What is the difference between hot and cold wallets?

What is the difference between hot and cold wallets?

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When we get started in the world of cryptocurrencies, there are a couple important decisions we have to make. Which cryptocurrencies do we want to invest in? Are we only interested in bitcoin or other cryptocurrencies as well? Where should we buy these digital assets? And hold on for a second: where should we keep these coins after we have successfully purchased them? What do people even mean when they say words like ‘cold wallets’ and ‘hot wallets’?

We have already written about the process of buying cryptocurrencies (you can buy bitcoin and other cryptocurrencies online at Coinmixed or using the Lurdy ATM) and what advantages different crypto assets like bitcoin, ethereum and litecoin offer. But now it’s time to clear up the question of storage: cold wallet, hot wallet, which is which and why should we choose one over the other. Let’s dive in!

Hot and cold wallets – which is better?

Before we jump into the explanation of what a hot and cold wallet is, we should make one thing clear. We are not trying to say that one option is better for storing cryptocurrencies than the other. Cold and hot wallets both have advantages and disadvantages and every crypto investor has to decide for themselves which storage possibility is the best for them. Before you opt to use either of them (or maybe both), make sure you do your homework and look up what certain wallets entail exactly – and what is it that you need to make sure that your investment is safe.

So now that we have that out of the way: cold and hot wallets? What are they even talking about?

What is the difference between hot and cold wallets?

Hot wallets – easy accessibility, lower security

The concept of wallets is very simple. Hot wallets are generally those that are connected to the Internet, while the cold ones are stored on some sort of hardware and are not accessible online.

Because the hot wallets are on the Internet, they are easily accessible from your desktop and cellphone as well. They are also generally easier to set up and they usually accept a wide range of cryptocurrencies. Another perk of these is that they are free and easy to create. You can set up a wallet online in a matter of minutes.

But naturally, hot wallets also have disadvantages. The compromise we make with the improved accessibility is that hot wallets are more susceptible to hacking. As nothing stored on the Internet is completely safe from hackers, hot wallets are also less secure than their cold counterparts.

Cold wallets – harder to access, safer to store

On the other hand, cold wallets are usually stored on some sort of hardware that is specifically created to keep your private keys. The most well-known and widely used cold wallets are the Ledger Nano S and the Trezor cold wallet but there are other options on the market as well. These cold wallets are definitely safer than the hot wallets as they are only accessible physically. The assets are locked behind a PIN or password that you have to provide in order to reach the cryptocurrencies. This, however, also means that they are more complicated to use for transactions as they require your physical presence. They are also more expensive than the hot ones – but the price for enhanced security must be paid in all fields of life.

It is actually the same dilemma that you would have with any other traditional asset. If you have a bar of gold, it is the safest if you keep it in a vault. (Preferably with constant armed guards surrounding it but that might be a bit too action movie-esque). But then if you keep your gold in the vault, how are you going to use it?

This is why cold wallets are generally used for those assets that you don’t want instant access to. If let’s say, you have a bigger amount of bitcoin that you want to ‘hodl’, you should definitely go with a cold wallet. But if you want to carry out a trade in the near future? Then hot wallets are way easier to use.

How to deposit and withdraw cryptocurrencies from a Coinmixed wallet?

Cryptocurrency exchanges have their own hot wallets for their users and Coinmixed is not an exception. Hot wallets are easily accessible from your account, and the three main cryptocurrencies, BTC, ETH and LTC that the exchange supports all have their own wallets. In addition, you can create several wallets for each crypto. So if, for example, you’d like to have more than one wallet to store your bitcoin on, you can easily create new ones on your account.

What is the difference between hot and cold wallets?

Making a deposit is very simple using the hot wallet on Coinmixed. If we’d like to make a bitcoin deposit, for example, all we have to do is go to our account and click on the header ‘Wallets’. There we’ll see our automatically generated wallet address that we can use to send our bitcoin deposit to. We can use the handy ‘Clipboard’ button to copy the address to our clipboard so that we do not make any unnecessary error while copying the long sequence of number and letters. Next to it, we can also use the QR code to scan the address.

Withdrawing from a wallet is also very similar to this. In this case we just have to choose which address we want to withdraw from and where we want to send the chosen amount to. This also uses that long sequence of numbers and letters that is the wallet address.

A little bit of this, a little bit of that

All in all, choosing between cold and hot wallets is something we need to decide based on our own individual needs and wants. But we also shouldn’t forget that the decision is not one or the other. We can enjoy the advantages of both options. Keeping cryptocurrencies which we do not need instant access to (or we simply want to hodl) is better if we use a cold wallet. But if we also need bitcoin and other altcoins easily accessible to us, we should make sure to keep some on a hot wallet.

Diversification doesn’t only work when we are looking at our investments. It’s also a great rule of thumb when we’re thinking about storage.

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