What Is A Hot Wallet? 

A hot wallet is a cryptocurrency wallet that is always connected to the internet, enabling quick access to digital assets and decentralized apps (dApps). These wallets generate seed phrases and store private keys online. However, the fact that the private keys are stored online is also one potential risk associated with cryptocurrency hot wallets. This constant internet access makes hot wallets relatively more vulnerable to hacks and exploits than cold storage options. Despite this risk, hot wallets are an ideal storage medium for users who frequently receive and send cryptocurrencies. There are two types of hot wallets, and they include the exchange-based (custodial) wallets and software (non-custodial) wallets.

Hot Wallet vs Cold Wallet

When deciding between a hot wallet and a cold wallet, it is essential to understand how each option fits your needs.  For instance, hot wallets are convenient for frequent transactions. They are typically software-based, and, as a result, accessible through devices like smartphones or computers, enabling the effective management of a crypto portfolio. Examples include; MetaMask, Trust Wallet, Phantom, etc. In contrast, cold wallets are hardware devices that store private keys offline, offering an increased level of security. These wallets are not connected to the internet, which curtails the risk of exploits. However, the devices do need an internet connection when funds need to be accessed. Cold wallets are ideal for long-term storage of cryptocurrencies, and they include; Trezor, Ledger, ELLIPAL, etc.

Pro Tip

While hot wallets offer ease of access and convenience, cold wallets provide robust security for long-term asset storage. Advance users store most of their token holdings on cold wallets, and only leave certain holdings on hot wallets for trading / active use. For a balanced approach, you can also consider integrating both cold and hot wallets. Connect your cold hardware wallet, such as a Ledger, to a hot wallet. This setup requires each hot wallet transaction to be approved through your cold wallet, combining the convenience of hot wallets with the security of cold storage.