Hot And Cold Digital Wallets: What Are The Differences?


Anybody that has shown even a passing interest in cryptocurrency is inundated with all kinds of confusing terminology. As with many things that are new and started with a small group of enthusiasts it almost has its own language.

This ends up driving people away that ordinarily would want to get more involved but get intimidated. Take the issue of digital wallets. There are a couple of different ones and you do need to understand something about them. After all, if you are going to buy any cryptocurrency you have to keep them somewhere. Which is what the wallet is.

In this article, I will go over what the difference is between a hot digital wallet and a cold one. That way you can understand which one is going to be best for you.

What is a digital wallet?

There are two fundamentals to buying and selling cryptocurrency. One is that you need a process to make the transaction so you can send and receive the currency. The other is you have to have an address on the blockchain where the coins actually reside.

Both of these things are handled by the digital wallet. The wallet is simply a place where the information about the cryptocurrency is stored. The currency itself is not in the wallet. What is there, is the public and private keys that are needed to be able to make transactions take place.

And those transactions happen on an exchange where you would be able to connect a bank account to buy the currency or to buy Bitcoins instantly with credit card and then transfer them to your wallet.

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Hot wallet

When you first open up an account on one of the exchanges that you choose, you will be given the credentials for a hot wallet. This is essentially an online account that stores the information you need in the form of your public and private keys.

All the exchanges are going to have their own hot wallet as well as many other apps and third parties. You are free to choose whichever one that you want to use and as long as you have the keys then it can be used to make transactions in any way you want.

There are different features that each will have to differentiate themselves as well as different types of security. You have to make sure that you choose a wallet from a well known source like one of the big exchanges so you know there are safety measures taken to keep them from getting hacked. After all, the wallets are storing sensitive information online.

Cold wallet

A cold wallet has all of the information that you would have in a hot one, just not online. Think of it as a USB flash drive and you get the idea of what it is all about.

The upside of having one is that they are far more secure than a hot wallet because when it is unplugged from your computer it literally can’t be hacked into. In fact, many have such tight security that if you plugged it into a computer that had a virus or a keylogger or something it won’t work.

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A disadvantage, however, is that they have limited coins they can hold. A hot wallet can work with any cryptocurrency available.

*This article has been contributed on behalf of Paxful. However, the information provided herein is not and is not intended to be, investment, financial, or other advice.

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