What is hot and what is cold wallet? How and when to use which?

What do we already know about Crypto Wallets?

When we first wrote about Crypto Wallets, we learned that it was a place to store cryptocurrencies. Those wallets, or crypto wallets that have evolved to date – can be completely digital or physical. Receiving and sending or trading cryptocurrencies are one aspect of a wallet, while proper storage and security keeping of cryptocurrencies are no less important.

In a previous blog post on this topic, we also addressed sad stories about lost hardware, missing passwords, and successful hacking attempts. We emphasize even today – your cryptocurrency must be stored in a way that provides a high level of security, but also, it must fit with your ‘still’ dealing with cryptocurrencies. In what way, at what point and where you will choose to store your cryptocurrencies, are the questions answered by you. It is very likely that you will create and use both. Of course, think carefully about your needs and capabilities, but also about the security levels of the wallet.

How to use Wallet?

Crypto Wallet is a place where you securely store your cryptocurrencies, but also store private keys. Using wallet, you store cryptocurrencies safely, while ensuring their availability for sending and receiving, i.e. trading. Wallets come in many forms, so we have hardware wallets or cold wallets, which look like a USB stick. Also, we have mobile applications or online versions of them, which make the use of cryptocurrencies as simple as buying a credit card online. Wallets like this are found in a completely digital environment, we call them Hot Wallets, and although easy to use, they are questionable security given the Internet connection they rely on when storing and exchanging.

Be that as it may, in order to send or receive cryptocurrencies – you have to connect to the Internet, and rely on a hot wallet. Furthermore, it is your choice whether to move cryptocurrencies back to cold storage after you make transactions, or leave them in a hot wallet.

Let's get to know Hot Wallet in more detail: What's good and what's not?

Good…

  • Allows fast, online, real-time exchanges;
  • Facilitates the transfer of cryptocurrency to crypto exchange where users trade, that is, sell and buy cryptocurrencies;
  • A digital environment for storing cryptocurrencies is safer, from, for example, keeping currencies on exchanges, but still, all items stored in a hot wallet are vulnerable to attack given that public and private keys are connected to the Internet;
  • Very often they are free to use (depends on the provider).

Bad…

  • They are susceptible to hacker attacks making an increased possibility of theft;
  • They depend on a third party, and they do not give you as a user full control over your funds: Namely, most Hot Wallets offered by exchanges do not allow you access to private keys, and you only get a login and password to access your account (despite sharing responsibility for the security of assets)
  • They are subject to property loss: If the exchange or resource you use closes and your funds are not secured, you will lose everything, and the same happens if your wallet is hacked.
hot wallet crypto

Let's get to know Cold Wallet in more detail: What's good and what's not?

Good…

  • Security: You do not entrust your private keys to third parties. The wallet is not connected to the Internet, so it cannot be hacked. It is not recommended to carry it around for safety, and it is advised to store it inside a safe or bank vault. Moreover, you enter the password on your hardware device, not on a personal computer where there is a possibility of hacking. Most Cold Wallets are encrypted with pin protection, and some of them even come with an additional layer of biometric authentication.
  • Recovery: Cold Wallet snails the recovery option, which you set as a user during the initial configuration. A recovery phrase consisting of 112 to 24 words needs to be written down and stored in an equally safe way. The phrase is unique it is generated by the device. When your hardware wallet is lost, damaged, or stolen, you can acquire a new hardware wallet to recover your crypto assets or import your recovery data into a software wallet, and immediately receive your funds back. Warning! The recovery phrase is configured by the device itself. It may not be provided in writing or obtained from third-party sources. For safety reasons, it is advised that it is best to purchase a Cold Wallet device directly from the manufacturer.

Bad…

  • Delays: Even if the transaction itself takes the same, it will take you longer to access the CW device. Moreover, you probably won’t be able to use it in a public place or on the go. Therefore, it is not very suitable for daily traders and fast transactions.
  • High Cost: While many online crypto wallets are available for free or have low fees, cold hardware wallets come at a certain cost, depending on the manufacturer, but on average they cost around $100.
  • Restrictions: CW devices typically do not accept the same number of cryptocurrencies as most popular Hot Wallets. Therefore, if you are buying cryptocurrencies that are not yet very popular, Cold Wallets may not support them.
cold wallet

Food for Thought: Hot or Cold?

