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Cryptocurrency Storage: Hot VS Cold Wallets

Cryptocurrency Storage: Hot VS Cold Wallets, FP Markets

Cryptocurrencies, especially Bitcoin, have become extremely popular assets globally. A report published in 2021 estimated that the number of crypto holders will surge to over 1 billion in 2022. Of course, the weak performance of cryptocurrencies in 2022 has hampered this growth. In this article, we will assess the difference between hot and cold crypto storage options.

What are crypto wallets?

Cryptocurrencies were created to be digital currencies that can be stored or used to make transactions. Therefore, like fiat currencies, storing them in a secure place is an important element.

Crypto wallets are tools that let cryptocurrency users store their coins and access them at any time. These wallets should be easy to use, accessible, and extremely secure.

Security is an important part of storage because of the risky nature of the cryptocurrency industry. According to Chainalysis, hackers stole almost $2 billion of cryptocurrencies in the first eight months of 2022.

Cryptocurrency Storage: Hot VS Cold Wallets, FP Markets

 

Hot crypto storage explained

Hot crypto wallets are storage options that are connected to the internet. They are the most popular storage options. Hot crypto storage options include web-based wallets, desktop wallets, and mobile wallets.

Most crypto exchanges like Coinbase, Binance, and Huobi offer these cold storage options seamlessly to their customers. Other independent companies like Opera and Brave provide these wallets only services to the users. Other popular hot storage options include MetaMask and Exodus.

Hot crypto storage wallets have their benefits and disadvantages. First, they are easy to create and use. For example, downloading and using a wallet like MetaMask is a simple process that takes less than five minutes. Exchange-linked crypto wallets like those offered by Coinbase and Binance are also easy to create.

Second, these storage options are highly accessible since they are connected to the internet. This means you can access your wallet at any time regardless of your location. Like with cloud computing, you only need your authentication details to access and use your coins.

Another benefit of using a hot crypto storage option is that they are offered free of charge allowing you to store as many cryptocurrencies as you wish.

Finally, popular wallets like MetaMask are compatible with most blockchain networks in industries like Decentralized Finance (DeFi) and non-fungible tokens (NFT).

However, security is the most important risk associated with hot crypto wallets. In the past few years, hackers have managed to steal crypto worth billions of dollars. However, more recently, wallet providers have upgraded their wallets to make them more secure.

 

Cold crypto storage explained

A cold crypto storage is a wallet that is completely offline. Resembling a USB stick, this is a piece of hardware that allows you to store your coins and them at your convenience. Another form of cold storage is paper wallets where you essentially write the long string of numbers of your transaction on a piece of paper. This comes with the obvious risks of loss or damage.

Unlike hot wallets, cold storage wallets are usually premium products that cost a certain amount. On average, these wallets cost over $50. Therefore, if you are storing a substantial amount of
cryptocurrencies, buying a cold wallet can make sense.

Hardware wallets are safer than hot wallets like MetaMask. For someone to steal cryptocurrencies stored in a wallet like Trezor, they would need to steal the device. They also need to have the access key for the specific cryptocurrency.

Another benefit of a cold storage option is the autonomy it provides you since you are the sole custodian of your coins. By so doing, it helps you eliminate the use of third parties.

However, cold storage options have their disadvantages. First, like other physical, or paper, wallets, they can easily get lost. If this happens, it is often not possible to recover the cryptocurrencies stored in it. Second, unlike digital wallets, they are not convenient since you need to have them physically with you to carry out a transaction.

 

Summary

Hot and cold cryptocurrency wallets are essential when dealing with digital coins. As we have seen, they both have their pros and cons. Therefore, experts recommend using a hybrid option that combines the two types of storage. This is how popular exchanges like Coinbase and Binance work. For example, you might store a certain percentage of your coins in one or two hot wallets. This might be for crypto that you plan to transact with and need convenient access to. And you might store the crypto that you plan to hold onto for a while in a secure hardware wallet.

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