What is a hot wallet? Great question. I’ve bet you’ve heard the words hot wallet and cold wallet and paper wallet and online wallet and hardware wallet all tossed around in the cryptocurrency industry. But which one is which?
And in particular, what is a hot wallet compared to the rest? Then, among the hot wallets, which wallet is safer? Faster? More secure? More user-friendly? Less hackable? I’ll explore all of that in today’s post.
In a previous post, I describe what a cryptocurrency wallet is in general. If you don’t have time to peruse my previous post, I’ll quickly summarize here: a wallet is a device/program that stores the private key component of your cryptocurrency. It grants you access to send cryptocurrency to anyone, anywhere in the world.
So then, What is a Hot Wallet?
Your private keys are needed in order to send cryptocurrency anywhere. Wallets keep your private keys secure and… private.
Cold wallets store your private keys in a secure offline environment (cold wallet = offline).
Hot wallets store your private keys in an online environment (hot wallet = online).
Therefore, a hot wallet is simply a program/user-interface on a device that is connected to the Internet that allows you to (relatively) safely store your cryptocurrency private keys on a device/software. It is connected online, which is its main advantage and disadvantage simultaneously.
You might be wondering why anyone would want to store their private keys online. Doesn’t that make them more susceptible to being hacked?
Technically yes. The more secure way to store your cryptocurrency would be on a cold/offline wallet. However, there are several key advantages to keeping your cryptocurrency private keys on a hot wallet.
Types of Cryptocurrency Hot Wallets:
There are many categories with their respective subcategories. Additionally, crypto hot wallets can exist in three main formats: desktop, mobile and online.
Desktop wallets – as you guessed, these hot wallets exist on desktop/laptop formats. Usually, these involve greater functional ability/interface. Security with desktop formats is a big risk because a desktop/laptop has a large attack surface for computer viruses that can hack your crypto in 2 dozen different ways. Security is important with Desktop hot wallets.
Mobile wallets – work through a mobile app on your phone. Easy access because most people have their smartphones with them all the time. Moreover, they are functionally more useful since we already are used to apps such as Apple Pay, Android Pay or Google Pay, making us familiar with mobile payments. You typically need access to your phone to use. Security is highly dependent on your mobile phone security and your own personal security behaviours (i.e. protecting your phone, strong passwords etc). Mobile wallets can be both custodial and non-custodial.
Online wallets – these are web-based wallets and their main advantage is that they can be accessed from anywhere in the world. However, typically these are custodial wallets meaning that your private keys are being held by another entity, which is placing trust in a third party. Until we have trusted custodial services that are regulated, this can be risky.
- Custodial – where another service custody’s (holds) your private keys.
- Online exchanges
- … many more
- Software applications/services
- Green Address
- Online exchanges
- Non-Custodial – where you custody (hold) your own private keys.
- Hot wallet apps
- Atomic Wallet (desktop, mobile)
- Copay (desktop, mobile; Bitcoin only)
- Jaxx (desktop, mobile)
- Exodus (desktop)
- Trezor One (a cold hardware wallet with integrated partitioning of a hot wallet on its app)
- Mycelium (mobile)
- Electrum (desktop, mobile)
- Hot wallet apps
Advantages of Using a Cryptocurrency Hot Wallet
There are several benefits to using a cryptocurrency hot wallet, most of which are attributed to its online connection.
- Safely maintain access to your cryptocurrency anywhere you go.
- Able to complete transactions wherever you are with an internet connection.
- Access through multiple devices (with some wallets)
While only two points, they are very significant in their advantage. The entire purpose origin of cryptocurrency was to be an alternate use and easy use of online value exchange to transact outside of government control.
If your cryptocurrency is all locked up in a cold hardware wallet that is stored in a metal safe, with the pin or passphrase in another metal safe in a different location, it can be quite cumbersome to access. And those barriers are intentional and an excellent way to safeguard your digital cryptocurrency assets.
Many of the above listed non-custodial wallets (you own your private keys) are compatible with certain hardware cold wallets for added security, and ease of transfer from cold wallet to hot wallet and back.
Disadvantages of Crypto Hot Wallets
The biggest and most obvious disadvantage to cryptocurrency hot wallets is that you are storing your cryptocurrency in an online environment which greatly increases the risk of theft/hacking.
Massive amounts of cryptocurrency have been hacked over the past couple of years and despite security improvements, the hacking will increase as the value of these cryptocurrencies increases.
That is pretty much the online big disadvantage to hot wallets. To be honest, if they were highly secure then they would be more reliable than cold wallets, since you are not solely depending on yourself to store your cryptocurrency private keys. However, they are not nearly as secure as cold hardware wallets, and so you must be weary.
Why Use a Crypto Hot Wallet?
Great question. There are only two truly satisfactory answers to that.
- To use your cryptocurrency.
- If you wish to actually purchase goods and services with $BTC, $ETH, $XRP, $BNB, $LTC, etc then having access to your private keys on a hot wallet is essential. Ideally a mobile wallet for convenience and maximal usage. This would be excellent adoption.
- Further, you may want to receive cryptocurrency as payment for goods/services. Technically a cold wallet would serve just as well for this, however, sometimes having a hot wallet is more convenient if you are actively engaged in business and requires access to those funds in a short while.
- To trade cryptocurrency. If you are an active trader of cryptocurrency then an online hot wallet is likely ideal for quick access to buy and sell based on the market fluctuations.
Markshire Crypto’s Conclusion – What is a Hot Wallet
Hot wallets store the private keys of your cryptocurrency in an online environment. This may be a web server, your mobile phone or your desktop/laptop computer. In all situations, your cryptocurrency is more easily accessible and simultaneously at higher risk of being stolen by hackers.
The two main components of the security of your crypto on hot wallets are: (i) your personal security habits (i.e. passwords, social security, behaviours, amount of crypto on your hot wallet) and (ii) the security behind the software of your hot wallet.
Therefore, you should only use highly reputable hot wallets that have been around and used widespread for at least a year.
I would only ever keep a small percentage or small absolute values of crypto on a hot wallet at any given time. For example 0.1 BTC (~$380 USD) or 2 ETH (~$270 USD).
While hot wallets sound excessively risky, they are the means for mainstream adoption. The world will conduct the vast majority of cryptocurrency transactions through hot wallets.
I believe that the security of hot wallets will only improve as the months and years go by.
I am pro-hot-wallets with responsible usage. You must be careful to only store small amounts of cryptocurrency on your hot wallets for use if you need.
Please feel free to drop a comment, question, or note for me. I love hearing from my readers