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December 12, 2023

Hot Wallet, Cold Wallet, Exchanges Wallet, Which One Is Better?

Hot Wallet vs Cold Wallet vs Exchanges Wallet
Katya Richardson

Written by Katya Richardson

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After purchasing cryptocurrency, deciding how and where to store your assets is a crucial step. People in the crypto world, store their assets inside a crypto wallet. Similar to a physical wallet for cash, a crypto wallet allows you to hold and transfer funds. Crypto wallets come in three main types: hot, cold, and exchange.

So which one is the right wallet for you? choosing the right option depends on personal preference. Sometimes, the best choice could involve using a combination of these wallet types, it is also depending on your cryptocurrency goals: the short or long term. To help you feel more confident in your decision, let’s take a closer look at these crypto wallets.

What are Crypto Wallets?

A crypto wallet is a software or service that allows users to store crypto assets and interact with the blockchain network. Crypto assets are not physically stored in the wallet, but the wallet stores information related to the ownership of assets and the private key required to perform transactions with those assets.

A crypto wallet serves as an interface that enables users to interact with the blockchain network and perform various operations, such as sending and receiving crypto assets, checking balances, and monitoring transaction history.

Various cryptocurrency wallets exist for storing digital currency, there are hot wallets, cold wallets and last exchange wallets. Each wallet includes its own pros and cons. Understanding the distinctions between these three types of wallets is essential for anyone interested in entering the world of crypto.

Hot Wallet vs Cold Wallet vs Exchanges Wallet - 3 common wallets

Hot Wallets

Hot crypto wallets are online platforms that offer various features, such as storing, sending, and receiving tokens, as well as managing and viewing all available tokens in one location. You can access a hot wallet through internet-enabled devices like mobile phones, tablets, and laptops.

A hot crypto wallet acts as an interface for conducting cryptocurrency transactions and is responsible for recording your transactions on the decentralised public blockchain ledger. The primary advantage of hot wallets is the convenience of sending and receiving crypto whenever you need it. However, hot wallets also have their drawbacks. Here are the advantages and disadvantages of hot wallets:

Hot wallet pros:

  • User-friendly: Hot storage platforms offer easy cryptocurrency storage and access from anywhere.
  • Cost-effective: Most hot wallets are free to use.
  • Convenience: Using a hot wallet connected to a specific exchange is convenient for ecosystem interaction.

Hot wallet cons:

  • Security risk: Hot wallets, although generally secure, are internet-connected and more susceptible to hacking.
  • Accessibility limitations: Depending on local laws, hot wallets requiring an internet connection may have restricted features in certain Australian regions or jurisdictions.

Cold Wallets

Cold wallets, often referred to as cold storage solutions, are a type of cryptocurrency wallet that is not connected to the internet. They are designed with a primary focus on enhancing security but come with limitations in terms of accessibility. But what are the cons of this wallet? Here’s a detailed explanation of their pros and cons:

Cold wallet pros:

  • Portability: Cold storage solutions are compact, plug-in devices that can be carried anywhere globally and easily used for decentralised app access.
  • Security: Private keys remain on the device, and transactions are locally signed, reducing vulnerability to cyberattacks.
  • Autonomy: Cold storage grants full control over crypto assets, eliminating reliance on third-party apps.

Cold wallet cons:

  • Price: Hardware wallets can cost between $79 and $255, making them pricier than online options.
  • Transfers: Transferring between cold storage devices is somewhat more cumbersome compared to hot storage wallets.
  • Limited Accessibility: Cold wallets are not as accessible as hot wallets. To access your funds, you need to physically connect the wallet to a computer, which can be inconvenient if you need to make frequent transaction.

Cryptocurrency Exchanges as Wallets

Exchange wallets are crypto wallets provided by cryptocurrency exchanges. They’re handy for trading and managing your crypto right on the exchange platform. Exchange wallets play a vital role by providing a secure storage option for different cryptocurrencies, allowing users to efficiently buy, sell, and trade assets, thereby enhancing liquidity within the exchange. These user-friendly wallets also enable users to place orders, monitor their account balances in real-time, and access transaction histories.

They often integrate seamlessly with additional exchange services like lending and margin trading. But keep in mind, that these wallets are usually less secure than other types, such as hardware or software wallets, because they’re controlled by the exchange and can be a target for hackers. Many users move their assets to more secure wallets when they’re not in the middle of a trading frenzy.

Striking the Right Balance: Combining Wallet Types

For a more balanced approach between security and convenience, you can opt for a combination of these 3 wallet types. Here are some pointers to assist you in achieving optimal security and convenience:

  • Hot Wallets for Everyday Transactions: Employ a hot wallet for your day-to-day cryptocurrency dealings and for storing smaller crypto amounts that you might require quick access to. Hot wallets are linked to the internet and are suitable for frequent trading or sending/receiving crypto.
  • Cold Wallets for Long-Term Safekeeping: On the flip side, reserve cold wallets for the long-term safe storage of your most valuable assets. These wallets are not connected to the internet, rendering them highly secure against online threats such as hacking.
  • Exchanges for Trading and Earning: Make use of cryptocurrency exchanges for trading and earning interest on your digital assets. However, only keep the funds you intend to actively trade or stake on the exchange, and regularly transfer excess funds to your secure cold wallet.

By adhering to these guidelines and striking the right balance between hot and cold wallets, you can enhance the security of your crypto assets while still enjoying the convenience of easy access for everyday transactions and trading on exchanges.

Hot Wallet vs Cold Wallet vs Exchanges Wallet - example wallets

Conclusion: Choosing the Right Storage Method

In conclusion, effectively managing cryptocurrency requires a combination of security measures and well-informed decision-making. Use hot wallets for daily transactions and trading. Keep only a small amount of cryptocurrency in these wallets and use two-factor authentication (2FA) for better security. For long-term storage and larger amounts, use cold wallets, which offer more protection by keeping your assets offline. Regularly back up your wallet and keep your recovery information safe. When using cryptocurrency exchanges, pick ones with good security and think about moving your funds to a cold wallet for extra safety.

To excel in cryptocurrency management, diversify your storage methods, stay informed about security practices, and be alert to potential cryptocurrency scams and phishing attempts. Continuously educate yourself about the latest developments and regulatory changes in the Australian crypto landscape. By adhering to these recommendations, you can confidently navigate the world of cryptocurrency while minimising security risks.

For those considering superannuation funds, you might wonder if SMSFs can invest in cryptocurrencies. Learn how Australian Self-Managed Superannuation Funds are navigating the crypto space.

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