One of the first questions people ask when they would like to buy or otherwise trade cryptocurrencies is where their digital assets will be stored. Cryptocurrencies and other assets are stored in cryptocurrency wallets. There are two types of wallets: cold and hot wallets. If you have never encountered these terms, or you have and you do not know what they mean, this article is a simple guide to understanding them and their differences.
Crypto wallets help protect your private and public keys. These are cryptographically generated characters (letters and numbers) that are used to authorize cryptocurrency transactions. Choosing the right wallet will depend on the level of security you need, how accessible you want your funds and assets to be, and how much cryptocurrency you would like to hold.
A hot cryptocurrency wallet is one that is connected to the internet like our computers and smartphones typically are. Hot wallets are usually free, and some exchanges even pay interest on them, especially if they use your cryptocurrency to ensure liquidity on their exchanges.
Because they are connected to the internet, they come with certain risks because they can be hacked, and your assets stolen. However, they have recovery and backup options, especially for passwords, and they can be accessed from multiple devices connected to the internet.
Cold wallets are hardware cryptocurrency wallets that are only connected to the internet when you need to store or otherwise transfer your assets or funds. Because they are not connected to the internet to work, cold wallets provide a higher level of security than hot wallets. However, you need extra protection to protect them from being stolen, lost, or damaged.
Hot wallets hold from one to tens of thousands of cryptocurrencies while cold wallets hold from a thousand to tens of thousands. This means you have a larger range to work with if you own a hot wallet.
Because they are connected to the internet, it is much easier to send funds or transfer them in and out of your account. Cold wallets require an extra step to connect online, which makes them much more secure but slower when transferring funds.
Hot wallets also make it much easier to see your assets in real-time. If you have a cold wallet, you can know the amount of cryptocurrency you have on there, but not how much it is worth. For that, you could use a crypto converter calculator that tells you how much the cryptocurrency in your wallet is worth.
While hot wallets are free and come with most exchanges, you need to purchase a cold wallet. This is a physical device,and this is what gives it its security features.
Hot wallets are not great for long-term crypto storage due to their security risks, but cold wallets are great for long-term storage as long as you do not lose them.
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