One of the biggest concerns of anyone with crypto assets is its safe and secure storage. Since the past decade, the number of security breaches of crypto storage and exchange platforms has greatly increased, with $3.8 Billion in digital assets stolen in the year 2022 alone. As the possession and value of cryptocurrency becomes more mainstream, attempted attacks will only continue to grow, as there will be more and more people with malicious intent. 

The two primary methods of crypto storage are hot wallets and cold wallets. Both have their respective advantages and disadvantages, and it will take some research to understand which works best for you.

To help you out in identifying which crypto storage method is ideal for your needs, we have developed a comprehensive buying guide. In this guide, we will discuss both hot wallets and cold wallets in detail, including their distinctive differences, benefits, risks, and recommendations. Read on to find out more.

Why Do We Need Crypto Wallets and How Do They Work?

Traditional currency stored in large commercial banks or offshore accounts can be at risk of hacking, fraud, or data breaches. Cryptocurrency, on the other hand, is not centralized in nature, which means it is not answerable to any government entity or organization. It exists on the blockchain and cannot be accessed in a physically tangible way like Dollar notes. 

However, as with any prized possession, there must be a means of safe and secure storage that protects it from any external threats. This is where crypto wallets come in, providing a guarded means to manage cryptocurrency. With crypto, the user has the highest form of authority, giving it sole control of its assets. This level of ownership is reflected in the way crypto wallets work as well. 

Unlike physical wallets which can store physical bills along with credit cards, crypto wallets do not hold cryptocurrency in the form of coins or cash. Instead, they keep the private keys of a user safe. A private key can be thought of as the password to a bank account, something that is extremely confidential and links to a user’s assets. The corresponding public key is on the blockchain, and both are required to make a transaction or validate a balance.

What Are Hot Wallets?

A hot wallet is an online crypto wallet that is connected to the internet. It is one of the most popular crypto wallet choices among digital asset owners due to their convenience and ease of use. Hot wallets can be accessed from all devices with an internet connection, including mobile phones, laptops, and desktops. Various features offered by hot wallets include the storage, sending, and receiving of crypto coins. 

With hot wallets, trading and making subsequent purchases is an easy process, as they are always online. This is why many users often opt to keep a certain percentage of their crypto assets in a hot wallet to allow for quick transactions. 

What are Cold Wallets?

The one major distinction that sets cold wallets apart from hot wallets is that the former is not connected to the internet. Also known as cold storage, a cold wallet can be compared to offline storage devices like thumb drives or hard disks. Their offline nature entails private key generation in a more secure manner, which minimizes risk of interception. As cold wallets are not always online, the contents stored in it are safe from live attacks like phishing, malware, and hacking. 

Common types of cold wallets include hardware wallets, paper wallets, and air-gapped devices. Hardware wallets are similar to flash drives which can be connected to devices. Paper wallets are physical documents that have private keys printed in some way. Lastly, air-gapped devices are external devices that never go live at all.

Benefits and Risks

As is evident with any piece of modern technology, both hot and cold wallets have their share of benefits and risks. The following section will guide you through the pros and cons of using hot wallets and cold wallets.

Hot Wallets

Benefits:

• Instant Transactions: The internet-based design of hot wallets means that transactions can be processed instantaneously. This saves both time and effort and is especially convenient for users who trade regularly.
• Compatibility and integration: Hot wallets are integrated with many popular crypto exchange platforms and are compatible with all devices that have an internet connection. This allows for greater access and ease of use.
• Low prices: Most hot wallets are free to use, with some only charging a small percentage of interest on the amount stored. 
• Multi-currency support: Most hot wallets support multiple cryptocurrencies, allowing users to manage all of their assets, regardless of their type.

Risks:

• Vulnerable to attacks: As hot wallets are perpetually online, they are at a greater risk of being subject to vulnerabilities like external malware and hacking attacks. Once a hacker gains access to the wallet’s information, they can easily access all of their digital assets, regardless of the platform where it has been acquired. 
• Legal restrictions: Not all hot wallets are accessible worldwide, with certain countries having legal measures in place that prevent their use. 
• Holding large amounts: It is not good practice to keep large amounts of cryptocurrency in hot wallets, mainly due to their high vulnerability of external penetration. This can be inconvenient to users who must then resort to keeping their assets in secondary locations.

Cold Wallets

Benefits:

• Highly secure: Unlike hot wallets which are always connected to the internet, cold wallets have the benefit of being completely offline in nature. This makes penetration of online threats like hacking, keyloggers, and other malware impossible. 
• Backup and Recovery: Cold wallets have certain backup and recovery options in place for safe recovery of assets in cases where the wallet is stolen or lost.
• Long term storage: Cold wallets are great for keeping funds stored away for longer periods of time. They do not accrue any interest, nor are they vulnerable to online threats, and can be tucked away indefinitely by users.
• Portable: Cold wallets often come in the form of thumb drives or other hardware. These devices are compact and portable, which can be convenient.

