Cryptocurrencies are not physically stored in a specific location like traditional money. Instead, they exist as records on a decentralized and distributed digital ledger called the blockchain. The blockchain is a public and transparent database that contains a complete history of all cryptocurrency transactions ever made.
When someone owns cryptocurrency, what they essentially possess is a private key associated with a specific address on the blockchain. This private key is a unique, secure, and randomly generated alphanumeric code. The private key serves as proof of ownership and allows the user to access and manage their cryptocurrency funds.
If you’re just getting into the world of crypto, there’s a good chance you’ve heard about cryptocurrency wallets: these wallets are where you store your private and public keys. There are many different offerings from many different companies, but what’s the best wallet for you? Let’s go over the two main types of cryptocurrency wallets: Hot Wallets and Cold Wallets.
Wallet Basics: How Does a Wallet Work?
Every cryptocurrency wallet has 2 parts: a public key and a private key.
A public key is a randomly generated string of numbers and letters that acts as an address for receiving cryptocurrency. The public key is used to receive cryptocurrency transactions. When someone wants to send cryptocurrency to your wallet, they use your public key (which is your wallet address) to specify the destination of the funds. It is safe to share the public key with others, as it does not allow anyone to access or control the funds in the wallet. Instead, it acts as a reference to the destination where cryptocurrency can be sent. It is also commonly expressed as a QR code. Unlike the private key, the public key is intended to be shared with others.
A private key is also randomly generated, but should be kept secret, since it grants access to your cryptocurrency holdings. It is essentially the digital equivalent of a personal password or PIN. The private key is used to sign transactions and prove ownership of the cryptocurrency stored in a wallet. Only the holder of the private key can access and control the funds associated with it. It is crucial to keep the private key secure and confidential, as anyone who gains access to it gains full control over the wallet and its funds. Losing or compromising the private key can lead to permanent loss of access to the associated cryptocurrency.
Hot Wallets
Wallets that are on desktops, mobile devices, and websites are typically hot wallets. The RockItCoin Mobile App, is a hot wallet, for example. Since hot wallets are always connected to the internet, it is super easy to use them to send, receive, buy, and sell crypto. Due to this constant online accessibility, they offer a high level of convenience and ease of use when it comes to managing cryptocurrency transactions.
Here’s how the internet connectivity of hot wallets facilitates seamless operations for sending, receiving, buying, and selling cryptocurrencies:
- Instant Access
With hot wallets, users can access their cryptocurrency funds instantly from any internet-connected device. This means they can make transactions at any time and from anywhere with ease, making hot wallets ideal for everyday use and frequent trading activities.
- User-Friendly Interfaces
Hot wallets often come with user-friendly interfaces and mobile apps that simplify the process of sending, receiving, buying, and selling cryptocurrencies. This accessibility encourages wider adoption and usage of cryptocurrencies among the general public.
- Real-Time Transactions
Being connected to the internet allows hot wallets to process transactions in real-time. When users initiate a transaction, it is immediately broadcast to the network, and recipients can receive the funds quickly, often within seconds, depending on the network’s confirmation time.
- Easy Exchanges
Hot wallets are well-suited for use on cryptocurrency exchanges. Traders can quickly deposit funds from their hot wallets to an exchange platform to start trading or withdraw profits back to the hot wallet after selling their cryptocurrencies.
- Mobile Wallets
Many hot wallets offer mobile applications, allowing users to manage their cryptocurrencies directly from their smartphones or tablets. This mobility provides unparalleled convenience for on-the-go transactions and management of crypto assets.
- Seamless Integration with DApps
Hot wallets can easily integrate with various decentralized applications (DApps). Users can interact with DApps directly from their hot wallets to participate in decentralized finance (DeFi) protocols, games, or other blockchain-based applications.
- Faster Updates
Hot wallets receive updates and improvements in real-time, ensuring users have access to the latest security features, bug fixes, and advancements in the cryptocurrency space.
Cons of Hot Wallets
One con to hot wallets is the possibility of being hacked. Being constantly connected to the internet presents some vulnerabilities to system-wide hacks and potentially lost funds. A recent example is $8 million lost in Solana in an exploit of the Slope mobile wallet. While most users likely won’t experience a large-scale hack, it’s always something to think about in the tech-heavy world of crypto.
Cold Wallets
Cold Wallets (referred to sometimes as cold storage) are typically specialized devices that you have to connect to a computer in order for any activity to occur. Popular examples of cold wallets include Ledger and Trezor. Paper wallets are also a form of cold storage, since the crypto is accessed only through the keys on the paper.
Cold wallets are viewed as the most secure way to store your crypto, as they are offline and thus require physical access to the device in order to access the cryptocurrency.
Security Benefits of Cold Wallets
The primary reason why cold wallets are considered the most secure way to store crypto is their offline nature. Since cold wallets are not connected to the internet, they are isolated from online threats and cyberattacks that hot wallets, which are always connected, may be susceptible to. This offline status means that anyone seeking access to the cryptocurrency stored in a cold wallet must physically interact with the device.
One crucial security feature of many cold wallets is the implementation of an “air gap” approach. With this method, the wallet’s private keys are stored on devices that have never been connected to the internet. By keeping the private keys completely isolated from online networks, the attack risks are significantly reduced, making it exceptionally challenging for hackers to gain unauthorized access to the wallet.
Your cold wallets’ lack of interaction with the internet shields your crypto from phishing attempts and fake websites that trick individuals into revealing their private keys. Since cold wallets do not communicate with the internet, users are less exposed to such malicious schemes that can compromise the security of hot wallets.
Another advantage of cold wallets is their immunity to computer viruses and malware. These malicious programs can infect hot wallets, leading to the theft of private keys and the loss of funds. However, since cold wallets are not connected to the internet, they remain unaffected by such digital threats.
You should know that cold wallets are highly secure due to their offline nature, “air gap” approach, protection against phishing attempts and fake websites, and immunity to computer viruses and malware. These features make cold wallets an ideal choice for individuals seeking maximum security for their cryptocurrency holdings. However, users must exercise caution in physically safeguarding their cold wallet devices and backup tools to ensure the highest level of protection.
Recovering Funds
If a crypto user loses their cold wallet, it can lead to the permanent loss of access to the cryptocurrencies stored in it. Losing a cold wallet can be a distressing situation, and the implications depend on the specific circumstances and precautions taken by the user. If the user did not create a backup of their cold wallet’s private keys or recovery tools, losing the physical wallet means they won’t be able to retrieve the private keys required to access their cryptocurrencies. In such cases, the funds stored in the lost wallet become inaccessible, and there is no way to recover them.
If the cold wallet is lost or stolen, there is a risk that someone else may find or take possession of it. If the wallet’s private keys are not securely encrypted or protected, the finder or thief could potentially access the funds and transfer them to their own wallet. Always create multiple backups of the cold wallet’s private keys or recovery seed and store them securely in separate physical locations. Use a secure location and keep the cold wallet in a safe and secure location to minimize the risk of loss or theft. If the cold wallet supports encryption or password protection, enable these security features to safeguard the private keys from unauthorized access.So, What’s the Best Type of Wallet?
In the end, it is up to the user to choose whether to use a hot or cold wallet. Many investors use a combination of both – securely storing the majority of their funds on a cold wallet, and moving it to a hot wallet to pay or sell and vice versa. Learn more about the RockItCoin mobile wallet and paper wallets on our FAQ page!
