KEYTAKEAWAYS
- Cold wallets offer the highest security as they are not connected to the internet but require physical access to the device.
- Hot wallets are more convenient and accessible from anywhere with the internet, but are more vulnerable to hacking.
- When choosing a wallet, consider personal security needs and convenience of use.
CONTENT
A crypto wallet is a digital tool for storing and managing cryptocurrencies. There are two types: cold wallets and hot wallets, each with unique features and benefits.
WHAT IS A CRYPTO WALLET?
Just as we store cash in a physical wallet, cryptocurrencies like Bitcoin also need to be stored in a cryptocurrency wallet.
Cryptocurrency wallets available on the market can be categorized into hot wallets, which are stored online, and cold wallets, which are stored on physical hardware.
A cryptocurrency wallet is a digital wallet used to store, send, and receive cryptocurrencies. Without a wallet, you cannot receive virtual currencies. This concept is somewhat similar to the relationship between a bank account and cash.
The actual operation of a cryptocurrency wallet is achieved by recording a public key and a private key:
1. Public Key: Represents the wallet address, similar to an account number for virtual currencies. It can receive specific types of virtual currencies (e.g., receiving Bitcoin requires a Bitcoin address). The wallet can view the balance associated with the address, and as the owner of the address, you can move funds on the blockchain.
2. Private Key: A randomly generated piece of cryptographic data, similar to a password. It is used to prove ownership and control over virtual funds. When making a payment, the private key must be used to prove that you are the holder of the virtual funds to complete the transaction. The private key must never be disclosed to anyone.
However, most wallets do not have the capability to buy or sell cryptocurrencies (they only have the storage function). Therefore, to buy or sell cryptocurrencies, you still need to use a cryptocurrency exchange.
>>> More to read : Top 3 Crypto Wallets in 2024 and Why Should You Pick Them
WHAT IS A COLD WALLET?
A cold wallet is considered one of the safest ways to store cryptocurrencies. This is because a cold wallet is not connected to the internet. It stores private keys offline in a physical manner and only authorizes transactions when needed, reducing the risk of hackers stealing the private keys. Cold wallets are also known as offline wallets or hardware wallets.
A cold wallet is like a transaction certificate or key; it must be inserted into a physical device (usually a USB drive) to access the wallet for transactions. Besides having a physical drive, cold wallets typically have corresponding software to allow users to view their asset status without exposing the private keys to danger.
Due to its more complex operation, cold wallets are mainly used by long-term HODLers or users who prioritize asset security. However, it’s important to note that if your mnemonic phrase is leaked or if you authorize a malicious contract, the wallet’s assets could still be lost, so operational security remains crucial.
- Disadvantages of Cold Wallets
1. Lower Convenience: Setting up and using a cold wallet is relatively complex. Each time you use it, you need to connect to another device and spend some extra time, making it inconvenient for frequent traders.
2. Hardware Costs: Cold wallets commonly cost between $100 to $200, which is higher than free hot wallets. Additionally, you must ensure that the cold wallet provider is trustworthy. Buying second-hand or tampered products can risk exposure of the private keys.
WHAT IS A HOT WALLET?
A hot wallet is a cryptocurrency wallet that operates on devices connected to the internet, such as computers and smartphones. For example, you can use your mobile phone as a medium; simply download an app to start trading virtual currencies.
The main features of a hot wallet are its convenience and ease of access. Since all operations are conducted online, there’s no need to go through the hassle of connecting a cold wallet device to the internet for every transaction. Due to its high usability, hot wallets are popular among general investors.
Hot wallets allow users to quickly view or use their held cryptocurrencies. However, since hot wallets generate private keys on internet-connected devices, they are relatively less secure.
- Disadvantages of Hot Wallets
Security Risks: Hot wallets generate wallet addresses and private keys while connected to the internet. This exposure means that the private keys are constantly at risk of being targeted by hackers and phishing attacks.
COLD WALLET VS HOT WALLET
The two types of wallets have different uses based on the user’s purpose. For frequent trading and short-term investments, it is recommended to keep assets in hot wallets for easy access. However, for long-term holding (2-5 years or longer) and long-term investments, it is advisable to store assets in cold wallets.
Cold wallets and hot wallets each have their unique features and advantages. Cold wallets are the most secure way to store cryptocurrencies, but they are less convenient than hot wallets. Hot wallets are more convenient but are also more susceptible to hacking and cyber attacks. When choosing a crypto wallet, it is crucial to consider personal needs and preferences.
>>> More to read : TOP 5 Crypto Trading Platforms April 2024
FAQ
- What is a cold wallet?
A cold wallet is a type of cryptocurrency wallet that is not connected to the internet. This type of wallet is also known as an offline wallet.
- What is a hot wallet?
A hot wallet is a wallet that operates on devices connected to the internet, such as computers and smartphones.
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