What are Hot Wallets, Cold Wallets and Hardware Wallets? (Explain Like I’m 5)
…continued from: Which crypto should I buy? How do you spot a crypto scam? (Explain Like I’m 5)
I heard the other day that some crypto wallets are hot and some are cold. What does that mean, Cryptoman?
I told you what a wallet was some time ago, Rookieboy. Usually, it’s a piece of software that holds your crypto, by virtue of its public and private key. Technically, a cold wallet is one that holds your crypto but is not connected to the Internet.
So, if I disconnect my PC from the Internet, then the wallet I have on it goes cold?
Well technically you could say that, but it is better to think of cold wallets as being on a thumb drive, or even being printed on paper—you know, something that is rarely or never connected to the Internet.
What is a paper wallet?
Well, you remember that when you set up your crypto wallet so you could move your one Ether out of CoinBase?
How could I forget? It was wierd.
The wallet provided you with a list of twelve words, like: bark, green, sour, weight, manner, smell, watch, reason, form, attend, plan, words.
Those weren’t the words. I remember that the list began with “hollow.”
Did you memorize the whole list?
No.
What did you do with it?
I typed it into my password program on my PC.
You are not supposed to do that in case someone has put malware onto your PC.
They haven’t.
How do you know?
Because I did that months ago and if they were going to steal crypto from my wallet they would have done it by now. It’s still there. I checked it yesterday.
You do know that’s really bad practice?
Stop lecturing me, Cryptoman, and tell me about paper wallets.
A paper wallet is just like a software wallet except you print the public and private key onto paper.
It looks like this:
See. It has a private key and a public key printed on it. It also shows the public and private key as two-dimensional bar codes.
How can I get one?
Google paper wallet, or better, since you’d want an ether paper wallet, Google: My Ether Wallet + paper wallet.
Why isn’t the private key made up of twelve goofy words?
It’s called a “twelve word seed,” RookieBoy, and it can be used to generate the long private key shown on the image.
What happens if I lose my public key?
You can generate it from the private key, but if you lose your private key you’ve lost your crypto.
Why doesn’t the paper wallet just have the twelve goofy words on it?
It’s more convenient the way it is. The two dimensional bar codes can be read by machine and you can type the keys directly. But you are right, the 12 words are a paper wallet of a kind.
What happens if I send one Ether to that paper ether wallet?
It would go into the wallet.
Without me needing any software to receive the Ether?
I’ve explained this before, RookieBoy. The crypto is stored immutably on the blockchain under the public key. You only need the private key to send crypto, not to receive it.
Do you have any paper wallets, Cryptoman?
No, but I have a hardware wallet.
What’s that?
It’s a cold wallet, like a paper wallet or a thumb drive, but it is very secure. You plug it into a PC or Mac, just like a thumb drive, and it connects directly to the blockchain in such a way that even if your PC is infected with all the malware known to man, it cannot hack into the connection.
How can I get one?
There are several different kinds. The mains ones are the Trezor and the Ledger. You get them by mail order from the website, but they can be pricey. Check the prices before you buy.
So what is a hot wallet then?
Technically the difference is that hot wallets are connected to the internet while cold wallets are not. If you have a hot wallet it is far more vulnerable to being hacked. This does happen as I keep telling you. Hackers put malware on PCs, called key-loggers, that record the keystrokes you make. If they capture the password for your wallet, they can use it to transfer money from it.
Isn’t it exchanges that get hacked most?
They are not hacked often, but when they are, the amounts involved are can be huge. In the famous Mt. Gox hack about $450 million was stolen and the Bitcoin price collapsed. In 2016 Bitfinex was hacked and $77 million went missing.
So who loses the money?
The people using the exchange lose their coins.
But aren’t those coins kept in your personal wallet on the exchange?
They could be, but on most exchanges they are not, they are kept in a common wallet that you do not own. That’s how a hacker can steal so much so quickly. They steal it from a common wallet.
Are any exchanges safe?
Nothing is certain except death, taxes and overused clichés.
I have some coins on one exchange. Should I keep them there?
The risk is greatest on an exchange, less so in your own hot wallet and completely safe in a cold wallet. The sensible thing to do is keep crypto on exchanges only when you want to trade it. Otherwise, it is best kept on a hardware wallet. However, there is some crypto that isn’t supported on any of the hardware wallets. For that you can have a paper wallet, but you have to use a hot wallet, when you want to use it.
Are there any other kinds of wallet?
Yes, leather wallets. They work great for fiat.
Robin Bloor Ph D. is the Technology Evangelist for Permission.io, author of The “Common Sense” of Crypto Currency, cofounder of The Bloor Group and webmaster of TheDataRightsofMan.com.
