A crypto wallet is designed to manage and store your digital assets. Unlike physical wallets, crypto wallets do not, in fact, hold any coins or tokens. Instead, they store your private keys, which are derived from your seed phrase, allowing you to access and manage your crypto assets. If you lose access to your wallet and cannot recover it, your crypto assets will still exist on the blockchain, but you will not be able to access them.
Crypto wallets are generally grouped into two types: hot wallets and cold wallets. Each has advantages and disadvantages, so you may need to use both for different purposes. But what is their difference, and how should you use them the most efficiently?
A hot wallet is a cryptocurrency wallet that stays connected to the Internet and a network. Due to its easy-to-use design and straightforward setup, such a wallet is the preferred choice for the everyday use of cryptocurrencies.
There are two sides to the constant Internet connection when it comes to hot wallets. On one hand, they are more vulnerable to hacker attacks due to being constantly online. On the other hand, the Internet connection eliminates wasting time switching on and transferring assets between offline storage and an app, allowing for greater speed and convenience.
Hot wallets can be categorized as web-based, mobile, or desktop. The first two types are software you download on your device (smartphone, tablet, or computer). They are usually non-custodial, which means you have complete control over your crypto assets, as only you can access your private keys. A web wallet is a wallet that a user creates online or gets by creating an account on an exchange. Web wallets can be non-custodial, where users control their private keys, or custodial, meaning the service manages the keys on behalf of the user.
The best way to utilize hot wallets is to use them for handling transactions but avoid storing large amounts of crypto assets on them full-time.
Cold wallets are generally considered more secure than hot wallets but are often less user-friendly. Since cold wallets have infrequent internet connections, hackers have fewer opportunities to steal your assets. First, they would need to steal your cold wallet or find a way to access it offline and then obtain your passwords or PINs, which is highly unlikely. Cold wallets come in various forms, such as hardware, paper, secondary offline computers, and even physical coins.
One of the most popular types of cold wallets is the hardware wallet, which looks similar to a USB stick. A hardware wallet is a physical device that stores your private keys in an isolated and secure environment, preventing them from being constantly exposed to the Internet. Note that different hardware wallets allow you to store a different number of assets, enabling you to interact with various blockchain networks.
With a hardware wallet, your private keys remain secure even when connecting the device to a computer or, in some models, via Bluetooth, as the keys never leave the device during transactions. It is possible because transaction signing happens on the hardware wallet, which broadcasts the signed transaction to the network via your computer. This ensures your private keys remain secure on the device, reducing the risk of unauthorized access during connections.
As stated earlier, using hardware wallets can be less convenient as it entails more time to sign in and transfer your assets to hot wallets to use elsewhere. Additionally, hardware wallets often require charging and can be relatively expensive, whereas many hot wallets are available for free.
A paper wallet is a cold wallet that is becoming less common nowadays. As the name suggests, it is a piece of paper with your private keys and a public wallet address printed on it. However, paper wallets have many disadvantages, such as the risk of loss, theft, and water damage.
If you decide to use a paper wallet, using a trusted wallet generator is crucial to avoid security breaches since hackers have already created a modified version of wallet generators that can steal your private keys. Moreover, when printing your newly generated keys, you must ensure that your printer is not connected to any public network to protect your keys from being stolen. Lastly, encrypting your keys with an additional BIP38 password is a good idea, too.
Due to significant security risks, paper wallets are largely obsolete and not recommended for storing cryptocurrencies. Still, they can be useful in certain situations, such as gifting.
Some users opt to enhance the security of their crypto funds by using multiple cold wallets, designating one that remains offline for long-term storage and another that occasionally connects to a hot wallet for transactions. This method does have a few disadvantages, though, such as the need to remember two sets of key phrases and the increased time required to transfer your assets from the coldest wallet to a DEX or other platform where you may need to use them.
Before investing in cryptocurrency, consider different storage options and choose those that suit you best. While hardware wallets are generally more secure than online wallets, they still cannot completely protect you from scams or hacks if you are not cautious. Therefore, being careful and mindful of possible consequences should be your priority.
