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.
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.
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
