A simple explanation for a hot wallet is that hot wallets are connected to the internet. Cold wallets, on the other hand, are not connected to the internet and work like savings accounts. These wallets are designed for different purposes and have different features that appeal to their users.
Many people use hot wallets for their everyday cryptocurrency exchanges and store smaller amounts of tokens on them. Cold wallets are on the other hand mostly used for long-term secure storage of tokens and are used to hold larger amounts not intended for frequent use.
Funds stored in exchanges likeCoinbase and Poloniex or wallets such as Mycelium and Exodus are therefore in hot wallets. For someone to access the funds, they need their devices to be connected to the internet every time.
All hardware wallets such as Trezor and Nano are therefore cold wallets or cold storage. Many people store funds or tokens meant for long-term holding in cold wallets. The cold wallet is not actively connected to the internet and users may take time before they need to access the wallet.
Both hot and cold wallets are used for receiving cryptocurrencies even when they are offline. Hot wallets are however faster in receiving of payments and transactions as compared to cold storage wallets since it is faster to verify with a wallet connected to the internet.
Related: What is Bitcoin?
Hot wallets safety
The security of hot wallets highly depends on the security measures undertaken by individuals and third parties. Due to the constant connection to the internet, they are very vulnerable to theft attacks. Users need to take precaution, keep their private keys safe and also store small amounts of funds in the wallets.
Hot wallets are categorized according to their accounts and software. Therefore, the security also depends on these different types of wallets. Storing your funds in wallets such as Exodus are said to be more secure than having your funds in certain exchanges. This is because you have your own private key and control funds in your wallet at all times.
Cold wallets
Cold wallets are in different categories including paper wallets and hardware wallets. This means that you do not have to spend a lot for your funds to be stored offline and securely. Paper wallets are easily created using a computer that has never been connected to the internet. They are used to store funds most securely since they are safe from any cyber-attacks.
Cold wallets can also be created using old smartphones or computers which have totally been disconnected from the internet. Paper wallets as a form of cold storage are very secure and prevent the worry of your funds being stolen.
Another form of cold storage is dedicated hardware wallets such as Trezor, Ledger Nano S and KeepKey. Hardware wallets are physical devices used to store cryptocurrencies offline and can be connected to a computer when needed. The security of hardware wallets is top notch since no transaction can take place without certain steps being followed. This includes pressing a physical button on the wallet device to sign the transaction. The private keys for the hardware wallets do not leave the wallet that is why they are safe from any form of hacking. Additionally, they are hard to hack. These hardware wallets have different features which interest users.
Hardware wallets for cold storage are the most secure as compared to hot wallets. Their prices range from $100 to $4oo. However in Kenya, for example, these prices may vary depending on shipping costs or the distributors you may choose to buy from. The hardware wallets offer the use of use of hot wallets as well as the security of cold wallets.
Further reading: how to earn bitcoins.
