What Is A Cold Wallet Vs. Hot Wallet? Why Do You Need Either In Web3?

What Is A Cold Wallet Vs. Hot Wallet? Why Do You Need Either In Web3?

There are a lot of concepts behind blockchain and crypto that can be hard to understand.

But if you have any intentions of breaking into the space, you have to know the fundamentals.

One of the most important concepts is the idea of wallets in the crypto world (and no we don't mean a traditional, physical wallet that holds cash).

Wallets are extremely important because this is where crypto is essentially stored, secured and transferred.

Overall wallets offer protection for crypto investors. A wallet will come with two important pieces of information: a public and private key.

A public key is how you send and receive crypto to your account — like a bank account number. This is also called your “wallet address.”

Your private key, on the other hand, is like your bank password, and it is how you access your account to move around or do other things with your crypto.

With crypto wallets, you'll also receive something that is called a seed phrase.

Your seed phrase is a string of random words generated by your cryptocurrency wallet that give you access to the crypto associated with that wallet gives you access to your wallet and all the private keys in the wallet.

It is basically the master password to all of your crypto.

You should never share your private keys or seed phrase with anyone. Ever.

But without getting too high-level and technical here, we'll simply break down the different types of wallets there are and whether or not you need them in a web3 world.

To start off, you have to understand that there are two types of wallets in the crypto world.

Hot Wallets

A hot wallet is a digital wallet that is connected to the internet and could be more vulnerable to online attacks — which could lead to stolen funds — but it's faster and makes it easier to trade or spend crypto.

Since it is connected to the internet, you can access any hot wallet from your computer or phone.

You can set up different hot wallets through your desktop browser with Metamask, TrustWallet or Phantom, depending on the cryptocurrency you are trying to store.

Most people use hot wallets because of their ease, convenience and they're usually free.

Every crypto exchange (Coinbase, Binance, FTX, etc..) has a hot wallet feature that makes investing and trading crypto seamless.

Hot wallets can make it much easier to transfer crypto to different exchanges and through different protocols so you can trade more, or cash out your holdings, and they are more secure than keeping your coins in your exchange account.

Cold Wallets

On the other hand, you have cold wallets which are otherwise known as a hardware wallet or cold storage. These are physical devices that keep your cryptocurrency completely offline. Most of them simply look like USB drives.

Cold wallets are less susceptible to attacks and vulnerabilities, but you can also risk losing your holdings.

There is no backup to this form of storage; if you misplace your wallet, you lose access to your investments. Obviously, this requires more responsibility, but you have more control.

Cold wallets also can cost up to $200 which you can get from companies such as Trezor or Ledger (though there are definitely cheaper options).

While a cold wallet makes hacking much more difficult, it’s still a possibility.

Do You Need a Wallet At All?

Most crypto exchanges let you buy cryptocurrency right after signing up, and it’s held in a wallet on the exchange — meaning using an additional wallet is not particularly required.

If you’re constantly worried about your holdings being stolen or exposed to fraud, and more security would give you peace of mind for your long-term crypto holdings, then a hot or cold wallet might help you feel more secure.

At the end of the day, it is all personal preference.

The best thing you can do is educate yourself on every option that's out there and do what feels right to you.

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ARLAN HAMILTON
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ARLAN HAMILTON
CEO & FOUNDER
ARLAN HAMILTON
CEO & FOUNDER
ARLAN HAMILTON
CEO & FOUNDER
ARLAN HAMILTON
CEO & FOUNDER
ARLAN HAMILTON
CEO & FOUNDER
ARLAN HAMILTON
CEO & FOUNDER
ARLAN HAMILTON
CEO & FOUNDER
ARLAN HAMILTON
CEO & FOUNDER
ARLAN HAMILTON
CEO & FOUNDER