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 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:

Some crypto exchanges, including Coinbase (COIN), Gemini and Binance, also offer wallets for seamless buying, trading and selling of cryptocurrency on their platforms.

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.

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.