We have learned – both Hot and Cold Wallets have their advantages and disadvantages, which also makes them more or less suitable for a particular application.

For example, Cold Wallets are not a suitable variant for daily traders, since they require: additional steps and time, and active trading in an environment where prices fluctuate minute by minute. Moreover, it can have a profound negative effect on your gains.

Despite this, due to the level of security they provide, Cold Wallets are an indispensable choice for HODLers, long-term investors and all those who own large amounts of cryptocurrencies. Even exchanges that provide Users with Hot Wallet options use cold storage to hold most of their clients’ funds.

Hot Wallets, on the other hand, are very practical. They have intuitive Krisnic interfaces, sync across multiple platforms and make your life easier. We can’t say they’re completely insecure because there are multiple layers of protection to keep your funds safe, but still – it’s Hot Wallets that are the first target of hackers.

Specifically, crypto crime reached $4.5 billion globally in 2019. That year, a record number of twelve crypto exchanges were hacked. In total, cryptocurrencies worth nearly $293 million and 510,000 user logins were stolen from crypto exchanges in 2019. While losses from cryptocurrency theft, hacking and fraud were reduced in 2020, hackers have begun investigating new targets, such as the hot “decentralized finance” sector. What we know for sure is that scammers never relax, and that you as a crypto trader should not neglect the security of your assets. Therefore, keeping large amounts of cryptocurrency in Hot Wallet for a long time is, to say the least – reckless.

Overall, it’s quite common for cryptocurrency owners to have both hot and cold wallets, but for different purposes. The best strategy is to keep the cryptocurrency intended for long-term storage in Cold Wallet, and transfer the amount required for active trading to Hot Wallet.

If you’re interested in rare, unusual coins, you may be disappointed that trusted cold wallet providers don’t support as many cryptocurrencies as online alternatives. In this case, hot wallets will become your only option. What is important is to choose those Hot Wallets that offer at least some insurance or additional security measures, which can help protect your crypto assets in a digitated environment.

We hope we have successfully guided you through the story of Crypto Wallets, but in case of additional questions – you can always contact us via email or find us on Instagram!

Until the next blog,

Kriptomat.hr Tim

Crypto Wallet

Crypto Wallet - from A to Z

Ten years have passed since we first encountered words like blockchain or Bitcoin. Few could have guessed at the time that this new type of property would grow to over 50 thousand dollars today. Still, those who bought it then (mostly out of sheer curiosity) – today can or have already become millionaires. In order to preserve purchased Bitcoins over the years, there was a need for a storage location.

Well, that’s where we come to Wallet, and those that have evolved to date – can be completely digital or physical. The basic functions of Wallet are receiving and sending cryptocurrencies, but also the backup storage of the same.

Source:
Zipmex

Crypto Wallet (CW) aka crypto wallet and how to use it?

Crypto Wallet is a place that you access with your unique private key, which serves to securely store your cryptocurrencies in it. In addition to cryptocurrencies, you can also store other digital assets, such as non-fungible tokens. Non Fungible Tokens, NFTs).

Each wallet has its own private and public key. While the private key serves access, the public key serves to receive and send cryptocurrencies. Public keys function like an address and are visible to everyone for the purpose of sending and receiving tokens (just as anyone can share their email address to receive messages). On the other hand, the private key is necessary to access funds held at a public address, and to determine the beneficial ownership of the property. Think of a private key as a password to access your email account.

Each Wallet also has its own public address which we can say is a “scattered” version of the public key. Since the public key consists of an extremely long series of numbers, it is summarized and shortened to form a public address. In fact, the private key generates a public key, which in turn generates a public address.

After one user initiates a transaction to send a cryptocurrency to another user, the transaction is broadcast into a network where its validity is confirmed – before it is finalized and recorded on the blockchain.

