The world of cryptocurrencies cannot be separated from the use of crypto wallets. This digital wallet is an essential thing that you must have to be able to transact in the crypto arena, including carrying out activities in the world of decentralized finance (Defi) such as crypto staking or yield farming.
Specifically, a wallet is a piece of software that you may use to store a cryptocurrency channel’s public and private keys. A valuable wallet to help you manage digital currency holdings allows you to interact with decentralized financial networks.
There are actually two types of wallets you may pick as options? They are hot wallets and cold wallets.
What’s the difference between the two? See the full explanation below:
Hot Crypto Wallets
This type of wallet is the most common type of crypto wallet because it is easy to build and use. These wallets are automatically created when you make an account on a crypto exchange platform, DeFi platform, or download a wallet on your smartphone.
Hot wallets are usually used for everyday crypto activities such as transactions. Because this wallet is always connected to the internet, you can quickly move your crypto assets with just the tap of a finger.
Since you’ll always be connected, it’s best to prepare a preventive way to protect your privacy. For example, you can go for PIA VPN with wireguard feature for safer transactions. The Wireguard VPN protocol will keep you safe by hiding your private information and hiding it only to yourself.
To know the differences between hot and cold wallets, let us first understand how it works.
How Hot Wallets Work
A crypto-asset market participant would want to keep their digital coins after they finish buying or mining crypto assets. Their choice will, of course, fall to the digital wallet.
However, hot wallets don’t store these digital coins even though they are called wallets. Instead of just being a repository, wallets also act as facilitators and loggers for your crypto transactions.
This software facilitates your transactions by recording each transaction change. These records are then stored in the blockchain ledger. It makes the crypto world very transparent and does not require financial intermediaries.
Why do crypto asset players trust hot wallets so much? The key is in the use of cryptographic keys in hot wallets.
Crypto wallets use a public key (such as a username) and a private key (such as a PIN) to allow users to access them. So, even though they are connected to the internet, at least crypto owners can make hot wallets their personal space in the cyber world.
Types of Hot Crypto Wallets
There are several types of hot wallets that you can choose from, and some wallets are designed for web transactions and specific applications only.
You have to dig further before deciding which hot wallets are suitable for your needs. There are three types of hot wallets as follows:
- Desktop Wallets, such as Electrum and Armory
- Mobile Wallets, such as Edge and Trust Wallet
- Hybrid Wallets, for example, BTCPay and Blockchain.
Weaknesses of Hot Wallets
Despite being very easy to use, hot wallets have one major drawback: their security. The weakness arises because the user can only access this wallet if the device is connected to the internet. Therefore, your wallet is at high risk of being hacked by irresponsible people.
If you have many crypto assets, it is not recommended that you store them in a hot wallet. Many crypto investors collaborate on the use of hot wallets with cold wallets. The trick is to deposit a small amount of cryptocurrency in hot wallets and then store most of it in cold wallets.
So, if you are a friend of the holders, you need another type of wallet, namely cold wallets.
Cold Crypto Wallets
This type of wallet is the opposite of hot wallets, and this wallet is not necessarily connected to the internet. It’s just that you can still connect it to the internet if you want to make transactions.
Because it is not connected online, this wallet is considered more secure as a place to store crypto assets.
There are two types of cold wallets that you can use when you want to store crypto money. Both have a physical form, such as a USB flash drive or paper.
This type of cold crypto wallet is indeed more popular than paper wallets.
Hardware wallets use a physical medium, usually a USB stick, to store private keys. So, the essential keys to opening your digital wallet will be safe from attacks by hackers or other rogue parties.
To use a hardware wallet, you must send your crypto assets from a hot wallet to a hardware wallet’s public address—or vice versa. Then, connect your wallet to the internet using the “default” software from the hardware.
The wallets that are classified as hardware wallets are Trezor and Safepal.
One of the cold wallet options that you can use to store your crypto money is a paper wallet. However, unlike hardware wallets, which use a USB-like device, paper wallets are paper that contains information such as public addresses and private keys.
So, it’s basically a piece of paper containing a key and QR codes that can facilitate your crypto transactions. This option is considered more secure than hot wallets because the storage does not require an internet connection.