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Cold wallet and hot wallet: What’s the difference?

24 June, 2022 Blockchain

In cryptocurrency, instead of decentralization and scalability, it seems like security is the top priority. Some investors prefer crypto wallets because of the high level of protection, rather than keeping tokens or coins directly on the exchange where they bought them. Due to the rapid expansion in the number of users, there is a wide range of wallet hardware to choose but generally, they are divided into 2 main types: Cold wallet and hot wallet. Let’s deep dive into its feature and learn how to distinguish them.

What is a cold wallet?

A cold wallet – also known as a hardware wallet – is a physical device with high security that keeps your cryptocurrency completely offline, with no continuous internet connection needed. 

It only connects to the internet when you need to make a transaction. Separating money offline is the most reliable way for users to protect their funds from hacker attacks and scams. Currently, cold wallets are known as the most effective crypto protection solution. Because as long as you keep your private key and passphrase private, cold wallet will not allow hacking attacks. One more thing, make sure to buy your cold wallet directly from the manufacturer to avoid the fake device.

2 types of cold wallet

Hardware wallet: This is the most commonly used wallet. Hardware wallets are physical devices, often similar to a USB stick, to securely store a user’s private key. They do not require a connection to the internet, so they are not affected by viruses or malware that may be on the computer. In addition, hardware wallets also allow you to set an additional PIN or password to ensure safety, if the case is lost, it will not be able to be used by a third party.

Paper wallet: Paper wallets are the safest way to protect your cryptocurrency from computer attacks. A paper wallet is simply a piece of paper printed with a public address, private key, and QR code to facilitate transactions. Only when you own this piece of paper will you be able to access the cryptocurrency in the addresses printed on the paper. However, paper wallets are also very easily damaged, degraded or lost at the printing shop. So many people have pressed these paper wallets and stored them in their homes or even deposited them in banks.

Pros and cons of cold wallet

Advantages:

  • High security and safety: Cold wallet stores the user’s address and private key in offline mode, completely separate from the Internet, so it is not affected by malicious computer software, viruses or hackers’ intrusion.
  • Stability and mobility: When using a cold wallet, you don’t have to worry about conditions such as system failure, slow network lag, or faulty software such as hot wallets or online e-wallets. In addition, with a compact design like a USB stick or a piece of paper, you can completely put it in your bag and take it everywhere.
  • No need to verify: Another point of cold wallets is that you do not need to participate in identity verification procedures while hot wallets are required. In particular, hardware wallets also have parallel software included that makes it easy for users to view investment portfolios without risking their private keys.

Disadvantages:

  • The inconvenience of transactions: Before making transactions, cold wallets need to be connected to the internet. If you forget to bring your wallet, the transaction will not be possible.
  • The price is quite high: To own a hardware wallet, you need to spend 50 to 200 dollars. Besides, if you want to use the software wallet offline, it will cost extra to buy a new phone or computer to perform the task of storing cryptocurrency.
  • Slow transaction processing speed: When using a hardware wallet, you need more time to transact because you have to perform many different operations.
  • Easy to lose or damage: Hard wallets are easily broken and damaged, while paper wallets are easily torn when subjected to strong physical impacts. Besides, despite the compact design, both these wallets are easy to lose if not stored carefully. This may cause you to lose your stored assets.
  • Limited storage capacity: Cold wallets are not yet capable of storing multiple cryptocurrencies simultaneously. Compared to hot wallets, it is quite limited.

What is a hot wallet?

A software wallet is another name for a hot wallet. It is an online form of digital storage that you may access from a computer or smartphone. Hot wallets are less secure from hackers than their cold wallet counterparts because of the internet connection. In addition to allowing you to retain your cryptocurrency in the exchange, some exchanges will also provide a separate hot wallet. Hot wallets are safer than storing your coins in your exchange account and can make it simple to move cryptocurrency back to an exchange to complete additional deals or cash out your holding.

Pros and cons of hot wallet

Advantages

  • Most of the hot wallets on the market will be free to use without any cost. Users only need to register for an account and can immediately use it.
  • Allowing almost all cryptocurrency
  • Approachable and user-friendly

Disadvantages

  • Due to frequent connections to the internet, hot wallets on the exchange can be attacked by hackers or malicious code that can save your wallet account information.
  • With software wallets, if your computer is stolen or your hard drive is damaged, your assets are also at risk of being lost.
  • Need more identity verification when accessing and transacting

Overall, for long-term investors, cold wallets are a smart choice, a safe place to protect their holdings from cyber attacks while hot wallets provide flexibility. Hopefully, you have a better understanding of hot wallets and cold wallets, thereby choosing for yourself a suitable wallet. 

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