What is a Wallet? Hot Wallet vs Cold Storage?

A cryptocurrency wallet is a device, physical medium, program, or a service which stores your public and/or private keys and can be used to track ownership, receive, or spend cryptocurrencies. The cryptocurrency itself is not in the wallet. Unlike traditional currency, cryptocurrency is entirely digital and exists on a decentralized ledger share across all blockchain nodes.  

There are different kinds of wallets, but these are generally divided into two categories: Hot wallets and cold storage wallets. Hot wallets are any that are connected to the internet directly, and conversely cold storage wallets are not connected to the internet. Hot wallets include software wallets that are web based, desktop wallets, and mobile wallets while cold storage wallets include hardware wallets and paper wallets. Most wallets work with multiple cryptocurrencies, and are stored in public addresses, or public keys, for each kind of cryptocurrency within the wallet. 

So, you might be wondering, if your cryptocurrency isn’t really in your custody, what do you hold on to that proves the crypto is yours? The answer is the previously mentioned public and private keys from your wallet. A public key identifies your wallet to the broader blockchain world–kind of like a street address that shows other crypto users where they should send funds. Private keys are algorithmically derived from public keys and need to be kept confidential by each user because private keys are your wallet’s digital “signature” that lets it interact and successfully complete transactions within the blockchain network.  

While a crypto wallet is ultimately just a public key that’s paired with a private key, not every wallet works the same way. To help us understand how they are different, let’s take a closer look at the four major categories of cryptocurrency wallets: hardware, desktop, mobile, and online. 

Hardware Wallets

Hardware wallets are physical devices explicitly designed for secure storage of private crypto keys. Hardware wallets separate your private keys from the internet, and they can only be used to transfer crypto when the wallet is plugged into a computer or connected to the internet in some other fashion, often via some combination of a USB device and a related web service.  Using a hardware wallet is slower and more cumbersome than other wallet options; this is because you can only access funds stored on a hardware wallet by physically accessing the device. The pathway the wallet builds between your private keys and the blockchain network protects your keys from internet exposure but also adds more steps–and therefore, adds complexity–to the user experience. But all these drawbacks come with one huge benefit: hardware wallets are generally considered the safest digital crypto storage option out there and are often considered the best choice for long-term crypto storage. 

Desktop Wallets

Desktop wallets are applications crypto users can install on their laptop or desktop computer. The wallets interact with the blockchain network whenever users connect to the internet to initiate transfers. Desktop wallets offer a good balance of security and accessibility–it’s easy to transfer crypto from them, and they store private keys offline. Users who rely on desktop wallets still must be conscious of security, though. It is important to look out for malware and other threats that can pull private keys from offline storage. It is also strongly recommended you enable Two Factor Authentication, or 2FA, to increase your security. You can read more about 2FA on our article linked here.

Mobile Wallets

Mobile wallets work similarly to desktop wallets, however, they’re applications installed on your phone instead of your computer. Mobile wallets let you carry your blockchain wallet around in your pocket, which makes spending your cryptocurrency very easy–after all, almost everyone always carries their phone with them. Just be sure to watch out for physical theft and tampering or malware infection. Just like desktop wallets, it is strongly recommended you enable 2FA. 

Online Wallets

Online wallets, also sometimes referred to as web wallets, store your private keys on a cloud-based server so you can access them anywhere, anytime, as long as you have an internet-connected device. Online wallets are quick and easy to set up, and they’re perfect for anyone who needs to trade crypto from a wide range of devices. Most cryptocurrency exchanges, including Amplify Exchange, require users to deposit crypto in an online wallet controlled by the exchange so that funds can move from owner to owner quickly. The trade-off is security; because online wallets need custody of your private keys to work, any security breaches on the exchanges end automatically put your funds at risk. Lastly, just like any other kind of hot wallet, it is strongly recommended you enable 2FA. 

What Cryptocurrency Wallet should I use? 

Which wallet is right for you? The answer depends on what you plan to do with your crypto. For many people, a combination of wallet types best suits their needs. Due to their high security, hardware wallets are the best choice for large crypto nest eggs you want to protect. Online wallets are very flexible but their also your highest-risk option, and so it would be best to avoid keeping large amounts of crypto in an online wallet for a long time. If hardware and online wallets are the two extremes of cryptocurrency wallets when it comes to accessibility and security, then desktop and mobile wallets are located somewhere in the middle. Both store your keys offline but live on devices that can easily connect to the internet yet contain all the security and accessibility advantages that will make your life easier. Each crypto user will most likely have different needs, but most will benefit from a combination of wallets rather than leaning heavily on one. No matter what your wallet configuration ultimately looks like, you should always implement good security practices. A combination of thoughtful wallet use and good security practices will help cryptocurrency users maximize the benefits of each wallet type. 

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