Hot Wallet

An online wallet for storing cryptocurrencies, known to be less secure compared to cold wallets.

If you’ve been using Bitcoin for a while, chances are you’ve used a hot wallet.

The term “hot wallet” refers to an online wallet that enables you to store, receive, and send money and tokens while online. Cryptocurrency wallets are available in a variety of shapes and sizes because they just need an internet connection to conduct transactions, unlike traditional currencies that need banks or physical wallets.

A hot wallet and a cold wallet differ primarily in terms of their internet connectivity. Whereas cold wallets cut off internet access, hot wallets do not.

Understanding the benefits and drawbacks of having your coins connected to or removed from the internet is crucial if you use Bitcoin. Because each approach has advantages of its own, many bitcoin owners have both hot and cold wallets.

The significant advantage of using a hot wallet is that you can easily use your crypto for purchases, payments, and regular transactions.

However, hot wallets are more susceptible to security risks and potential hacking compared to cold wallets. This doesn’t mean that hot wallets are inherently unsafe, but their internet accessibility makes them slightly more vulnerable. In contrast, a cold wallet is completely isolated from the internet, similar to keeping a valuable gold brick in a home vault.

Both hot and cold wallets store the essential elements of a cryptocurrency wallet, namely the public and private keys that ensure secure transactions.

In a hot wallet, these keys and any funds are exposed to potential attacks since they are stored on an internet-accessible device.

To protect your funds from theft, it is advisable to keep only a small portion of your holdings in a hot wallet and store the rest in a cold wallet. If you plan to spend a specific amount in the near future, it can be kept in your hot wallet.

For reference, hot wallets typically come in various forms such as USB sticks, exchanges, or wallets on your phone, all of which connect to the internet. On the other hand, a cold wallet can be as simple as a piece of paper containing your public and private keys.