After buying cryptocurrency, deciding how and where to store your assets is a very important step. Unlike physical currencies, cryptocurrencies run on blockchains and therefore require digital storage systems called wallets. Like cash wallets, crypto wallets allow you to hold and transfer funds. The similarities end there. Crypto wallets consist of public and private keys, which are strings of characters that allow holders to receive and transfer their crypto assets.
Crypto wallets have two types of storage options, depending on preference: "hot" storage and "cold" storage. Hot storage is an application or platform connected to the internet, while cold storage is stored offline, usually via a physical device such as a thumb drive. While both hot and cold storage systems allow individuals to access their digital funds, they differ in user experience and level of security.
Which option is right for you is a matter of personal choice. The correct answer is probably a combination of these two options, depending on what you want to do with your cryptocurrency in the long and short term.
Hot vs. Cold Storage: Pros and Cons
Hot storage refers to an application or platform that connects to the internet and allows you to manage your cryptocurrency assets. Many of these services are free and available on a computer or mobile device. Some examples of hot wallets include the following software:
MetaMask: A popular browser plugin that acts as a wallet for Ether (ETH) and other ERC-20 tokens
Exodus: Desktop and mobile software that connects to the Exodus decentralized exchange and supports 150+ cryptocurrencies
Mycelium: A full-fledged, Bitcoin-centric mobile app with native transaction options
Several cryptocurrency exchanges, including Coinbase (COIN), Gemini, and Binance, also offer wallets for seamlessly buying, trading, and selling cryptocurrencies on their platforms.
Advantages of hot storage:
User Friendly: Because they are always connected to the internet, these platforms allow you to easily store and access your cryptocurrencies from anywhere.
Fees: Most hot wallets are free to use.
Convenience: If you use a hot wallet linked to a specific exchange, it is convenient to interact within that ecosystem.
Hot storage disadvantages:
Security: While hot wallets are generally secure, they are connected to the internet, making them more vulnerable to hacking.
Accessibility: Because they require a connection to the internet, certain wallet features may be restricted in certain countries or jurisdictions, depending on local laws.
Cold storage, on the other hand, keeps users' private keys offline, thus adding an extra layer of security against potential hacking. While a hardware wallet is not an absolute requirement for moving your cryptocurrencies into cold storage, most people will opt for a hardware solution such as:
Ledger: A USB-like device that allows users to buy, exchange and stake over 1,000 cryptocurrencies
Trezor: A small plug-in device, compatible with over 1,000 cryptocurrencies, available on PC and mobile
Cold storage allows users full control over their private keys and assets, but is also more expensive.
Advantages of cold storage:
Portability: Cold storage solutions are typically small, plug-in devices that can be carried anywhere in the world and easily used to log into decentralized applications.
Security: Your private key never leaves the device, and transactions are signed locally, greatly reducing the risk of your device being attacked by a cyber attack.
Autonomy: Cold storage allows you to be the sole custodian of your crypto assets, eliminating third-party applications from your storage experience.
Cold storage disadvantages:
Price: Hardware wallets cost between $79 and $255, more expensive than online options.
Transfers: Transfers between cold storage devices are slightly more cumbersome than hot storage wallets.
Layout: Some people may experience a learning curve in how to use the small screen on a hardware device.
Hot vs. Cold: Which Is Safest?
While there have been several notable hacks associated with hot storage wallets, security measures are constantly improving. In September 2020, a security breach at Singapore-based exchange KuCoin resulted in the destruction of approximately $281 million worth of crypto assets, though most of the funds were later recovered. In July 2019, Japanese cryptocurrency exchange Bitpoint lost approximately $32 million in user funds due to a hack.
User data on the cold storage system Ledger was compromised in July 2020, but no user funds were stolen.
Ultimately, there are several factors to consider when deciding whether to use a cold or hot wallet. Many people use a combination of hot and cold storage options to create a secure and seamless trading experience. Most exchanges, including Coinbase, keep user funds in a variety of cold storage options, which Coinbase refers to as the "gold standard" of encryption Monetary asset security. “Generally, experts recommend storing large amounts of cryptocurrencies or crypto assets that users do not need to access frequently in cold storage.