Welcome back to SHERWOOD’s blog! Tonight, let’s fill our quarantine time with considering the difference between “hot wallet” and “cold wallet”. Most of you have certainly heard these expressions many times but since some users find themselves not having a clear idea on what is the difference, let’s look at it in detail.
So, there are two types of cryptowallets: “hot” and “cold”. The difference is very simple. Hot wallets are always connected to the Internet as they only operate directly on the blockchain. Cold wallets operate autonomously, for instance on USB drives, or function like hardware wallets.
As for the question of which one is more important for crypto assets management, the answer is: both. Almost all digital currencies holders use both hot and cold wallets in order to be able to implement different operations. It is a combination of these two tools that creates a strong platform for any business that deals with cryptocurrencies.
Cold wallets enable you to store your assets autonomously, in a 100% safe and secure environment. A good illustration would be using a safety deposit box in a traditional bank instead of keeping it on the banking account. Although cold wallets have an extremely low mobility, they guarantee the most powerful level of security you could wish for.
They are normally used for storing large amounts of a cryptocurrency, which requires reliable protection. Cold wallets don’t need to be permanently connected to the Internet, and thus, there are no risks of financial losses that you inevitably face when storing the assets on hot wallets.
You can even use a “physical” carrier as your cold wallet, such as paper wallets with the keys printed out or cold wallets’ backups stored on digital carriers, like flesh drives. Thus, you can store the data required for getting access to the wallet in safe places, like lockers or safety deposit boxes.
Hot wallets are basically a certain bitcoin address that can be used by its owner for carrying out such transactions as purchases or exchanges at any moment. Hot wallets are connected to the Internet 24/7 and thus, cannot be considered as the safest storage: they are too vulnerable in front of the hackers attacks. That’s why it is only reasonable to store small cryptocurrencies amounts on them.
However, there are invaluable advantages in using hot wallets, as they are capable of stunning mobility and enable users to get instant access to the assets. Besides, by using a hot wallet, you automatically get access to multi-currency solutions enabling you to store several digital currencies simultaneously.
In conclusion, let’s say a hot wallet is your current account and a cold wallet is your deposit account. Which means, you can use both cold and hot wallets for your operations, but the wisest decision would be to use a hot one for carrying out any transactions and then immediately transfer any assets you’ve got to a cold one, where you can securely store any amounts in the safest environment.