Security is paramount in the crypto world because you are dealing with digital money, so you need to approach it with the same care as high-value physical items. Besides learning where to buy Ethereum or any other digital asset, figuring out the best way to store your funds is another important aspect of your crypto journey.
Using a crypto wallet is a great way to do so, representing an excellent tool for crypto newbies and experienced investors. Simply put, a crypto wallet is a program or device that holds your crypto keys, enabling you to access and manage your assets. There are two types of self-custody options, namely cold wallets and hot wallets, both providing their own pros and cons, which you must understand to choose the option that works best for you. In what follows, we will discuss how cold and hot wallets work and examine their advantages and disadvantages.
Cold Wallets
Cold wallets can be accessed without an Internet connection, making them less vulnerable to cybersecurity issues. This feature has made cold wallets a truly popular option after the collapse of FTX – a major crypto exchange that went bankrupt in November 2022 after an alleged cyber-attack that left users’ funds gone. They take the form of hardware devices, such as a USB stick, that can be bought at a price range of $50 to $200. Through their nature, they provide an additional layer of security, as the keys are stored offline. Different types of cold wallets are available, including:
- Hardware Wallet. This type of wallet is an offline device utilized to store public and private keys. It can be a smart card or a USB, which enables you to access your crypto.
- Paper Wallet. This is a physical document with private and public keys written on it and a QR code that facilitates crypto transactions. However, this type of wallet has a considerable downside: if the document gets damaged, it is no longer useful.
- Deep Cold Storage. This type of wallet is designed for users who want to go out of their way to safeguard their crypto funds. It involves methods like burying your private keys under the ground or breaking them into several parts and putting them in different vault services.
Pros and Cons of Cold Wallets
Cold Wallets
Pros
- They provide increased security by storing private keys offline in several locations; They encourage long-term crypto investing, which is more lucrative;
- They reduce the risk of physical theft of users’ funds;
- They are immune to security problems and don’t require software upgrades.
Cons
- They aren’t very convenient, requiring users to go through multiple steps before they can sign a transaction;
- They aren’t free, as users must pay around $50-$300 to get a decent cold wallet;
- They can be complicated to use and can be lost easily.
Hot Wallets
Hot wallets differ from cold wallets because they are always connected to the Internet, and they come in various types and are used for different purposes. For instance, depending on users’ needs, some can be utilized as web-only wallets, ecosystem-specific wallets, mobile apps, and so on.
Pros
- They offer increased convenience because they can be accessed on desktop or mobile;
- They can be set up easily;
- They provide a simple way to access Web3 opportunities such as gaming apps, NFTs and DeFi;
- They offer an intuitive user experience, like a dApp browser, portfolio tracker, NFT display, and so on;
- They enable investors to store multiple digital assets, unlike hardware wallets which only support a limited number of cryptos;
- They are suitable for crypto payments and trading.
Cons
- They are more susceptible to cyber threats;
- They can lead to significant losses if users install apps from unofficial sources or download malicious software.
So, which type of wallet should you choose?
Each crypto investor’s journey is unique, so choosing a wallet largely depends on your own needs. For example, if you make crypto transactions regularly, opting for a hot wallet is better. On the other hand, a cold wallet is more suitable for those who make fewer transactions.
As highlighted previously in the article, there are some notable differences between hot wallets and cold wallets. If you prioritize safety, you’ll likely want to use a cold wallet to ensure your crypto funds aren’t vulnerable to online threats. In terms of pricing, cold wallets are associated with considerable costs compared to hot wallets, which can be used freely on app stores for both iOS and Android users. Not only can hot wallets be set up quickly, but they also provide a better user experience than a cold storage solution.
When it comes to convenience, hot wallets definitely win because they are mobile and come in the form of tablets, smartphones, and PCs, making them ideal for users who want to interface with smart contracts or send payments frequently.
Hot wallets also offer functionalities for innovations like DeFi and NFTs, including a dapp browser, gaming hubs and NFT display. On the contrary, cold storage options do not provide such use cases and offer users fewer interactive opportunities.
If you have difficulty choosing between the two types of wallets, the good news is that you can use both! In fact, this is the best approach to take: you can store a fraction of the cryptos you rarely use in a cold wallet and put the other tokens in a hot wallet. This isn’t only a great way to increase the security of your digital assets, but it also provides you with more flexibility.
The bottom line
Before deciding which crypto wallet to choose, it is recommended to conduct comprehensive research to ensure you understand how they both work. This will allow you to make an informed decision, ensuring you will have a positive experience when storing and trading cryptocurrencies.
Protecting your crypto funds is of great importance, so it only makes sense to prioritize it and take the time to weigh your options carefully and make the best decision for you.
