Wallet Series #2
All of the five wallet types can be broken down into two main categories; hot storage and cold storage. Learning what the difference is and how it can impact your security is important to know when going into obtaining a wallet and securing your funds.
A hot storage location is most commonly used in the form of online wallets, mobile wallets, and sometimes desktop wallets. When I describe the differences of hot and cold storage I always refer to ice. Imagine you have a cup filled with ice and a straw. When you are in a hot storage location, your ice melts and you can drink it through the straw. Hot storage can be considered your liquid assets.
Hot storage is always connected to the internet. It is less secure in that regards because when there is always a connection to the internet, there is always someone trying to hack into that server and gain access. Most of the hot storage you will commonly use such as exchanges and online wallets will have a lot of security features to protect your coins, but just keep in mind they could be hacked into at any point.
A good thought process is to always limit the amount of funds you have in hot storage locations. You don’t want to have larger amounts of coins on anything that is constantly connected to the internet just for security purposes. I cannot recommend an amount that you should be comfortable leaving on hot storage locations, because everyone has various definitions of the term “large” when it comes to monetary values. Just know that your funds are susceptible to hacking and be mindful of that when you are using them.
Cold storage examples would be hardware wallets, paper wallets, and sometimes desktop wallets. Since desktop wallets can be used online or offline, they can be considered both cold and hot depending on your usage. Like the example I gave above with hot storage using ice. Imagine the same scenario, you have a cup filled with ice, and a straw. Since you are in cold storage, your ice isn’t melting very fast and you can’t drink the water. Cold storage is the more secure option for storage.
The real difference between cold and hot storage is the susceptibility that occurs with the connection of the internet. Cold storage is not connected to the internet and therefore is more secure than cold storage. You will want to hold your larger amounts of coins in cold storage. This will ensure the security of your coins.
hot storage can be viewed as your checking account, it is liquid and can be used daily with ease. It is not as secure, but it has more flexibility in its use. Cold storage is less liquid and can be viewed as a savings account or money market account. The funds are there, they are more secure, but they are also not as liquid and you will need to do a few extra steps to use them. It is best to have a combination of both hot and cold wallets to be most efficient. You will want to keep the bulk of your crypto investment in cold storage, and your daily spending/trading money in your hot wallets.
Always remember to store your keys appropriately to ensure that your cold or hot storage locations remain as secure as possible. If you are unclear on what this means, read our article about your keys and how to store them properly.