How to Choose a Crypto Wallet: Hot and Cold Wallets Explained
With over 560 million people now owning cryptocurrency globally, the need for secure storage has never been more critical. Yet, CoinGecko's survey revealed a significant knowledge gap: 80.1% of crypto holders use convenient hot wallets and 70.6% use centralised exchanges (CEXs) for storage, while only 33.5% utilise secure cold wallets. This highlights a crucial trade-off between accessibility and security that every crypto owner must understand.
This article will introduce you to the core differences between hot and cold wallets, their pros and cons, and how to choose the right one to keep your digital assets safe. Let's get started!
What Is a Hot Wallet?
A hot wallet is a software-based crypto wallet that is always connected to the internet. It generates and stores your private keys online, on an internet-connected device or server.
The primary use case of a hot wallet is to provide convenience and speed for frequent transactions. They are ideal for holding smaller amounts of crypto that you might utilise for active trading, making quick transfers, or interacting with decentralised applications (dApps) and decentralised finance (DeFi) protocols like lending and staking. The main types of hot wallets include:
Mobile wallets: Smartphone apps for managing crypto on the go.
Desktop wallets: Software applications installed on a computer, often offering advanced features.
Web wallets: Browser extensions (like MetaMask) that allow seamless interaction with dApps.
Exchange wallets: Custodial wallets provided by exchanges like VALR integrated directly into the trading platform.
While their greatest benefits are convenience, ease of use, and quick access, their biggest downside is a higher vulnerability to online security threats like hacking, malware, and phishing due to their continuous internet connection.
What Is a Cold Wallet?
A cold wallet, also known as cold storage, is a crypto wallet whose core feature is that it generates and stores a user's private keys in a completely offline environment, isolated from the internet. Its key utility is to provide the maximum level of security for your digital assets. This makes it the preferred choice for the long-term storage (HODLing) of large amounts of cryptocurrency.
When you need to make a cold wallet transaction, it is signed offline within the device itself. This process ensures that your private keys are never exposed to an internet-connected computer, protecting them from online threats. The main types of cold wallets are:
Hardware wallets: Physical devices (like USBs or smartcards) designed to securely store private keys offline. Ledger and Trezor are popular examples.
Paper wallets: A piece of paper with the private and public keys printed on it, now considered an outdated and risky method.
The primary benefit of a cold wallet is its superior security against online threats. However, its main downsides are that it is less convenient for frequent transactions and carries the risk of being physically lost or damaged.
Hot vs. Cold Wallets: How Do the Two Wallet Types Compare?
The table below breaks down the key differences between hot and cold wallets:
| Hot Wallet | Cold Wallet | |
|---|---|---|
| Definition | A software-based wallet that is connected to the internet. | A physical device or medium that stores keys offline. |
| Purpose | Frequent trading, spending, and dApp interaction with smaller crypto amounts. | Secure, long-term storage of large amounts of crypto. |
| Private Key Storage | Online, on an internet-connected device or server. | Offline, isolated from any internet connection. |
| Security | More vulnerable to online threats like hacking, malware, and phishing. | Highly secure and (near-)immune to remote online attacks. |
| Convenience | Very convenient, providing fast and easy access to funds. | Less convenient, requiring extra steps to access funds for transactions. |
| Main Types | Mobile, desktop, web, and exchange wallets. | Hardware wallets and paper wallets. |
| Examples | MetaMask, Trust Wallet, VALR | Ledger, Trezor |
How to Choose the Right Crypto Wallet
The right choice between a hot and a cold wallet depends on your individual needs. The decision typically comes down to how much crypto you hold, how often you transact, and your personal risk tolerance.
A hot wallet is the best choice for active day traders, frequent DeFi users, and anyone needing quick access to a smaller, spending balance of crypto.
A cold wallet is the undisputed best choice for long-term HODLers and for securing large amounts of cryptocurrency that are not needed for daily transactions.
For most users, a hybrid strategy offers the best of both worlds. This involves keeping the majority of your crypto savings in a highly secure cold wallet while maintaining a smaller, more accessible amount in a hot wallet for trading and daily use.
How to Keep Your Crypto Wallet Secure
Regardless of which wallet you choose, following security best practices is essential for protecting your funds. Here is a crucial checklist for any crypto owner:
Never share your seed phrase or private keys with anyone, under any circumstances.
Store your backup seed phrase securely offline. Write it down on paper and keep it in a safe, private location. Never store it as a digital file on a computer or in a cloud service.
Use strong, unique passwords for your wallets and enable two-factor authentication (2FA) on all associated accounts, especially exchanges.
Beware of phishing scams. Always double-check website URLs and be suspicious of unsolicited links, emails, or messages asking for your wallet details.
Use a hardware wallet (cold storage) for significant amounts of crypto. This is the gold standard for security.
Keep your wallet software and device operating systems updated to protect against the latest vulnerabilities.
Create a Hot Wallet on VALR
Choosing between a hot and cold wallet is ultimately a trade-off between everyday convenience and long-term security. For most people, using both in a hybrid strategy provides the ideal balance.
VALR is a regulated (FSCA-licensed), user-friendly, and secure cryptocurrency exchange that provides a convenient hot wallet integrated directly into its platform. Supporting over 100 digital assets, it's the ideal platform for users who want to securely send, receive, trade, and earn crypto.
Ready to get started with a secure hot wallet? Create an account on VALR today!
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate. VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.