EVERYTHING YOU NEED TO KNOW ABOUT HOT AND COLD DIGITAL ASSET WALLETS
As digital assets have moved from the periphery of the global financial discussion toward its center, it is necessary to comment on how to efficiently acquire, manage, and protect them. This post answers the following questions: What is a digital asset wallet? What is the difference between hot and cold wallets? What are the different types of hot and cold wallets? What are recommended examples of hot and cold wallet providers? How can investors protect their digital asset wallets?
WHAT IS A DIGITAL WALLET?
A digital wallet is a wallet that stores digital assets (e.g. Bitcoin). Although that may seem dubiously self-evident, its true. A digital wallet operates in much the same way as a conventional wallet for bank notes and credit cards, only that it stores digital assets like Ethereum and Tron. Investors and traders use digital wallets like consumers use conventional wallets, or like traders in traditional finance use brokerage accounts. It is the holding place for their digital assets.
There are two kinds of digital wallets. One is called a hot wallet. The other, a cold wallet. And although it is tempting to populate the rest of this post with meteorological metaphors, I’ll spare you.
WHAT IS THE DIFFERENCE BETWEEN HOT AND COLD WALLETS?
Hot wallets
Hot wallets are connected to the Internet. That is their most distinctive quality. Being connected to the Internet means that the holdings in a hot wallet can be used to complete Internet-dependent transactions. It is common to hear hot wallets compared to checking accounts, which are the kind of accounts used for everyday purchases and bill paying. Hot wallets are used in much the same spirit by prudent digital asset investors. The assets that such investors keep there are slated to be spent trading or purchasing new digital assets. And that brings us to the cold wallet.
Cold wallets (or cold storage)
If at the end of the last paragraph you asked — “Okay, but where do such investors keep the assets not slated to be spent trading or purchasing new digital assets, at least for the foreseeable future?” — you would be referring to purpose of cold wallets.
Cold wallets, unlike their warmer counterparts, are not connected to the Internet. This is called “air gapping”. They exist, but not online. And there are good reasons why; the most important being security. Cold wallets are more secure, as it turns the digital nature of protecting digital assets into a physical one. The reason is they are free from unauthorized access, cyber hacks, and other wallet-compromising attacks. How do they work? Good question.
All digital asset transactions involve what are called private keys. A hot wallet facilitates all transaction activity using an online device. However, given that the activity is facilitated online, the private keys used in such transactions are in principle susceptible to hacking. Cold wallets prevent this by conducting the signing portion of transactions offline, so that the private keys used experience zero exposure to the online ecosystem.
It is important to note that cold wallets are not 100% impervious to losses. For this reason, companies like ANXONE have developed custody solutions and purchased crime insurance against the unlikely event that a threat is posed to an investor’s cold wallet holdings.
WHAT ARE THE DIFFERENT TYPES OF HOT, COLD WALLETS and Custody Solutions?
Types of hot wallets
Mobile wallets — mobile based, compatible with Android and iOS, convenient and user-friendly.
Web wallets — accessible through common Internet browsers, private keys are stored online, can be hosted on exchanges or not hosted.
Desktop wallets — come in installable software packs, compatible with Mac, Windows, Linux, requires robust computer security controls like antivirus software and firewall protections.
Types of cold wallets
Hardware wallets — safest method for holding digital assets, built to manage private keys, compatible with USB devices.
Custody Solutions:
Typically a cold wallet with physical barriers built around it to prevent physical theft and access, digital seepage and attacks through electromagnetic emissions interference (EMI) and finally process risks when the custodian processes withdrawals.
HOW CAN INVESTORS PROTECT THEIR DIGITAL ASSET WALLETS?
As the token economy has developed, a growing diversity of investors have begun to obtain digital asset exposure. This includes everyone from college graduates and experimental traders to hedge funds and investment banks. Even governments are getting in on the action, most recently with the Ethiopian government collaborating with Atala to develop a digital asset for use in the country.
This means that security, while always important, is now urgently so. Enter the role of custody solutions. ANXONE is a leading firm in the industry, offering insurance for institutional investors to protect their holdings and thus encourage their continued participation in digital asset trading. The benefits of using ANXONE’s custody solutions are three-fold:
1. It protects against crime, covering digital asset losses, damages, destruction, and theft.
2. It gives confidence to traders, knowing their digital assets are stored in secure facilities with externally audited operational and control processes.
3. It is subject to stringent compliance and control policies.
The development of custody solutions is evidence of the token economy’s continued maturation.
START investing with ANXONE
ANXONE is a platform for professional investors. We allow the use of both hot and cold wallets and enable the settling of digital asset withdrawal requests from cold wallet-only fund transfers. We also give professional traders the ability to work exclusively from cold storage and are the first exchange in Asia to offer a suite of insurance products for digital asset wallets. Our custody solutions are built to assure investors they can trade with confidence, knowing their digital assets are secure and protected.
Secure your digital asset wealth today, contact: [custody@anxone.io]
