What is the difference between hot wallet vs. cold wallet storage?

“Hot” vs. “cold” storage refers to whether the wallet is connected to the internet.

Cold Wallet Bitcoin Storage

Cold wallets are not connected to the internet. It is possible to create a cold wallet on a device that has never touched the internet and generate wallet addresses and send Bitcoin to that wallet. When you want to spend this Bitcoin, you can use the cold wallet to create and sign a transaction using its unique keys and broadcast it to the Bitcoin network. Because a cold wallet is not connected to the internet, it is more secure and resistant to being hacked.

Hot Wallet Bitcoin Storage

Hot wallets are riskier because they are always connected to the internet and could become a target for hackers or malicious actors. However, being on a device connected to the internet also makes a hot wallet more accessible because the user does not have to take the extra step of signing a transaction offline and broadcasting it from a device connected to the internet.

Should I use a hot or cold wallet storage?

Most Bitcoin investors will probably utilize a combination of hot and cold wallets.

Hot wallets are good for your spending money. You may keep a small amount of Bitcoin you use to trade on exchanges, pay expenses, or send money to friends and family on a hot wallet, so it is available the moment you wish to use it. It would be best if you did not store more value in your hot wallet, then you might keep in cash in the physical wallet in your back pocket. If you plan on making online purchases with bitcoin, a hot wallet is an excellent place to store those funds for immediate availability.

Cold storage wallets are best used for your savings and long-term investments for added security. A properly configured cold storage wallet will be able to store bitcoin and other cryptocurrencies for years. If hot wallets are like the cash in your wallet for spending, then cold storage wallets are the cash you keep in a safe, under the mattress, or in a safety deposit box.

Cold Wallet Pros & Cons

Pros: Cold storage wallets are created in an air-gapped system and are more secure than hot wallets. They are not connected to the internet, so cold storage wallets are not subject to cyber attacks that could compromise the private keys and bitcoin.

Cons: In order to spend funds on a cold storage wallet, these funds may need to be sent to a hot wallet connected to the internet. The extra step of taking bitcoins out of cold storage wallet may be inconvenient for performing everyday trades or transactions.

Hot Wallet Pros & Cons

Pros: Hot wallets are more convenient for sending funds on-demand. A hot wallet is connected to the internet and can sign and instantly broadcast bitcoin transactions to the network.

Cons: Because a hot wallet is connected to the internet, it is subject to security issues associated with any other device connected to the internet.

Bitcoin Wallet Custody

When discussing hot wallets and cold storage, it is also important to understand the concept of custody. One of the unique features of Bitcoin is the ability to be your own bank. To do that, you need to have a Bitcoin wallet that allows you to maintain control of the keys that unlocks your Bitcoin. When it comes to storing your Bitcoin, in addition to hot vs. cold, there are two categories that refer to who has ultimate control over your Bitcoin, custodial vs. non-custodial wallets.

Custodial Bitcoin Wallets

With a custodial wallet, you do not get to be your own bank. Much like traditional banking, your Bitcoin is stored in the custody of a wallet owned and controlled by the company providing this service. Many online exchanges such as Gemini, Kraken, or Coinbase will store your Bitcoin in their custodial wallets so that you can place trades. Because storing your Bitcoin with services like these is like keeping your money in a bank, it is yours. Still, it is ultimately controlled by the service provider who can deny and freeze transactions (and Bitcoin stored with a custodian does not carry the same protections as banks in terms of FDIC insurance).

Non-Custodial Wallets

With a non-custodial wallet, the keys to unlock and transact with your Bitcoin is stored on a device you own, or even on a piece of paper. An example of a non-custodial wallet might be a wallet app you download on your phone. Please note that when you choose to keep custody of your Bitcoin, you are responsible for backing it up. If you lose access to your backup or seed phrase, you will lose access to your Bitcoin if the device goes missing or is destroyed.

Should I use a custodial or non-custodial wallet?

Whether you choose to store your Bitcoin with a custodial service, or be your own bank with a non-custodial wallet app or device, make sure to do some research on the product or service that you choose. If you purchase any hardware wallet devices, make sure to buy from a trusted source, as there have been instances of counterfeits that can cause your Bitcoin to be lost or stolen.