# Hot Wallet: Definition, Types, Examples, and Safety Tips

> **Definition**
>
> Hot wallets, constantly connected to the internet, are used for storing, sending, and receiving digital currencies. These wallets provide ease of access but pose heightened security risks. Understanding their function and how to enhance their security can better safeguard your cryptocurrency assets.

## What Is a Hot Wallet?

A hot wallet is a cryptocurrency wallet that is always connected to the internet or another connected device. Hot wallets are used as temporary key storage and to send and receive cryptocurrency. Usually, their interfaces also allow you to view how many tokens you have available.

### Key Takeaways

*   Hot wallets are cryptocurrency wallets always connected to the internet, making them convenient for transactions but more vulnerable to hacks than cold storage options.  
    
*   It's crucial to use hot wallets only for transactions and store most crypto-assets in cold wallets to reduce the risk of theft.  
    
*   While many hot wallets are free, their security and features vary, so researching before choosing one is essential to ensure the protection of digital assets.  
    
*   Keeping cryptocurrencies in exchange accounts offers convenience but carries the risk of losing tokens if the exchange is hacked, despite potential insurance coverage.  
    
*   Exchanging cryptocurrencies for fiat currency and placing funds in a bank account can mitigate the risk associated with holding substantial balances in hot wallets.

## Understanding Hot Wallet Functionality

When you acquire cryptocurrency, you need a wallet for transactions if you plan to use it for buying goods or services. Your [cryptocurrencies](https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/)' private keys, used for access, are stored in these wallets when you receive coins.

Owning cryptocurrency gives you [private keys](https://www.investopedia.com/terms/p/private-key.asp) for accessing it. Public keys, like usernames, identify the wallet and let users receive tokens without exposing their identity. Private keys are similar to personal identification numbers that must be entered when creating a transaction. These wallets use usernames and passwords, but can also employ other login methods.

Hot wallets are applications connected to the internet and the cryptocurrency infrastructure, which allows you to use them. The hot wallet serves as an interface for users to use and store cryptocurrency keys.

They are different from [cold wallets](https://www.investopedia.com/terms/c/cold-storage.asp), which are devices or applications that store your private keys offline—these can be an application on a device that doesn't connect to the internet or a device that looks like a USB thumb drive that stores your keys. You can even write your keys on a piece of paper, which is considered a cold wallet. To use the cryptocurrency you have in cold storage, you need to transfer the keys to your hot wallet.

> **Fast Fact**
>
> Cold wallets, or cold storage, are among the safest ways to secure digital currency.

## Exploring Different Types of Hot Wallets

There are various hot wallets available, and many of them are free to download. Some wallets are specifically designed to be used in partnership with particular mobile web applications; you might find one that only works with a particular cryptocurrency or ecosystem. In addition, some cryptocurrency exchanges will only accept transfers to and from specific wallets.

Examples of hot wallets are MetaMask, Coinbase Wallet, and Edge Wallet. MetaMask is designed [for transactions using the Ethereum ecosystem](https://www.investopedia.com/the-best-ethereum-wallets-11740429). Coinbase Wallet is the wallet for the cryptocurrency exchange Coinbase, and Edge Wallet is designed to accept transactions using all of your digital assets.

Because there are so many wallets with different designs and intents, it's important for you to research hot wallets before downloading and using their services. Wallet developers have varying degrees of expertise, various commitments to security and privacy, and different priorities in mind when creating their wallets. Some might have fees; others might not. You might need to use one wallet that integrates with your internet browser for one currency and another wallet that is a dedicated application.

> **Important**
>
> On the internet, you might find cryptocurrency cold and hot wallets broken down into many categories like hardware, software, web, desktop, or mobile. All the different categories and definitions exist because many businesses are trying to get you to spend money, and writers, academics, and enthusiasts are trying to standardize cryptocurrency and blockchain definitions or demonstrate their expertise. What's important to remember when you're reading about wallets is that it doesn't matter what it is called:If it is connected to another device or the internet, it is a hot wallet.If it does not have a connection to another device or the internet, it is a cold wallet.Some devices can be both hot and cold.