Risks:

• Can be misplaced easily: As cold wallets are typically either small portable devices or pieces of paper, they can be easily lost or misplaced. This is in contrast with hot wallets, which can be accessed on any device with an internet connection. Cold wallets store the most private of information related to a person’s digital assets and can result in great loss if fallen into the wrong hands. 
• High prices: Cold wallets can be quite expensive, with prices ranging between $50 to thousands of dollars. This is an additional expense compared to hot wallets which are software-based and free to use. 
• Low transaction speeds: To transfer funds from a cold wallet to a hot wallet, a user must first sign the transaction offline and then transfer its data onto an online device. This results in a longer transaction time than hot wallets which process funds instantly.

Final Thoughts

Both hot wallets and cold wallets offer a variety of advantages to their users, making them the top choice for crypto enthusiast who want to keep their assets safe. Which one is better for you solely depends on your priorities. If you are a beginner with very minimal total assets who trades frequently online, then keeping a hot wallet is the better option. However, if you are a seasoned trader with a large amount of digital currency, then it is safer to keep most of it in cold wallets offline. 

But ideally there is a third option that is combination of both hot wallets and cold wallets to enjoy both convenience and security.

This third option, often referred to as a "distributed wallet," brings together the best of both worlds, blending the accessibility of hot wallets with the security of cold wallets. It’s designed for those who seek both convenience and safety in managing their crypto assets.

Distributed wallets operate on a unique model. They store a part of your assets in a hot wallet for everyday transactions and quick access, and the remaining in a cold wallet setup for long-term, secure storage. This hybrid approach addresses the limitations of solely using hot or cold wallets. With distributed wallets, users don't have to sacrifice security for convenience or vice versa.

For instance, you can keep a portion of your funds in the hot wallet for regular trading and purchases, ensuring quick and easy transactions. The bulk of your assets, particularly those you don’t need immediate access to, can be safely tucked away in the cold storage component of the distributed wallet. This approach significantly reduces the risk of large-scale asset theft, as the most substantial portion of your assets remains offline and out of reach from online threats.

Additionally, the distributed wallet system often incorporates advanced security measures like multi-signature authentication and biometric verification, which provide an extra layer of protection for both the hot and cold storage components. This dual-layered security mechanism ensures that even if one component is compromised, the other remains secure, safeguarding your assets.

Ultimately, choosing between hot, cold, or distributed wallets depends on your individual needs and how you interact with your cryptocurrency. However, the emergence of distributed wallets presents an innovative solution for those who desire a balanced approach to security and accessibility. By understanding the unique advantages of this system, users can effectively manage their digital assets with confidence, enjoying the benefits of both hot and cold wallets in a single, integrated solution.

Frequently Asked Questions

Are cold wallets more expensive than hot wallets?

Yes, cold wallets typically cost more to use than hot wallets. This is because with the former, users often purchase a physical device that is not connected to the internet to store their crypto data. These devices can be flash drives, air-gapped laptops, or other solid-state hardware. Depending on the make, quality, and specs, such a device can cost upwards of thousands of dollars. Hot wallets, on the other hand function on the internet, and the only cost is a minimal interest charged by certain platforms. 

Can I use both a hot wallet and a cold wallet?

There is no harm in using both hot and cold wallets for your personal storage. In fact, many crypto users recommend using a combination of both, with cold wallets containing the majority of your assets and hot wallets storing a small amount for quick transactions. 

What is Gridlock Wallet?

Gridlock Wallet is a non-custodial crypto wallet that combines both the convenience of hot wallets and the safety of cold wallets to deliver a product that is the best of both worlds. With Gridlock, users have sole custody of their assets, and do not need to worry about getting hacked or their data being compromised. 

The innovative design of Gridlock Wallet sets it apart in the world of cryptocurrency storage. It's engineered to offer a seamless user experience, blending the easy access of hot wallets with the robust security typical of cold wallets. This integrated approach means that users can manage their digital currencies more efficiently, without having to choose between quick access and high security.

Gridlock Wallet's unique architecture ensures that users maintain complete control over their assets. This level of control is crucial in the crypto space where security concerns are paramount. With Gridlock, the risk of external threats, such as hacking or data breaches, is significantly reduced. The wallet employs state-of-the-art encryption and security protocols to safeguard your assets, mirroring the security you'd expect from a high-grade bank vault, but with the added convenience of instant access.

Another standout feature of Gridlock Wallet is its user-friendly interface, which makes it accessible to both beginners and experienced crypto enthusiasts. It simplifies the often complex world of crypto transactions, making it easier to send, receive, and manage digital assets. Moreover, Gridlock's design is built with the future in mind, offering scalability and adaptability to evolving crypto technologies and trends. This forward-thinking approach ensures that users are not just getting a wallet for today’s needs, but a versatile tool that will remain relevant and effective in the rapidly evolving crypto landscape.

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Written by Reid Zedkongor

Reid Zedkongor is peeling away layers of confusion around blockchain and cybersecurity. With a computer engineering background, he can dive into the details of crypto complexities to make crypto adoption easy for everyone. In his free time, he often reads fiction or enjoys a good laugh over a beer.