Types of Hot and Cold Wallets


Bitcoin or Cryptocurrency Hot Wallet

As mentioned in the article What is a cryptocurrency wallet? A hot wallet is simply a Cryptocurrency wallet that runs in a computer or electronic device that is connected to the internet. In other words, it’s an online wallet. This type of wallet can also run on a live website that holds your private keys.

In the following paragraph the different types of hot wallets are discussed in detail.

Desktop wallet or Software Wallet

A desktop wallet is a software program designed to run on a computer. It connects to the blockchain through the computer’s internet connection.

Whether the wallet is hot or cold, is dependent upon whether the computer itself is online or offline. Given the resources available to desktop computers and the usually large displays at hand, the feature set of desktop wallets are typically very robust.

Desktop wallets such as Exodus, Electrum and Etherwall, although very robust if they are connected to the internet there is a possibility that spyware, malware or hackers can gain access to your private keys and steal your funds.

Another threat is ransomware which could lock the computer and you could lose all your private keys. There are advantages and disadvantages to desktop wallets.

One advantage is the ease of use and the fast access available to send or receive funds. Another advantage is that a cryptocurrency software wallet such as Exodus can be used to hold as many as 93 different cryptocurrencies which makes it very versatile and practical.

On the other hand, one disadvantage is the possibility to lose your private keys due to failure of hardware such as hard drive. Of course, most desktop wallets provide the user with recovery phrases also called seeds to be able to recuperate the wallet in case of hardware failure, but it’s not worth the risk if you are planning to store a large amount of cryptocurrencies such as Bitcoin, Etherium, Litecoin or any other altcoin.

In case you don’t know what “Wallet Recovery Phrases” or “Seed Words” are, let me take a minute to explain.

When setting up most software wallets for storing cryptocurrencies or Bitcoin, if the software is any good and well designed, one of the first steps after filling basic information, is to write down a list of words that gives you the option to recover your whole wallet in case you lose the computer, or the hard drive fails.

To do this you must reinstall the wallet’s software in another computer and when prompted you must enter each word or phrase in the exact order as they were given to you previously by the system. T

hese seed words are then used by an algorithm that repopulates the database of the public and private keys for all your stored coins. The software then connects to the blockchain of each crypto coin and checks to see what the balance for each address is.

Web-based wallet

A Web-based cryptocurrency wallet is a type of hot wallet that is always connected to the internet and can be accessible through the Web. In a web-based wallet, private keys are stored in the servers of the exchange and the user does not have the private keys.

With the always-on nature of the Web, this type of wallet is always online so that it is easily accessible. This makes it less than ideal in terms of security. Ease of use is one of the hallmarks of a web-based wallet.

In the crypto world is very important to keep in mind that if you don’t hold your private keys, you don’t have power over your funds. That is a lesson many people have had to learn the hard way.

Back in 2014 an exchange named Mt. Gox lost approximately 850.000 Bitcoin that were stolen from their wallets. Many users lost all their funds and the reason was because they entrusted their private keys to an exchange.

Web-based wallets are ok to use only if you are exchanging between cryptocurrencies, let’s say for example, you have bitcoin but would like to exchange it for some Ethereum or Litecoin. You would send your Bitcoin to an exchange such as Bitrex, Binance or Coinbase. After you exchange it unless you are riding the markets to buy low and sell high to profit from the price difference, my recommendation would be to immediately send it back to your cold storage. More on cold Storage is explained Here.

Mobile Wallet

A mobile wallet is one which runs on a smartphone, tablet or any mobile device. Since mobile devices are designed to be online on a continuous basis, these wallets are typically considered hot wallets.

They are very easy to use, and mobile wallets are great if you make transactions on a regular basis. With the limitations of mobile phones in their size and resources, the interfaces on mobile wallets are typically simpler than those featured on Desktop- or Web-based wallets.

Since they can be used anywhere, they fit many use cases, such as using cryptocurrency to buy goods at a retail stores where cryptos are accepted. As mentioned previously, it is ok to use a mobile cryptocurrency wallet with a small amount of coins, due to the risk of hackers, theft of your phone, etc.

Bitcoin or Crypto Cold Wallet

Also mentioned in the article What is a cryptocurrency wallet? A cold wallet is a wallet that is offline, in other words the computer or device that runs the wallet’s software is not connected to the internet.

In the following paragraph the different types of cold wallets are discussed in detail.

Offline Computer

One way to keep your private keys secure is to use an encrypted computer like a laptop as cold wallet. This computer should never connect to the internet. It must be offline always, not even to perform updates to the operating system. In some extreme cases people take out the wireless network card so that it cannot connect to the internet, not even by mistake.

If you decide to go this route, remember to have an encrypted backup of the hard drive in case the one installed failed. Using this way to store your crypto keys is not the most practical way but is one option. In the beginning of crypto many people used this method as cold storage to store their Bitcoins.

Paper wallet

A paper wallet is the simplest and most primitive way to store crypto. This involves printing a QR code representing your public and private keys. In some cases, the keys can be represented by words that are written down on a piece of paper.

This is the most inconvenient type of cryptocurrency wallet, but it is arguably one of the most secure. This wallet is only online in those instances when you provide the information on the paper to validate your keys.

Many people use paper wallets to store cryptocurrencies for a long period of time as cold storage. This idea is valid as far as the paper wallet is kept safe from prying eyes, damage from water, fire etc. Remember that if the private key is lost there is no possible way to recuperate the funds and they will be lost forever.

There are steps that can be taken into consideration that would greatly increase the security of your paper wallet when preparing them.

For example, by using Linux Ubuntu operating system Live USB you can run the paper wallet generator completely off-line in a computer and by connecting a printer you can create and print as many paper wallets as you would like being assured that your private keys are indeed private.

Hardware Wallet

A hardware wallet is a dedicated piece of hardware designed to hold private and public keys of Bitcoin and cryptocurrencies. This is the newest and most secure way to store cryptocurrencies by having the right balance between security and convenience.

A hardware wallet consists of two parts. The first part is the actual hardware that makes up the device which contains integrated circuits that are instructed to run an algorithm that generates and stores private and public keys that never live the device. The second part is the software or app that is installed in the computer to be able to communicate and provide a user interface so that transactions can be performed easily and securely.

Hardware wallets can be brought online or offline relatively easy which provides the versatility of having the convenience of a hot software wallet with the security of cold offline storage wallets. They are connected to the computer using a standard USB connection.

Hardware wallets are generally compatible with many different Web interfaces. They also typically feature support for multiple different cryptocurrencies. Hardware wallets are immune to computer viruses that sometimes cause software wallets to be compromised. Please click the following post if you would like to learn more about How Hardware Wallets Work.

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