A crypto wallet is an important element in cryptocurrency. Anyone integrating within the digital currency sphere will come across this familiar word. As the name suggests the crypto wallet serves the same purpose as a normal wallet we use in our lives.
Crypto wallets play a pivotal role in cryptocurrency by securely storing crypto assets. There are two types of crypto wallets namely hot wallets and cold wallets. They are fundamentally different from each other. This article aims to introduce the two wallets and the distinct purposes they serve.
Understanding The Importance of Crypto Wallets
Crypto wallets come in the form of a physical device or software program used for storing digital currency. It does not specifically store the crypto assets but rather the keys that are used to unlock any digital transactions. The transaction process is a highly secure procedure between a sender and receiver. Crypto wallets store the keys that act as passwords or codes to unlock these transactions. Only the sender and the receiver will have access to the keys stored in the crypto wallets.
Crypto wallets hold a significant position in cryptocurrency and the blockchain network. It holds the key without which users cannot have access to their holdings. Wallet also makes it receive and send cryptocurrencies to anyone from anywhere around the world. A third party can easily access your holdings without a private key. Crypto wallets act like a secure ledger that holds the private key.
What are Hot Wallets?
Hot wallets or software wallets are connected to the internet. They are much easier to use and can be used from smartphones or laptops. Hot wallets are the perfect choice for active traders and are meant to be used for daily cryptocurrency transactions.
These types of wallets can be accessed by the sender or receiver from anywhere in the world using a stable internet connection. Hot wallets have become a popular choice among many traders as they can be traded from anywhere using hands-on devices.
What are Cold Wallets?
Cold wallets often known as Cold Storage do not require internet for storing the keys. They operate offline making them more secure than hot wallets. These wallets appear in the form of hardware devices.
Cold wallets are mostly used for long-term investments as they offer increased security. There are five types of cold wallets that can used by users according to their requirements. Renowned crypto exchanges mostly favor cold wallets due to their increased security.
Hot Wallet vs Cold Wallet
Let us look at some of the fundamental differences between hot wallets and cold wallets to understand their purposes in a better manner.
Security Features
This is one of the most common and significant differences between hot and cold wallets. Hot wallets store the private keys on internet-connected devices. These make them vulnerable to potential malware used by hackers to get access to the private key.
For this very reason, large amounts of funds cannot be stored in hard wallets. On the other hand cold wallets appear as hardware and do not require the internet to carry out its operations. Hence they can be considered a suitable option for long-term investment.
It is quite difficult to hack hardware and gain access to the private key. The hardware stores the private key in a chip. Advanced traders prefer cold wallets over hot wallets for security reasons.
Cost
Hot wallets are generally cost-effective. They even allow users to create a hot wallet free of cost. Users can easily create hot wallets on their phones without paying any additional fees. Cold wallets however are expensive compared to hot wallets. Users sometimes have to invest quite an amount to create a cold wallet. Since they provide increased security, the charges are also much higher.
Accessibility
Hot wallets are much easier to use and are meant for daily transactions. They can be used from anywhere using hands-on devices. This factor makes hot wallets more accessible and convenient to use. It is a favorable factor for active traders.
Cold wallets on the other hand are less convenient for everyday use. They are mostly preferred for long-term investments. It cannot be used everywhere as they come in the form of hardware and there are various processes to accelerate transactions through cold wallets.
Choice of cryptocurrencies
Hot wallets offer support for a wide range of cryptocurrencies. It is capable of storing more than hundreds of cryptocurrencies. Well this is not the case in cold wallets. They do not accept every cryptocurrency. This might cause a barrier to traders.
Explore More: Tips For Using Your Hardware Wallet Securely
The Bottom Line
Both hot and cold wallets form a necessary part of the trading process. They serve the common purpose of storing the private key but they are fundamentally different from each other. They perform their main functions in unique ways. Both wallets also come with their own benefits and limitations. Investors have to choose the kind of crypto wallets according to their needs and requirements.