Before broadcasting, the transaction is digitally signed via a private key, and thus also proves ownership of the private key. No one is going to reveal the details of the private key. As the public key is composed of a private key, with the help of a public key, it is proven that the digital signature came from his private key. After the transaction is confirmed as valid – the funds are sent to the recipient’s public address.

What else is important to know about Wallet?

You can install the wallet in the desktop version on your PC, but also on your smart device in the form of a mobile application so that you can easily use it anywhere it is.

In addition to an extremely important feature, which is cryptocurrency storage – Wallets also interact with online exchanges where the cryptocurrencies you own are easily exchanged for some others. You can also use wallet as a kind of digital identity, when connecting to different decentralized applications (dApps).

With a lot of positive features of Wallet, so far we’ve all had the opportunity to hear those slightly less positive stories about lost hardware, forgotten passwords, and even successful hacking attempts. That’s why your cryptocurrency has to be stored in a way that provides a high level of security, but it also has to go hand in hand with your still dealing with cryptocurrencies.

Cryptocurrency storage and corresponding Wallet

Once a particular cryptocurrency or several have been purchased, it is important to decide on how to use that currency further. Let’s list some of the ways:

  1. Daily trading
  2. Long-term storage as a kind of savings so-called. HODling
  3. A combination of daily trading and long-term storage

In everyday trading, the most important feature is liquidity, which in the context of cryptocurrencies refers to the conversion of a particular cryptocurrency into a traditional currency or fiat, or into some other cryptocurrency. It is precisely the degree of liquidity, that is, the frequency of conversions that determines the further method of storage.

Stock market storage - Why yes and why not?

After a cryptocurrency is purchased on an exchange, that exchange usually offers you a storage option as well. In this case – your cryptocurrencies remain on the stock exchange, but this may not be the best option for you. Among the hundreds of crypto exchanges currently existing in the crypto world – Binance is one of the most popular. The purpose for which the Binance exchange is appropriate is the previously mentioned daily trading of cryptocurrencies (eng. high frequency trading. The reason for this is that this type of exchange allows instant transactions, because cryptocurrencies are already on the stock exchange, so there is no need to transfer them from a wallet to a stock wallet. However, what creates the biggest problem is questionable security and a high chance of hacker attacks. So, the advantage provided by high liquidity also means less security of your cryptocurrencies.

The hacker attack that we remember to this day is the case of the Mt. Gox Stock Exchange, which at that moment was known as an almost impenetrable exchange, through which more than 70% of global transactions were carried out. This was not the only case of a hacker attack, which supports that – although some stock exchanges “swear” by their impenetrability, there is always a chance of an attack, as well as the chance that you will lose all your digital assets.

If you lose money once, the probability of a return is minimal. Namely, stock exchanges in previous cases, have not reacted “protectively” towards their users because they are actually the ones who own the funds, not you – given that you do not have your private key tied to one of the stock exchanges. As the saying goes, “Not your keys, not your coins!”

Source:
Medium

Storage in your Wallet with the help of a public and private key

Now that we’ve learned that a stock market wallet is questionable security, it’s time to get acquainted with a safer alternative – storing cryptocurrencies in a personal crypto wallet. Here it is important for us to familiarize ourselves with concepts such as public and private keys, and with what these keys allow us to do.

With personal Wallets, purchased cryptocurrencies are essentially still on the blockhain (from which they cannot be downloaded), but you can access them with the help of your private key.

Source:
Phemex

Where's your private key?

The private key is in your personal, non-stock Crypto Wallet – either online or offline. Consider that online Wallet completely “depends” on the Internet connection, while offline or hardware Wallet connects to the Internet at the time of making the transaction.

Because of this characteristic of the hardware wallet (eng. Cold Wallet), we can say that this wallet is still somewhat more secure than the online variant, and that it represents a kind of equivalent to a safe in the real world.

But let’s go back to the extremely important private key, which is also the “entrance” to your Wallet. Since a private key is essential when transferring cryptocurrency to another address, it is very important to carefully store your key and store it in a safe place – such as a vault or safe. If you lose your private key, you will lose your digital assets. What this really means is that Bitcoin or any other currency can’t be hacked by itself, but a device that stores a private key can.

