Hot wallets are better for convenience, while cold wallets excel in terms of security. You can use a hot wallet if you’re making frequent transactions with smaller amounts of cryptocurrency. Meanwhile, if you are looking to store a larger amount of crypto over a longer period of time, a cold wallet is strongly recommended.
What is a cold wallet?
A cold wallet is a cryptocurrency wallet on a device that is not connected to the internet. The main purpose of a cold wallet is to keep private keys away from internet-connected devices.
Hardware cryptocurrency wallets are the most typical example of a cold wallet. However, cold wallets can have many different forms. For example, even a regular piece of paper with a seed phrase or private keys written on it can be considered a cold wallet.
Hardware wallets are the most convenient type of cold wallet to use. Here are some examples of the most popular hardware wallets you can buy today:
Ledger Nano S Plus
Ledger Nano X
Trezor Model One
Trezor Model T
Blockstream Jade
By using a hardware wallet, you can greatly increase the security of your Bitcoin, Ethereum and other cryptocurrency investments.
What is a hot wallet?
A hot wallet is a cryptocurrency wallet on a device that’s connected to the internet. This includes wallets that function as web browser extensions as well as wallets that users install on their desktop computer or mobile phone.
The main reason why hot wallets are used is convenience. With a hot wallet, you can quickly access your cryptocurrency and make transactions. Meanwhile, using a cold wallet involves an additional step such as connecting your hardware wallet to your computer.
Here are some examples of popular wallets that are usually used as hot wallets:
MetaMask
Coinbase Wallet
Trust Wallet
Electrum
1inch DeFi Wallet
However, many of the wallets we have listed here can be used in combination with a hardware wallet for increased security.
Hot wallets vs. cold wallets — Head-to-head comparison
The simplest way to explain the difference between hot wallets and cold wallets is that hot wallets are better for convenience and cold wallets are better for security. Let’s quickly go through the differences between the two types of wallets with a comparison chart:
Hot wallets Cold wallets Price Typically free to use Good quality hardware wallets start at around $50 Use case Frequent transactions, smaller amounts of cryptocurrency Long-term storage, larger amounts of cryptocurrency Security Since they are on internet-connected devices, hot wallets are much more vulnerable to cyber attacks Very strong if used properly Convenience Very convenient to use Less convenient, as you need to connect a physical device to your computer or mobile phone and enter a PIN whenever you want to make a transaction Recovery Seed phrase Seed phrase
Hot wallets are usually free to use. In fact, if someone is trying to make you pay for using a hot wallet, you need to be extremely careful as you might be dealing with a scammer. The best hot wallets, such as MetaMask and Trust Wallet, are completely free to use.
Meanwhile, if you want a cold wallet, your best bet is to purchase a hardware cryptocurrency wallet. Despite massively improving the security of your cryptocurrency holdings, hardware wallets are fortunately not too expensive. For example, you can get a Ledger Nano S Plus hardware wallet for just under $80 or even lower if you can find a sale.
If your private keys are stored on a device that’s connected to the internet, cyber attackers could potentially be able steal your cryptocurrency if they compromise your device. Meanwhile, cold wallets keep your private keys offline at all times. When you want to make a transaction, you connect your hardware wallet to your desktop computer or mobile phone. The hardware wallet signs the transaction without exposing your private keys to the device you’re connected to.
When it comes to restoring access to your wallet, you’ll need to securely back up your seed phrase regardless of whether you’re using a hot wallet or a cold wallet. For example, if you have a hot wallet on your mobile phone and it gets stolen or malfunctions, you’ll be able to access your funds if you have backed up your seed phrase. The same applies if your hardware wallet is stolen, lost or damaged.
Is it better to have a cold wallet or hot wallet?
Hot wallets and cold wallets serve different purposes, so we can’t directly state which type of wallet is better. Generally, hot wallets are better suited for when you require short-term storage and want to make transactions frequently. Meanwhile, cold wallets are superior for storing cryptocurrency over a longer period of time.
To illustrate the difference between the usage of hot and cold wallets, we can use the example of keeping cash in your wallet versus having money in your bank account. Generally speaking, it’s not a great idea to carry around a large amount of money in your wallet. However, having some cash on hand is convenient for making everyday purchases.
Most people keep the majority of their money in their bank account, but have some cash on hand for convenience. This plays out similarly in the world of cryptocurrency. A common practice is to have a smaller amount of funds in a hot wallet for convenience, while keeping the majority of one’s cryptocurrency portfolio in cold wallets.