## Important Considerations for Using Hot Wallets

There are several aspects you should consider before deciding on your hot wallet. Most important are its security features and how you use them. Your cryptocurrency is only as safe as the way you store your keys. Any items stored in a hot wallet are vulnerable to hacks, malware, ransomware, or any other method thieves can think of.

To keep your cryptocurrency safe, consider some of these tips.

> **Fast Fact**
>
> The old saying, "Don't keep all of your eggs in one basket," applies to many financial assets, including cryptocurrency. If you use more than one storage type or strategy, you're minimizing the risks of theft and loss.

### Best Practices for Hot Wallet Usage

Keep only a small portion of your crypto-assets in your hot wallet; only add what you need when you need it. This strategy would mean storing most of your assets in a cold wallet and transferring what you need to the hot wallet for immediate or near-future use.

### Storing Cryptocurrency Assets in Exchanges

You might keep cryptocurrency tokens in accounts linked to your exchange. Some [exchanges](https://www.investopedia.com/terms/b/bitcoin-exchange.asp) will have insurance for asset loss due to theft or system failure and may reimburse up to a set amount. These exchanges either subcontract custodial services and transfer your keys to them or have built data storage methods designed for key storage.

If an attacker breaches the exchange network, you could lose cryptocurrency stored there. To help customers if this happens, some exchanges are insured for the loss of customers' assets if they (the exchange) lose them due to theft or failure of their systems and will reimburse you up to a certain amount.

### Converting Cryptocurrency to Optimize Security

If you maintain a substantial balance of cryptocurrency, you're accepting the risk of drawing the attention of hackers or losing a significant portion of your holdings in an attack. Because many of the top digital currency exchanges allow users to transfer between various fiat currencies and cryptocurrencies, you should only hold small amounts in your wallet. You can convert the rest to your country's currency and place it in your bank account.

> **Fast Fact**
>
> There might be fees for exchanging cryptocurrency for fiat currency and transferring the funds out of the exchange or removing it to store it, but it's worth considering if you're not holding your cryptocurrency as an investment.

## Hot Wallets vs. Cold Storage for Cryptocurrency Investment

[Cryptocurrency investing](https://www.investopedia.com/tech/what-you-must-know-investing-crypto/) is similar to stock market investing—you own a cryptocurrency and wait for its fair market value to increase. You could continue holding it or try to sell it to another investor at a profit. However, a hot wallet is a precarious place to store your cryptocurrency investments. Cold storage, such as a [paper wallet](https://www.investopedia.com/terms/p/paper-wallet.asp) or other non-connected methods, might serve you better as you wait for your cryptocurrency's value to increase.

You could also use a custodial cold wallet, such as a reputable, regulated, and insured exchange's cold storage or [licensed digital asset custodian](https://www.investopedia.com/selecting-a-qualified-crypto-custodian-8400929). Another option is to invest in a cryptocurrency ETF that holds cryptocurrency so that you gain exposure to these assets without needing to secure them yourself.

## How Do I Secure My Hot Wallet?

Only keep small amounts in your hot wallet, ensure you back it up, keep the software up to date, encrypt it, and keep your password secure to make sure your wallet is safe.

## What Are Hot Wallets?

A hot wallet is any software or device designed to hold cryptocurrency private keys with a connection to another device or the internet.

## Is Coinbase a Hot Wallet?

Coinbase provides a hot wallet for its customers that allows them to interact with the exchange's services.

## How Much Does a Hot Wallet Cost?

Many hot wallets are free because they are downloadable software or apps. There are some devices with software uploaded on them that can act as hot and cold wallets. Depending on the options, these can range from less than $100 to hundreds of dollars.

## The Bottom Line

Hot wallets are cryptocurrency storage solutions connected to the internet, allowing users to send, receive, and store digital assets. However, due to their constant connectivity, they are more susceptible to security risks like hacking and malware. To safeguard your assets, use hot wallets primarily for transactions and store only small amounts in them; transfer larger balances to [cold storage](https://www.investopedia.com/articles/investing/030515/what-cold-storage-bitcoin.asp) for enhanced security. Ensure you research the features, security measures, and purposes of different hot wallets before selecting one that suits your needs.

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