Cold wallets vs. hot wallets
Tags: hotwallet, coldwallet, privatekeys, publickeys
Published: 2022-03-09 09:49:30


Understanding cryptocurrencies forces individuals to learn about financial instruments that previously might have been unreachable. Traditional banking systems have been responsible for holding finances for decades, and only in times of political uncertainty do people rush to retrieve this cash. The onus of securing these assets in crypto is on to the individual. Users are required to understand the instruments that make this possible. 

The adage "not your keys, not your coins" is at the center of this discussion. Meaning crypto-assets purchased on exchanges are not necessarily yours but owned by the third-party intermediary, as they have control of the wallet's private key. 

**Wallets**
Cryptocurrencies are stored in digital wallets that facilitate the usage and management of various digital assets, not unlike a bank account. Turning every crypto holder into a bank makes security essential. 

The key features of a crypto wallet are its private and public keys. The public key is similar to an email address in that it is used to receive money or other assets transferred to a user's wallet. It is also known as an address. This address is shared publicly, but owners need to understand that anyone with their public keys can also track their entire transaction history on the blockchain. Users that are not comfortable with anyone tracking their financial activities need to have a good juggling act between multiple wallets to try and obfuscate their identity. 

The private key is like a password and should never be shared with anyone. Common crypto scams involve tricking newbies into giving over their private keys or playing on individuals' greedy nature by offering them access to a wallet with X amount of funds. Not financial advice, but nothing is for free, don't be greedy. 

A lengthy string of random, algorithmically produced characters represents each key.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/0o8z0hg52qi4dsaopbs5.png)

Seed phrases play a vital part in any crypto wallet; recovery of a lost wallet is impossible without them. Seed phrases are a group of 12 to 24 random words that the wallet provides after creating it. Seed phrases should be kept in a safe location where no one can access them and should not be shared. If a wallet's owner ever loses access to their wallet, they can use the seed phrase to generate public and private keys again. 

The exchange controls the private keys of cryptocurrencies bought on them. Users can keep their cryptocurrencies in their wallets if they so choose. There are two types of off-exchange wallets: hot wallets and cold wallets.

**Hot Wallets**
Hot wallets' defining characteristic is their connection to the internet. For most users, it's the first kind of wallet they will own. Generally, the wallet is in the crypto exchanges' mobile or desktop application. Having a connection to the internet is essential in crypto as it aids in trading, purchasing, and a variety of other activities. The internet connection is what exposes wallets to a security risk. There will always be malicious actors testing the limits of every protocol or wallet to find a breaking point, to extract funds. Understanding how to mitigate this is important. That's why it's not a good idea to keep all of one's money in a hot wallet.

**Cold Wallets**
Cold wallets have no internet connection, and a byproduct of this is that they are a bit cumbersome to use. They are only connected to the internet when users need to transfer in or out of the wallet. Two types of cold wallets are hardware wallets and paper wallets. 

Hardware wallets have a distinct look since most look like a USB stick. Hardware wallets technically do not hold cryptocurrency; it is always on the blockchain. The wallets' purpose is to store private keys of said cryptocurrency, removing blockchain's access until it is needed again to activate new transactions. When users need to reaccess these funds, they can connect the wallet to its dedicated software, reinitiate network control of their asset, and transfer it wherever required. 

Paper wallets are exactly how they sound, a piece of paper with public and private keys printed on it. Some could have a QR code as well. Technically it is the most secure wallet someone could own, but early crypto adopters can attest to its frailty. Paper can be misplaced, stolen, susceptible to water or fire damage. The ink could run over time, ruining the readability of its contents. 

When creating a paper wallet, the keys are removed from the blockchain network, and coins are unreachable without them. To reaccess these funds, users need to scan the private key QR code into their hot wallets. 

**Closing** 
Most new crypto users have only used hot wallets because of their convenience and the exchange's security reassurances. We should never forget if you don't have complete control of your private keys, you are not in control of your finances. Crypto was created to remove third-party intermediaries between individuals and their money. Being your bank and being responsible for your funds is a frightening endeavor, but it can be enlightening if you want to attain any amount of financial literacy and independence.

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