What about the public key?

All cryptocurrencies you own are linked to a public key whose role we could best compare with a public address or an IBAN number from a bank card. In other words, the public key has the role of a locator, that is, the address where you can receive just purchased currencies.

Multi-coin vs. Single-coin Wallet

Although most Wallets are designed to handle one type of cryptocurrency (eng. Single-coin Wallet), there are also wallets in which you can handle several different cryptocurrencies (eng. Multi-coin Wallet). Multi-coin Wallets allow the user to convert one currency into another, while Single-coin Wallets allow you to receive and send only one cryptocurrency, such as Bitcoin or Ethereum.

A good example of Multi-coin Wallet: Trust Wallet

Trust Wallet is a crypto wallet that allows you to easily send, receive, trade and store cryptocurrencies. It is easy to use, and a simple user interface makes it suitable for absolute beginners.

Trust Wallet has another advantage – the ability to invest cryptocurrencies and earn rewards, and it is additionally interesting because it provides the ability to buy, store and sell non-fungible tokens (irreplaceable tokens). Non Fungible Token (NFT), about which we will discover more in one of the following blogs.

Unlike other wallets (e.g., Metamask or MyEtherWallet) that mainly support Ethereum ERC20 tokens, Trust Wallet supports a large number of cryptocurrencies from various blockhains including Bitcoin, Ethereum, Binance Coin, Litecoin, XRP and others. This figure is much higher than what most crypto wallets can support. Furthermore, with Trust Wallet, you can purchase cryptocurrencies from various third-party platforms, including Mercurio, MoonPay, Ramp Network, Simplex, Transak, and Wyre.

About Trust Wallet Security

Given that this is a decentralized Wallet – each user is independent and responsible for their security. Furthermore, this wallet is a good example of Hot Wallet – which, let us recall, we said is always connected to the Internet, and that compared to Cold Wallets – is less secure.

What does a Trust Wallet download look like?

This one, like most Hot Wallet, you download as a desktop or mobile app through Apple, Google Play or Android store. You choose create new wallet, followed by privacy policy and terms of service. You will then be asked to create a six-digit access code, which will furthermore be your secret security code to access your wallet. We can compare it to the pin you access your smartphone or to the pin that is attached to your bank card.

This is followed by a key step, where you are expected to create a backup of your wallet. This is an important step for the future because it will be the only way to recover your wallet – in case something happens to your computer or mobile device.

At this step, the app will display a unique 12-word recovery phrase (in the case of other Wallets it can also be a 24-word string) that is extremely important to write down in the correct order – just as you were originally shown, and then store it safely. On the next screen, you will select words in a sequence of 1 to 12 according to the previously written order. Once you’ve done it right, you’re ready to send and receive!

What are Ether Scan and Bitcoin Explorer and when to use them?

Etherscan is not an Ethereum wallet, nor is it a wallet provider. It is a free and independent block explorer based on the Ethereum blockhain. The Etherscan app tracks blockchain transactions on the Ethereum network, and the app then displays results like a search engine. This allows you as a user to find transaction details on the Ethereum blockchain – which at the very least gives you peace of mind, in case your transferred funds haven’t yet appeared in your wallet.

While using Etherscan, after you enter any Ethereum address in the search box (to see the current balance), but also the transaction history – Etherscan will display all gas and smart contracts that include that address.

The BTC.com Explorer works on a similar principle, and the main difference is that the latter is based on the Bitcoin blockchain.

What both researchers have in common is that they allow an overview of assets located at any wallet public address.

A thought for the end: Until the next Wallet story - repeat the old and get ready for more!

After we have successfully mastered the topic of Wallet, prepare for our next blog, in which we will reveal more details about the private and public key, and then we will follow a blog about the difference between Hot and Cold Wallet.

We’re excited about the next story, and hopefully so are you. Write to us and follow us on social media! Until the next blog,

Your Kriptomat.hr Team