Hot Wallet vs. Cold Wallet: How to Protect Your Crypto Money

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There are many things that distinguish crypto investing from investing in other assets. One of those differences — in fact, one of the most important differences — is that crypto investors have to decide how to store their assets once they have purchased them. Although crypto is not a tangible asset, it does exist in cyberspace. Investors need to keep these assets safe or they risk “misplacing” them – or worse, losing them to a hack. Basically, the crypto wallet you choose can determine how safe your assets are.

In recent months, choosing the right crypto wallet has also become more important than ever. On the one hand, there is the huge increase in hacks and scams putting assets at risk; by CertiK, over $2 billion worth of crypto assets have been stolen so far this year. That’s more than the total stolen in 2021 – and there are still about five months left in 2022. Users have lost a lot of money by choosing a wallet that’s not secure enough to deal with this growing wave of crime.

A more recent development that also makes storage important is the freezing of withdrawals on various DeFi platforms. The bear market is hurting crypto investors, that’s for sure. But it’s also decimating exchanges, crypto lenders, and other platforms that rely on a healthy market. As the crypto winter sets in, some of these platforms have halted all withdrawals to preserve liquidity. While this outrages investors who want to withdraw their assets at will, there’s really nothing they can do until withdrawals resume. Allowing a DeFi platform to retain custody of your assets ultimately means you don’t have full control over your assets.

The two main storage options for crypto investors looking to retain custody of their assets are hot or cold crypto wallets. Both of these perform the same central function: keeping your assets in one place. However, they offer different levels of security and different responsibilities for the user. In order to protect your crypto, it’s best to learn these differences – and choose the right option for you.

Hot Wallets: the pros and cons

The first type of crypto wallet, the hot wallet, is the more popular of the two. This is largely due to its convenience. Unlike cold wallets, hot wallets are fully online. Most often, they exist as apps or browser extensions. This is their main advantage: they are extremely easy to use. Moving assets back and forth is both simple and much faster than cold wallets, since transactions take place entirely online.

However, this is also a major drawback of the hot wallet. These online keys are no more secure than a traditional password; anyone with the tools and means to access the keys can do so. There have been huge instances of theft from hot wallets; in May, a person using a Binance (BNB-USD) hot wallet was stolen from 7000 Bitcoin (BTC-USD) when a hacker got their keys.

Of course, many crypto exchanges and other DeFi platforms offer their own hot wallets. Yet, as said before, the downside of these wallets is that the user does not have real control over their own assets. If a given platform were to stop withdrawals, users of that platform’s wallet would not be able to move their assets at all.

Cold wallets: the pros and cons

Cold wallets are a much safer option for storing crypto. This is because users store their private keys offline. Users store their keys physically, whether on a hard drive, in a laptop or elsewhere. The only way for a thief to access these keys is to obtain the physical copy.

Privacy is perhaps the biggest advantage of cold storage, but the downside is the biggest downside. When an investor wants to move crypto in and out of a cold wallet, they must sign for those transactions offline and then send it online to the network. It is a longer and tedious process.

Since the cold wallet keys are stored physically, it is also very possible to lose access to your assets. This leads to painful stories, like the man who accidentally threw a hard drive containing his keys into a wallet containing thousands of BTC.

InvestorPlace Ashley Cassell reports that cold storage is becoming a much more attractive option in the wake of cyber insecurity and distrust of DeFi platforms. Hardware wallets like Trezor make using cold wallet even easier, with safeguards to mitigate issues like a misplaced key. Some of these options even allow users to stake crypto, a feature previously reserved for online wallets.

Which crypto wallet is best for you?

Choosing the best crypto wallet for your assets really comes down to your trading needs and behaviors. Some users may only need one type, others the second type, and some even both.

Given their entirely online existence, hot wallets have a convenience factor that may outweigh any security flaws. Arbitrage investors looking for gains by buying and selling might opt ​​for a hot portfolio. Indeed, the constant movement of crypto online and offline can be arduous. Doing it constantly may not be worth it.

However, those who buy and hold for the long term might opt ​​for the cold wallet. If the user does nothing with their assets other than holding them and waiting for them to rise in value, there is no reason to use a risky hot wallet. Cold wallets keep these assets infinitely safer. And it’s not complicated to use one if you only move the crypto once in a while.

Think of hot wallets as a real wallet and cold wallets as a safe. Hot wallets are perfect when you are constantly spending and buying currencies – always in your pocket. But cold wallets are much safer, although much more inconvenient.

As of the date of publication, Brenden Rearick has not held (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.