If you’re making cryptocurrency transactions frequently, for example to engage in decentralized finance or trade on NFT marketplaces, keeping some funds in a hot wallet can make the process a lot more convenient. However, you always need to keep in mind that hot wallets are a lot weaker than cold wallets in terms of security.
Custodial wallets vs. non-custodial wallets
Besides the hot wallet vs. cold wallet debate, it’s also important to know the difference between custodial and non-custodial wallets.
Custodial wallets
A custodial wallet is a cryptocurrency wallet where a third party manages private keys on behalf of the user. For example, when you deposit your crypto to a cryptocurrency exchange, you are sending your crypto to a wallet managed by the exchange.
If you have an account on a cryptocurrency exchange and you hold some cryptocurrency in it, you are effectively using a custodial wallet since the private keys associated with your coins are controlled by the exchange and not you.
Whenever you try to do anything with the cryptocurrency in your account, you submit a request and it’s ultimately up to the exchange if they approve it or not.
Another issue with using custodial hot wallets is that cryptocurrency exchanges are an attractive target for hackers.
Non-custodial wallets
Non-custodial wallets are cryptocurrency exchanges where the user has the responsibility of managing their private keys.
The biggest benefit of using a non-custodial wallet is that it gives you full control over your cryptocurrency. You can send and receive cryptocurrency whenever you want without having to ask anyone for permission, and you don’t need to trust anyone but yourself that your private keys will be kept secret.
When using a non-custodial wallet, it’s very important to securely back up your seed phrase, which will allow you to access your cryptocurrency in the event you forget your password or the device you’re using your wallet on is stolen or stops functioning. We recommend that you use a metal crypto wallet backup to keep your seed phrase secure.
Is the criticism of custodial crypto wallets justified?
In the cryptocurrency community, you will often hear the phrase “not your keys, not your coins”. This phrase is meant to alert users that if the private keys necessary to access their cryptocurrency are managed by someone else (for example a cryptocurrency exchange), the user is ultimately not truly in control of their cryptocurrency.
For example, an exchange could decline a user’s withdrawal request or use their coins for speculative investments, as we have seen with the now-defunct FTX exchange.
Even though custodial wallets get a lot of criticism in the cryptocurrency community, they do have their merits.
The reality is that even people who are not very technologically savvy and don’t have a good understanding of how cryptocurrencies function want to invest in crypto. For such users, keeping their cryptocurrency on a high quality exchange with a strong track record on security (for example Kraken or Coinbase) might actually be preferable than using a non-custodial wallet.
We have seen countless examples of scammers tricking users into sharing their seed phrase via email or various social media networks and chat apps. Meanwhile, a good cryptocurrency exchange will detect suspicious log in attempts and require at least 2-factor authentication to make unauthorized withdrawals more difficult.
In addition, exchanges can help users restore access to their account even if they forget their password. Meanwhile, if someone using a non-custodial wallet fails to store their seed phrase backup properly and loses access to it, there is nothing that can be done to recover the wallet.
To be sure, we encourage crypto investors to use non-custodial wallets whenever possible, but it’s important to understand that using a non-custodial wallet comes with responsibility — you need to keep your private keys secret at all times and ensure that your seed phrase is backed up properly.
However, users that aren’t confident in their ability to securely manage their private keys and seed phrase can benefit from keeping their funds on a reputable custodial wallet (preferrably an exchange with strong security standards).
FAQs
Is MetaMask a hot or cold wallet?
MetaMask is typically used as a hot wallet. However, MetaMask can also be used as a cold wallet, as it can connect to hardware cryptocurrency wallets such as the devices made by Ledger and Trezor.
Is Coinbase Wallet a hot or cold wallet?
Coinbase Wallet is most often used as a hot wallet. Still, the Coinbase Wallet does allow users to connect hardware wallets such as Ledger devices, which allows the Coinbase Wallet to function as a cold wallet.
Which crypto wallet is cold?
If you want cold storage for your cryptocurrency, your best bet is to purchase a hardware cryptocurrency wallet. Alternatively, you could have a cold wallet on a desktop or mobile phone that’s never connected to the internet, or use a paper wallet. However, these options are much less convenient than using a hardware wallet.
The bottom line
Hot wallets and cold wallets both play distinct roles. Hot wallets are optimized for ease of use, while cold wallets prioritize security. During their crypto investing journey, most users end up using both hot and cold wallets.
If you’re looking to learn more about cryptocurrency wallets and keeping your precious digital coins and tokens safe, make sure to check out our article explaining how to secure your crypto.
