It’s finally happened. The crypto-verse has surfaced from the underground and become the hottest topic of conversation. Blockchain (not sure If we have a blockchain article to link to) technologies are rapidly outpacing traditional business models, leaving them in a scramble to stay relevant. However, with the worlds attention increasing, the need for adequate security of crypto-assets has never been greater. With this in mind, understanding the difference between a hot or cold wallet is not only imperative; it should be the first step you take before investing in this new market sector.
With Great Power Comes Great Responsibility
With the development of decentralised networks and crypto-assets, society has reclaimed its power over personal finances. No longer requiring banks or third-party validation, we can now transport huge sums of money/value across the world in a matter of minutes, for an exceptionally low cost, to anyone with an online connection.
However! Whilst we have reclaimed ownership of our financial freedoms, we have also taken on one huge responsibility. Without the refuge of established financial institutions (namely banks), the storage and security of crypto-currencies and assets rests solely on your shoulders. Depending on your needs, the choice between a hot or cold wallet can literally be a choice between financial freedom and complete bankruptcy.
The Red Pill or the Blue Pill?
Acquiring/buying crypto-assets, and their safe storage, are two separate considerations. In fact the idea of ‘storing’ your crypto-assets can be confusing in itself, after all, you don’t have a physical product to hide away, right?
When we use the term ‘store’ or ‘secure’ we are actually referring to the secure storage of your private keys. These keys are what actually allow you to transfer value (or assets) between yourself and another holder of a private key.
In essence, a private key is nothing more than a string of numbers, which is used to prove to the network that you are, legitimately, the owner of those assets. Therefore, if you do not hold your private keys, or in the event they are lost/stolen, you are effectively handing ownership of your assets to whoever does hold them. It is important to understand this concept before we dive into the difference between a hot or cold wallet, and where each may be applicable.
The term ‘hot wallet’ refers to any means of storing a crypto-asset that has been, or is currently, connected to the Internet. That is to say, if you are able to directly access your wallet through an online connection e.g. on an exchange, or through your phone/computer with an online connection, it is considered a hot wallet.
Some examples of hot wallets include:
- Native wallets provided by exchanges e.g. Coinbase, Coinjar, Coinspot
- Desktop applications/wallets e.g. Exodus and Copay
- Smart phone storage wallets e.g. Jaxx, My Ether Wallet
Aside from the connection to the Internet, it is important to note that hot wallets also put the control of private keys in the hands of a third party. In the case of some hot wallets, like those native to exchanges, it is likely that there are only a few private keys to cover all customers, as opposed to generating a private key for each individual. This allows for transactions to occur immediately, however does leave the exchange open to security breaches.- link to hacking article.
Desktop and mobile applications can be considered a more secure hot wallet, as they put private keys back into the hands of the operator. By requiring assets to be sent to/from exchanges, or directly to an address before value can be transferred, they are considered a step up from the wallets on exchanges.
Some desktop apps, such as Exodus, also have services such as ShapeShift built into their interface, which lets you instantly exchange currencies within the wallet e.g. Btc to Ltc or Btc to Eth.
Regardless though, by installing these onto devices that are connected to the Internet, they are also susceptible to hacking, viruses and phishing scams. Particularly in the event that private keys, or login information is stored somewhere else on the device, rendering the wallet incapable of safely storing your assets.
A cold wallet is any means of storage that has never been connected to the online world, or cannot be accessed via the Internet. Most commonly these are hand-held devices, referred to as hardware wallets, which do not have the capabilities to connect to the Internet on their own, however can extend to other means of storage. Some examples of cold storage wallets include:
- Paper wallets. That is, private keys are generated and physically recorded onto paper, and then stored in a safe or safety deposit box.
- Desktop wallets installed on air-gapped computers
- Cold-storage devices e.g. ORBIS Secure Wallet, Trezor, Ledger Nano S
Cold Wallets are designed not only to store your private keys offline, but also to provide immutable protection against hacking and scams. After all, no one can hack your piece of paper, or access your computer that has never been connected to the Internet. They CAN, however, steal your paper wallet or computer if you haven’t spent the time/money to store them properly. In terms of ultimate security and convenience, some cold wallets definitely rank high above others, and those are cold storage hardware devices.
For example, let’s say you wanted to trade an asset instantly. If it is in cold storage, you need your private keys to make the trade. But your keys are stored on a paper wallet in a safety deposit box, and the bank is closed. Or, alternatively, they’re on an air-gapped computer at home, but you’re away for the weekend.
On the other hand, let’s say you own an ORBIS Secure Wallet. The device is designed to be ultra portable, and interaction with it occurs wirelessly (as opposed to the Trezor or Ledger Nano S). Not only does this create the only true immutable and un-hackable cold storage wallet, it also means that you are literally carrying your safe around with you. It can be backed up, and backed up again, in case you lose the device and lets you transfer your assets between addresses, hot wallets and exchanges in the blink of an eye- and back again- without ever compromising the safety or security of your holdings.
So Wait. Should I Use a Hot or Cold Wallet?
The choice to use a hot or cold wallet doesn’t have a one-size-fits-all solution. Rather there are a number of factors to take into account:
- The size and frequency of your trades/transactions
- Is your portfolio logically planned and balanced?
- The security of your exchanges/methods of trades
- The security of your personal devices
- The amount of risk you are willing to assume
- The amount of risk you are willing to place on a third party
- The personal liability of storing private keys/assets
- Can you afford to lose your assets?
Lets take the first two points into consideration. Do you have short term, mid-term and long term holdings in your portfolio? Do you trade frequently, or are you buying and holding? You see in both cases, using a hot or cold wallet, or a combination of both a hot and cold wallet may be applicable. It really depends on your personal preference, investment portfolio and risk assumption.
If you have mid to long term holdings your safest and most secure way to store them is on a cold storage device such as the ORBIS secure wallet. This allows you to leave your shorter term (and presumably smaller holdings) on exchanges, for quick access and transactions.
However! Even though short-term holdings may be smaller, you need to consider the effect that losing them could have on your portfolio. If you are willing to assume the risk and liability (points 3–8 above) then you may decide to leave some assets in hot wallets. You must recognize, though, that the risk is yours and yours alone. You see, whilst hot wallets offer the ability to instantly make trades, they are open to security breaches, viruses, and other Internet related fallibilities.
On the flip side, many cold wallets make instantaneous trading and transacting almost impossible. And whilst carrying a cold storage device may be a portable means of securing your holdings, having to physically connect them to a phone or computer renders their portability null.
There Has to Be a Solution!
There is. Thankfully the ORBIS Secure Wallet solves the issues of security, portability and instant trading whilst providing the most secure cold storage solution to date. Interactions with the ORBIS Secure Wallet happen wirelessly, meaning it can be accessed via your phone or computer without ever connecting the wallet to the Internet.
This lets you carry the device around with you, connecting it to the trading platform of your choice for instant fundability. It also means that you can secure your whole portfolio, instead of risking some assets over others in matters of convenience. So when deciding if a hot or cold wallet is the right option for you, consider the ORBIS Secure Wallet as your one-stop-solution for security and asset management.