Every owner of cryptocurrencies needs a wallet, but how to choose the right one(s)? There are so many various types of wallets it’s not always clear what’s the difference between them or easy to decide which one will suit your needs the best. 

cold wallet hot wallet meaning

One thing for sure, there is something for everyone. Despite that, we can easily segment the types of digital currency wallets into two big categories: hot wallets and cold wallets (also called and known as cold storages).

It’s quite easy to distinguish one type from another. In simple words, all wallets that are connected to the internet are considered hot. Likewise, all wallets that are kept offline are cold. 

As such, hot wallets are perfectly convenient for everyday use (e.g., buying goods and services, transferring small amounts of crypto to friends or family, etc.), and comes in the form of easily accessible software. 

Contrary to hot wallets, cold storages are, in most cases, physical hardware devices designed for far more secure, long-term cryptocurrency storing for those that have significant amounts of digital assets that require strong security measures to protect. 

cold storage hot wallet

So, it all boils down to one main difference between the two choices – the level of security.

Types of hot wallets

Although there are numerous wallets that offer different features, all can be segmented into online, mobile and desktop wallets. Online wallets run on cloud servers and can be accessed on any device with a web browser. Mobile wallets are exactly that – apps for your iOS or Android phone, whereas desktop wallets run as applications on a computer. 

online desktop mobile wallet

But, no matter which one you intend to use, all hot wallets one thing in common – to use them, you need to have an internet-connected device, which makes them vulnerable to online theft.

So, if you lose your device or it gets hacked, there is a high probability that your private keys will be gone along with your crypto assets. But, as long as you take precautions, your online identity and cryptocurrencies that you have will surely remain intact. 

However, when it comes to choosing the most suitable hot (software) wallet, there is another crucial aspect to consider: whether the hot wallet is custodial or non-custodial.

Custodial vs Non-Custodial wallets

Some wallet providers do not give you access to your private keys and instead keeps them in their servers. Such wallets are called custodial, meaning they do not give you full control of your funds. As a result, such wallet providers could freeze your assets if some regulatory entity would insist on it. Moreover, if such service provider would suddenly cease to exist or gets hacked, you would most likely lose access to your funds whatsoever. 

what is custodial non custodial

On the other hand, not all crypto users are comfortable keeping the burden of security on their shoulders. So, if remembering passwords is not your strongest suit, custodial wallet providers might be a better choice.  

In such a case, you have access to different tools for recovering access to the funds if something goes south for you, for example, restoring password via email. Moreover, using 3rd party services means that some actions or mistakes could be reversed if needed, which would be impossible with non-custodial wallets. 

Speaking of, non-custodial wallets are the exact opposite – you get full control of your funds as you are the sole owner of your private keys, while the wallets themselves are generally serverless. 

Even though the burden of security lies on your shoulders entirely, it is considered to be a much safer option than trusting custodial wallet providers. When using non-custodial wallets, you can be sure that no 3rd party or government agency can ever tamper with what you have or what you do on the blockchain.  

Cold wallet (storage) options

Finally, we come to the cold storage option. Unlike software wallets, cold wallets usually come in the form of hardware similar to a USB stick. These encrypted and highly secure devices store your private keys entirely offline and have a PIN number as an additional security measure. Simply plug it in your computer, and you’re ready to make a transaction.

cold wallet types benefits

Even if someone managed to steal your cold storage device, it still wouldn’t mean that your funds are lost as the hacker would need to decrypt it and hack your PIN number, which is proven nearly impossible to do. Better known examples of hardware wallets are Trezor and Ledger Nano.

However, cold storage doesn’t necessarily have to be a piece of hardware. In fact, even a plain piece of paper with a handwritten private key can serve as a cold wallet. As long as you keep it in a secure, fire-proof place, it does its job, even though it’s not as convenient as other options. 

Choose wisely!

Picking the right wallet is undoubtedly essential, but if you’re not sure where to start, check out our article where we share our suggestions – you might find all you need right there!

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