Blog Crypto Hot Wallet vs Cold Wallet: Where Should You Store Your Crypto?

Hot Wallet vs Cold Wallet: Where Should You Store Your Crypto?

date May 10, 2022 time 5 min read 355 views

The hot wallet vs cold wallet debate is crucial to finding the right place to keep your cryptocurrency holdings. Your choice will likely come down to whether you place more value on convenience or security, but it’s not exactly an easy choice to make. Fortunately, we’re here to help you make the right decision.

If you’re going to invest in crypto, it’s a given that you want to keep it as safe as possible—and that probably means transferring it from an exchange to a dedicated wallet. But not all wallets are made equal. Should you opt for a hot wallet vs cold wallet?

Ultimately, the answer to this question comes down to a tradeoff between accessibility and security. You shouldn’t discount either of these two factors completely, but it’s almost impossible for a wallet to excel in both. Keep reading to find out which is which when it comes to hot and cold wallets (along with some pointers to help you choose).

Introducing hot wallet vs cold wallet

Before we dive into comparing a cold wallet vs hot wallet, you need to understand how to identify the best crypto wallets by knowing which features to look for. 

Crypto wallets are a must, but they vary in security and other features.
Crypto wallets are a must, but they vary in security and other features. (Source: Pixabay)

Or maybe you’re not even sure what a crypto wallet is. The crypto community tends to talk about wallets as though you’re actually storing your crypto on them directly, because it’s easier to conceptualize. But really, your crypto is stored on its respective blockchain—for instance, your ETH is found on the Ethereum blockchain. Not your wallet. Instead, your wallet stores your private key, which you need to access your crypto on the blockchain.

Can’t you just store your crypto in an exchange, you might wonder? While this might be a convenient option if you’re frequently trading or don’t want the complications of transferring your funds out, an exchange isn’t the most secure place to keep your money. For one, keeping your holdings there means the exchange retains ownership of your private key and not you, so they could technically take them away from you (even if it’s unlikely). Also, hackers see exchanges like Coinbase and Binance as more profitable targets than an individual’s wallet.

So, separate wallets are a must for storing your crypto. Here’s what you should be looking out for.

Compatibility 

A physical wallet can store Japanese yen, US dollars, or even Monopoly money—but things are a little more complex when it comes to crypto wallets. Different wallets are programmed to accept different cryptocurrencies, so do your research to ensure you don’t end up disappointed. 

Costs

In some cases, you might have to spend money on a crypto wallet upfront. Others might claim to be free, but charge fees for transferring your crypto in and out. Also, some wallets may offer an option to trade crypto within the wallet, but this is also likely to involve fees.

Make sure you know what you’re signing up for.

Security

We’ve already mentioned security a couple of times, and we’re going to mention it more later on. That’s because if you’re going to transfer your funds from an exchange to a wallet, you want to be sure that it’s actually got the security kudos to be worth the bother.

Few things are more important than security when it comes to your crypto wallet.
Few things are more important than security when it comes to your crypto wallet. (Source: Pixabay)

To help you figure this out, it’s worth looking at whether there have been any past hacks or security breaches of a wallet provider, whether the platform uses two-step encryption to look after funds, and if it stores funds online or offline.

Accessibility 

How easy is it to get into your wallet? Do you just have to enter the right login details from any device anywhere in the world, or do you need a physical drive to be able to access anything? These are key questions.

Unfortunately, accessibility and security tend to be opposing forces, as we’ll see below.

Hot wallet vs cold wallet

So now we get to the ultimate dilemma: Should you choose a hot wallet vs cold wallet? Let’s define the two to help you decide.

Hot wallets

A hot wallet is the type you come across the most often. Anything that you can access online—whether through the web, your mobile, or downloadable software—is classed as a hot wallet. You might also hear them referred to as offline wallets, soft wallets, or software wallets. MetaMask is a market leader here, but there are many, many others.

The biggest perk of using a hot wallet is that it’s quick and easy to open one and access your crypto. All you’ll have to do is enter your login details, and voila—you have everything you need in front of you. This is ideal for someone who wants to trade their crypto while keeping the money in a more secure place than it would be on an exchange. 

Also, as long as you don’t lose your login details, you know that you’ll always be able to access your funds, avoiding that gut-wrenching moment where you realize you misplaced the physical device that’s holding all your crypto.

However, this is exactly what makes hot wallets less secure. If you go down this route and want to store a huge amount of crypto, it’s best to split the balance across a few different wallets.

Cold wallets

Unlike the hot wallet, a cold wallet stores your private keys offline in a physical device, such as a hard drive or a USB. You’ll also need a PIN or password. This makes it practically impossible for a hacker to get your funds without breaking into the place where it’s stored. Ledger is an example of one of these secure crypto wallets.

Cold wallets are some of the most secure around since they keep your crypto in a physical device.
Cold wallets are some of the most secure around since they keep your crypto in a physical device. (Source: Pixabay)

Because you need to buy a cold wallet, it will also cost more upfront. But arguably, a couple of hundred bucks is nothing compared to the cost of losing your investment. 

As mentioned already, accessibility and security are generally opposing forces. It’s not hard to see why—an ultra-secure door with multiple complex locks isn’t going to be the one that allows you to get into your house most easily. So, the lack of accessibility isn’t necessarily a huge drawback as long as you’re careful and organized.  

Cold wallets are a great choice for those who want to HODL their crypto. Just make sure you don’t do a Jason Howells by accidentally throwing away hundreds of millions of dollars worth of dollars.

Hot wallet vs cold wallet: Which will it be?

So, hot or cold—which will it be? The verdict is that hot wallets are a great option for those who are new to crypto or trading frequently. However, if you have a large amount of crypto with a high value and want to keep it as safe as possible, you should probably opt for a cold wallet.

It doesn’t have to be a binary choice though —why not split your holdings between the two types?

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