtherWallet. If you download a wallet to your desktop or your phone, that is also a hot wallet because it is connected to the internet.
Most exchanges utilize hot wallets at least to some degree. This allows for fast access to user funds. However, it also means if you are storing your funds on an exchange with these practices, those funds could be at risk. The wallets are connected to the Internet, so they are always being targeted by malicious individuals and hackers.
Hot wallet or cold wallet?
There's no simple answer to this question. Every cryptocurrency user needs to evaluate their requirements. If you are going to only hold, cold storage is the way to go. If you are planning to execute big trades in the near future, consider a hot wallet. If you are going to do a bit of both, or if you want to trade but mitigate risk, store funds in both hot and cold storage.
Storing crypto in a hot wallet doesn’t necessarily mean it’s unsafe, it just means your funds are more at risk to hacking. Utilize the different kinds of wallets to mitigate risk as much as you can, while maintaining the access you need. If need any help storing you funds securely, look to Liquid. We’ve got you covered.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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