What Is a Hot Wallet?
A hot wallet is a cryptocurrency wallet that is always connected to the internet and cryptocurrency network. Hot wallets are used to send and receive cryptocurrency, and they allow you to view how many tokens you have available to use.
Key Takeaways
- A hot wallet is a wallet that is always connected to the internet; they allow you to store, send, and receive tokens.
- Hot wallets are linked with public and private keys that help facilitate transactions and act as security measures.
- Because hot wallets are connected to the internet, they tend to be somewhat more vulnerable to hacks and theft than cold storage methods.
How a Hot Wallet Works
When you buy or mine cryptocurrency, you need a wallet to facilitate transactions if you decide to use it for purchasing goods or services. Your cryptocurrencies, or rather the private keys you use to access them, are stored in these wallets when ownership is transferred to you by the ecosystem.
When you own a cryptocurrency, you’re given private keys that identify it as yours. Public keys are similar to account usernames; they identify the wallet, so the user can receive tokens without revealing their identity. Private keys are like personal identification numbers; they provide you access to the wallet, allowing you to check balances, initiate transactions, and more. Without either of these keys, the wallet is effectively useless.
Hot wallets are applications connected to the internet and the cryptocurrency infrastructure, which allows you to use them. For a user, the hot wallet is the interface for accessing and storing your cryptocurrency. For the cryptocurrency network, their role is to facilitate any changes to the transaction record maintained on the decentralized blockchain ledger for whichever cryptocurrency you’re using.
Cold wallets, also known as cold storage, are considered one of the safest methods for securing your digital currency. These are distinct from hot wallets as they store your private keys offline, using either an application that doesn’t connect to the internet or a device similar to a USB thumb drive. To use the cryptocurrency you have in cold storage, you need to transfer them to your hot wallet.
Types of Hot Wallets
There are various hot wallets available, many of which are free to download. Some wallets are designed to work specifically with particular mobile web applications; you might find one tailored for a specific cryptocurrency or ecosystem. Additionally, some cryptocurrency exchanges will only accept transfers to and from specific wallets.
Examples of hot wallets include MetaMask, Coinbase Wallet, and Edge Wallet. MetaMask is designed for transactions within the Ethereum ecosystem. Coinbase Wallet is the wallet for the cryptocurrency exchange Coinbase, and Edge Wallet is designed to accept transactions using all your digital assets.
Given the variety of wallets with different designs and intents, it’s important to research hot wallets before downloading and using their services. Wallet developers have varying degrees of expertise, different commitments to security and privacy, and diverse priorities when developing their wallets. Some might have fees, and others may 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.
Special Considerations
There are several aspects you should consider before deciding on your hot wallet. Most important are its security features and how you intend to use them. Your cryptocurrency’s safety and security depend on how you store your tokens. Since items stored in a hot wallet are vulnerable to attack due to the storage of public and private keys on the internet, consider some precautionary strategies to safeguard your cryptocurrency. The old saying “don’t keep all of your eggs in one basket” applies to financial assets, including cryptocurrency. If you diversify your storage strategies, you’ll minimize risks of theft and loss.
Use Your Hot Wallet Only for Transactions
It’s advisable to only keep a small portion of your crypto assets in your hot wallet; only put the amount of cryptocurrency you need for spending when you need it. This strategy necessitates storing most of your assets in a cold wallet and transferring necessary amounts to the hot wallet for immediate use.
Store Your Assets in an Exchange
Alternatively, you could opt to keep your cryptocurrency tokens in accounts linked to the exchange you use. Some exchanges store your cryptocurrency within their infrastructure, essentially serving as a hot wallet provider. However, this option comes with risks—if an attacker gains access to the exchange’s network, you might lose your cryptocurrency in an attack.
Exchange Your Cryptocurrencies
Maintaining a substantial cryptocurrency balance attracts hackers and significant risk in the event of an attack. Many top digital currency exchanges allow you to transfer between fiat currencies and cryptocurrencies, enabling you to hold only small amounts in your wallet. You can convert the rest to your local currency and store it in your bank account. Although there might be fees for converting and transferring funds, it could be worth considering if not holding your cryptocurrency as an investment.
Hot Wallets and Investing
Cryptocurrency investing is similar to stock market investing—you own cryptocurrency waiting for its market value to increase. You could hold it or sell it to another investor for profit. However, storing your investment in a hot wallet is risky. Cold storage, paper storage, or other non-connected methods might be safer as you wait for your cryptocurrency’s value to appreciate.
How Do I Secure My Hot Wallet?
To ensure your hot wallet’s safety:
- Only keep small amounts in it.
- Ensure regular backups.
- Keep the software up to date.
- Encrypt it.
- Secure your password.
Can Hot Wallets be Hacked?
Current technology and software make hacking hot wallets difficult but not impossible. The devices your wallet is on (phones, computers, tablets) can be accessed through various methods, making hot wallets most vulnerable.
Are Hot Wallets Safe?
Hot wallets can be safe if used only for transferring digital currency while keeping the rest in cold storage. This way, there’s no risk of loss if the hot wallet is accessed.
Related Terms: cold wallet, cryptocurrency exchange, blockchain ledger, digital currency, crypto security.
