Heard people talking about hot and cold storage in Web3 but don’t really know what they are? In this blog we will simply define them and explain what you should be looking out for.
A Simple Definition Of The Different Types Of Storage In Web3
When you buy cryptocurrency on the blockchain you have to store it in a wallet. You can choose a hot wallet or a cold wallet. A hot wallet is always online and often comes in the guise of an application or platform on a crypto exchange. It is convenient but not as safe as a cold wallet which is hardware, like a USB, that connects to your device when you want to use it.
How Wallets Work
Crypto wallets don’t work in quite the same way as the leather one in your pocket. They don’t store your cryptocurrency as such, they store your public and private keys that grant you access to your funds. Choosing what kind of wallet to use can be daunting but it is an important decision. That decision should largely be based on your risk tolerance level and how often you intend to use your crypto. It may be worthwhile to consider a combination of the two, allowing you to keep your bigger cryptocurrency assets offline in cold storage, while leaving smaller amounts that you regularly trade in a hot wallet.
Hot Wallets (Or Hot Storage)
Hot wallets are all about convenience. Many of them are free and linked to various exchanges that store your crypto within their infrastructure. They may be accessed online, via your mobile or software downloaded to your desktop. Examples of popular hot wallets are:
MetaMask – a browser plug-in that allows you to trade Ethereum.
Exodus – a free mobile and desktop wallet where you can trade multiple cryptocurrencies.
Mycelium – a well established mobile-only Bitcoin wallet.
Coinbase – a Bitcoin wallet that doesn’t require signing up to a Coinbase exchange.
Edge – a smartphone wallet that encrypts all of your data on your device.
Advantages Of Hot Wallets
Convenience – it cuts significant time from the task of using your crypto, logging in etc.
Cost – most hot wallets are free.
Easy to use – user friendly interfaces make trading your cryptocurrencies a breeze.
Disadvantages Of Hot Wallets
Security – this is the big one and it is a significant risk. If your private keys are connected to the internet in any way, there is always the chance they could be hacked and you could lose your funds.
Accessibility – hot wallets rely on an internet connection so if it becomes unavailable for any reason whether due to an outage or restrictions in a certain jurisdiction, you will not be able to trade.
Cold Wallets (Or Cold Storage)
Unlike hot storage or wallets, cold storage keeps a user’s private keys offline, adding a vital extra layer of security. It’s called “cold storage” because, like keeping a side of lamb in the cool room, it keeps for a long time. There are four different types of cold storage:
Hardware wallets – this is the safest way to secure your crypto. It is an electronic device, similar to a USB, which you connect to the internet when in use. Ledger Nano X and Trezor are examples of popular hardware wallets. They will cost you around $200.
Paper wallet – a free piece of paper with your public and private keys printed on it. It may also include a barcode.
USB – you could store your private keys on a USB but they are notoriously unreliable and if the device fails or you lose it, you can say goodbye to your crypto forever.
Brain wallets – if you are like Rain Man and can remember 12 words, you might want to try this route. No one can ever hack your brain, but if you forget the words, you will pay a high price.
Advantages Of Cold Wallets
Security – keeping your private keys offline significantly reduces the chances you could be hacked.
Portability – cold wallets are normally easy to carry with you wherever you go.
Autonomy – you are in sole charge of your privateWant To Know More About Hot And Cold Storage? keys without the need for a third party.
Disadvantages Of Cold Wallets
Cost – represent a small investment to get started of around $200 as opposed to hot wallets which are usually free.
Challenging – you may need to watch a few online videos before being confident of how to use your new cold wallet.
Cumbersome – they are clunkier to use than online exchanges offering hot storage.
Deep Cold Storage
If you have vast sums of crypto and want to add an additional layer of security to your funds, you may want to consider “deep cold storage”. This could be burying your hardware wallet in a waterproof vessel in your back yard or trusting it with a storage service that keeps it in a vault. Again, both have their obvious pros and cons and it’s all about what method works for you.
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