After purchasing cryptocurrency, deciding how and where to store your assets is a very important step. Unlike physical currency, cryptocurrencies run on a blockchain, and therefore require digital storage systems called wallets. Like a cash wallet, a crypto wallet allows you to hold and transfer funds. There the similarities end. Crypto wallets consist of public and private keys, which are strings of characters that allow holders to receive and transfer their crypto assets.
There are two types of storage options for crypto wallets, depending on preference: "hot" storage and "cold" storage. Hot storage is an app or platform that is connected to the internet, while cold storage is stored offline, often through a physical device such as a thumb drive. While both hot and cold storage systems offer individuals access to their digital funds, they differ in user experience and security levels.
Which option is right for you is a matter of personal choice. The right answer may be a combination of the two options, depending on what you are looking to do with cryptocurrency in both the long and short term.
Hot vs. cold storage: Pros and cons
Hot storage refers to an application or platform that is connected to the internet and allows you to manage your cryptocurrency holdings. Many of these services are free and are available to use on a computer or mobile device. Some examples of hot wallets include the following software:
- MetaMask: A popular browser plug-in that acts as a wallet for ether (ETH) and other ERC-20 tokens
- Exodus: A desktop and mobile software that connects to the Exodus decentralized exchange and supports over 150 cryptocurrencies
- Mycelium: An established, bitcoin-focused mobile application with local trading options
Some crypto exchanges, including Coinbase (COIN), Gemini and Binance, also offer wallets for seamless buying, trading and selling of cryptocurrency on their platforms.
Hot storage pros:
- User friendly: Because they are always connected to the internet, these platforms allow you to store and access your cryptocurrency easily and from anywhere.
- Cost: Most hot wallets are free to use.
- Convenience: If you are using a hot wallet linked to a particular exchange, it is convenient to interact within that ecosystem.
Hot storage cons:
- Security: While hot wallets are generally secure, they are connected to the internet and are therefore more vulnerable to being hacked.
- Accessibility: Because they require a connection to the internet, some wallet features may be restricted in certain countries or jurisdictions, depending on local laws.
Cold storage, on the other hand, holds a user’s private keys offline and therefore adds an extra layer of security from potential hacks. While a hardware wallet is not an absolute requirement to move your crypto into cold storage, the majority of people will opt for a hardware solution such as:
Cold storage allows users to have full control over their private keys and assets, but also comes at a higher price point.
Cold storage pros:
- Portability: Cold storage solutions are often small, plug-in devices that can be carried around wherever in the world you go and can easily be used to log into decentralized apps.
- Security: Your private keys never leave the device and transactions are signed locally, making the devices significantly less vulnerable to cyberattacks.
- Autonomy: Cold storage allows you to be the sole custodian of your crypto assets, eliminating third-party applications from your storage experience.
Cold storage cons:
- Price: Hardware wallets can range between $79 and $255, making them more expensive than online options.
- Transfers: Transfers between cold storage devices are slightly more cumbersome than hot storage wallets.
- Layout: Some people may experience a learning curve on how to use the smaller screens on hardware devices.
Hot vs. cold: Which is safest?
While there have been several notable hacks linked to hot storage wallets, security measures continue to improve. In September 2020, about $281 million worth of crypto assets were compromised in a security breach of Singapore-headquartered exchange KuCoin, though most of the funds were later restored. In July 2019, Japanese cryptocurrency exchange Bitpoint lost about $32 million in user funds due to a hack.
Cold storage system Ledger had its user data compromised in July 2020, although no user funds were stolen.
Ultimately, there are several factors to consider when deciding whether to use a cold or hot storage wallet. Many people utilize a combination of both cold and hot storage options in order to create a secure and seamless transaction experience, Most exchanges, including Coinbase, keep user funds across a variety of cold storage options, which Coinbase refers to as the “gold standard of cryptocurrency asset security.” Generally, experts recommend that large amounts of cryptocurrency, or cryptocurrency assets that users do not need to access very often, should be held in cold storage.