If you are into cryptocurrency trading, you know that you need a place to store your cryptocurrency. Just like you use your wallet to keep cash, you use a digital wallet to keep your digital money. Even in cryptocurrency wallets, there is a lot of variety.
Broadly though, they are divided into two categories- hot and cold wallets. Cold wallet refers to offline storage where the cryptocurrency is stored offline, mostly in a physical hardware device, away from the internet. Such wallets are a secure form of storage but they can be cumbersome to use while trading.
Hot wallets, on the other hand, are online wallets. They remain connected to the internet 24/7. As such, it is very easy to transfer crypto from a hot wallet. Therefore, these wallets are preferred more by people while trading rather than cold wallets which have to be manually connected to a device with the internet.
MetaMask, Trust Wallet, Coinbase Wallet, and Binance Wallet are some examples of popular hot wallets.
What is a Hot Wallet?
Simply put, a hot wallet is a cryptocurrency wallet that is ‘online’ or connected to the internet. These are software wallets that are used for storing cryptocurrency and NFTs and facilitate transactions among crypto traders. They are available in the form of mobile or desktop apps and browser extensions.
In a hot wallet, both the public and private keys are kept online. This is in contrast to cold wallets which keep the private key offline. Hot wallets are, therefore, fast and convenient when it comes to facilitating crypto transactions. On the downside, being completely online also makes them more vulnerable to cyber-attacks.
How do Hot Wallets work?
You need a wallet to facilitate transactions whenever you buy, trade or mine cryptocurrency. Two concepts to remember here are- public keys and private keys. Public keys are similar to your public user name on a social media site. They tell the address or destination where the crypto coins would be sent.
Private keys, on the other hand, are the keys with which you can access your cryptocurrency. In this sense, they are akin to an e-mail or social media account password. Only the owner of the account knows this password. Just like that, the private keys are known only to the owner of the wallet.
It is the public key that you share with the payer when you have to receive funds. In a hot wallet, both public and private keys are kept online. Therefore, when a transaction is initiated, it is the public key that tells the final destination of the coins being transferred. Then it is digitally signed with the help of the private keys after which the transaction is completed.
All this takes place online and there is no separate device that needs to be connected to a computer as is the case with cold wallets. Hot wallets are, therefore, quite convenient for frequent crypto transfers.
Types of Hot Wallets
While you may think hot wallets are all the same, that’s not actually true. Hot wallets can be of several types. There are wallets that are designed to hold some specific cryptocurrencies only or work with certain specific chains. These days, a lot of cryptocurrency exchanges have started offering in-built wallets on their platforms.
Generally, though, hot wallets are divided into three categories- desktop wallets, web wallets, and mobile wallets.
Desktop Wallets
Desktop wallets are available in the form of downloadable applications or installable software packages. When you use a desktop wallet, the control of the private key remains with you. If you want, you can also set an additional password for accessing the key. In this case, you are responsible for the safety of your wallet from viruses and malware.
Web Wallets
Web wallets are a type of hot wallet that can be accessed via a web browser. You don’t need to download or install them on your computer. These wallets are the best when it comes to the ease of trading. You can send or receive cryptocurrency instantly with a web wallet.
However, because they are constantly online, web wallets are the most vulnerable to hacking attempts and DDoS attacks. Also, depending on the wallet, some may need to have control over your keys while others don’t have this requirement.
Mobile Wallets
Mobile wallets are similar to desktop wallets. They are simply mobile apps that you have to install on your phone. These wallets are pretty convenient as you can conduct transactions anytime anywhere with them. Mobile wallets often make use of QR codes for transactions.
They face the same security risks that desktop wallets face and hence, it is important to encrypt and password-protect your mobile wallet.
Hot Wallets and Crypto Protection
The mere fact that hot wallets are constantly connected to the internet makes them susceptible to cyber-attacks. In a way, their biggest merit is also their biggest vulnerability. While they are awfully convenient to use, it is also easier for a hacker to gain unauthorized access while the transaction is in process.
While most major hot wallet brands and companies do take the requisite security measures, the possibility of message interception and online spoofing is always there because ultimately, everything is stored on online servers.
It is, therefore, not a good idea to keep all your crypto assets, or even the majority of them, in a hot wallet. Think of it like this. You keep only a limited amount of cash in your wallet while the rest stays in your bank account. Similarly, what most people do is keep a minimal amount required to conduct trades in their hot wallet. The majority of the cryptocurrency is stored in cold wallets which are mostly physical devices not connected to the internet. In other words, hot wallets are for short-term trades while cold wallets are for long-term holdings.
Hot Wallet Frequently Asked Questions(FAQs)
What are examples of Hot Wallets?
MetaMask, Trust Wallet, Binance Wallet, and Edge Wallet are some major examples of hot wallets. They offer several good features and are available on multiple devices such as mobile phones and web browsers.
Is Coinbase a Hot Wallet?
Yes, Coinbase wallet is a hot wallet. It is a self-custody wallet to store your cryptocurrencies and NFTs. You can access it both from a mobile phone and a web browser.
What is the cost of a Hot Wallet?
Unlike cold wallets which can cost anything between $50-$200, most hot wallets are free. You just need to download them from their website or the app store. Additionally, some hot wallets may also pay some interest on the crypto stored with them.
The Bottom Line
Hot wallets are software cryptocurrency wallets that keep everything online. These wallets promote ease of use and are particularly useful when you are trading online and need to make quick transfers. On the flip side, hot wallets are notorious for being particularly vulnerable to cyber-attacks.
It is, therefore, a good idea to not keep all your assets in a hot wallet. Store only a little amount in a hot wallet and the majority of your crypto assets should be in offline storage. Also, remember to properly research and select a wallet that has a good reputation, offers maximum security, and is compatible with your needs.
