You may have heard about cold and hot digital wallets but do you know how they are different from each other?
The simplest way to describe the difference between a cold wallet and a hot one is this: hot wallets are connected to the internet while cold wallets are not. Most people who hold digital assets have both cold and hot wallets because they are designed for different purposes.
Hot wallets are like checking accounts while cold wallets are similar to savings accounts.
People who have digital assets keep a small amount of money in their hot wallets for purchasing stuff. They keep the vast majority of their digital coins in their cold wallet.
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Q: Why do people keep most of their digital coins in a cold wallet?
A: Hackers cannot steal digital assets that are not connected to the internet.
Q: So then, how safe are hot wallets?
A: The security of hot wallets is dependent upon the security habits of individuals and third parties. They are vulnerable to theft because they are constantly connected to the internet. As long as something is connected to the internet, it is vulnerable to attack. But keeping very small amounts of digital currency in hot wallets is fine because a hacker probably won’t waste resources trying to gain access to small amounts of money.
Accounts within digital asset exchanges like Poloniex and Bittrex are considered hot wallets because these companies hold your funds in their infrastructure and servers. If a hacker drains Poloniex and you have an account with them, then there’s a good chance you will lose your money because Poloniex in actuality holds your funds.
If you have a Coinbase account, then this is also considered a hot wallet. If Coinbase gets hacked, you could lose your funds. Keeping small amounts in Coinbase is a best practice. Buying and selling Bitcoin using Coinbase is safe as long as you move your money after the trades. I think Coinbase is a very security-intensive business and in the six months of using it, I haven’t had any issues. But keeping large amounts of money in Coinbase is probably not a good idea. For US customers, Coinbase is really useful, even though its fees are a bit high. Coinbase is ideal for beginners because their site and app are designed so well and are so easy to use.
Another kind of hot wallet like Exodus.io is a software application that is downloaded to your computer. There are many kinds of wallets like this including the Dash QT wallet. In this type of wallet, Exodus doesn’t store your private keys on its servers and therefore, your money is under your control, not theirs. But your money is still vulnerable because a hacker could get your funds by gaining access to your computer. The Exodus wallet is designed to interact directly with the different blockchains. Exodus supports many different digital assets as well.
There are many different software wallets to choose from and many things to consider when choosing one. The reason I like to use Exodus is because it’s easy to use and is integrated with Shapeshift. Because of this Shapeshift integration, I don’t have to go to an external exchange like Bittrex or Poloniex in order to make trades. I can do that all within Exodus. It is a fairly new wallet and by no means perfect, but the fact that the people who created this wallet are accessible and eager to help resolve customer issues, makes this wallet even more appealing. I needed some support when I upgraded my Exodus software recently and I got the help I needed in real-time in the Exodus slack from the founder named JT. This was pretty impressive.
There are different kinds of cold wallets but I’m only going to focus on the hardware variety.
A hardware wallet is a physical device that is kept offline but has the ability to be plugged into a computer when needed. Hardware wallets are safe because when you make a transaction, they ask you to confirm each one by pressing a button on the device. They are pretty much hacker-proof. At least I’ve never heard of any being hacked before. They do feel magic because I don’t know how they are programmed.
There are three main hardware wallet brands: Trezor.io, Ledger Nano S and KeepKey.
Each one has different features, so do your due diligence and research all of them. I decided to go with Trezor for many reasons and I’m happy with it so far. The Trezor customer service has been very good, the communication is outstanding and it supports many different currencies: Bitcoin, Dash, Ethereum, Ethereum Classic, ZCash, Litecoin, Namecoin, Dogecoin, and Testnet.
I recently learned from my friend Heidi, who runs the Crypto Tips YouTube channel that KeepKey partnered with Shapeshift. This makes it possible to trade different coins within the KeepKey hardware wallet. That’s pretty cool!
The only thing I’ve heard about Ledger Nano S is that the writing on it is very small and hard to read. Ledger Nano has a good blog so it might be worth familiarizing yourself with it to learn more details.
For me, I’m sticking with Trezor for now since I’m quite satisfied with it.
ps- I’m still learning a lot every day about hot and cold wallets. If you have additional information about anything I’ve discussed, add your comments below. I’ve been involved in digital currencies since June 2016, so in many ways, I’m fairly new to this new and exciting world.
About the author:
Her favorite quote is by Rimbaud:
“I have researched the magic shapes of the happiness no one escapes.”