Investing

Hot Wallets vs Cold Wallets – What to Know

Last Friday, Japanese exchange, Coincheck, lost $530MM to hackers in the largest cryptocurrency heist to date. If youre new to crypto, you need to be smart about where you store your money and never leave it vulnerable to an exchange hack. Find out the difference between wallet storage options and set up a secure wallet to store your bitcoin and other cryptocurrencies.

Dont Leave Your Money on an Exchange

Ive said it once, and Ill say it again. Dont leave your money on an exchange. The Coincheck heist is the biggest, but its nothing new in the history of crypto. Mt. Gox ($450MM stolen in 2014), Bitfinex ($72MM in 2016), and Nicehash ($64MM in 2017) are all recent hacks that robbed thousands of crypto investors of their money.

Hot vs Cold Wallets

Unless youre about to trade, keep your crypto safely stored in a wallet. There are two types of wallets hot and cold. A hot wallet is connected to the internet while a cold wallet is not.

Which Kind of Wallet Do I Need?

If youre planning to trade often, you need a hot wallet. If youre new to crypto and not ready to buy a more expensive form of storage ($60-100), get a hot wallet so your money is off the exchanges. If youre serious about crypto investment, Id suggest getting a cold wallet for long-term HODLing and a hot wallet for trading on exchanges.

Hot Wallets

A hot wallet is the easiest first wallet to create after you buy your first cryptocurrency on an exchange. Coinbase and most other exchanges offer free wallets, but your money is still vulnerable to hacks. A hot wallet is easily accessible to spend or trade and removes the big target on your back leaving it on an exchange. Its still less secure than a cold wallet, however, because someone could hack your password.

Hot wallets are free and generally pretty easy to set up. They come in a variety of formats including software, mobile, and online. Different wallets support different cryptocurrencies, so pick an option that works with your investment goals. Here are four solid options:

Blockchain.info

Self-proclaimed the #1 wallet, blockchain.info has an online wallet that stores Bitcoin and Ethereum. Its easy to use and has a clean interface, making it a good option if you only need a wallet for BTC or ETH.

Myetherwallet.com

MyEtherWallet (MEW) integrates well with the Trezor, a hardware wallet Ill discuss in the cold wallet section below. Its a little harder to set up than some of the others, but it works well on multiple machines and supports ethereum and every ERC-20 compliant token.

Electrum

Electrum has been around since the early days (2011) and offers a software wallet with many added safety features. You can integrate with cold wallet storage, and recover your password if needed. Electrum only supports bitcoin storage, so youll have to create another wallet if you want to store other cryptocurrencies.

Exodus Wallet

With a beautiful pie chart interface showcasing all your investments, Exodus is an attractive, easy to use wallet for those of us invested in several cryptocurrencies. Exodus would be my number one choice except for one key issue, it lacks two-factor authentication, making it less secure than others.

When to Use a Hot Wallet

If youre planning to trade often, you need a hot wallet. If youre new to crypto, you should get a hot wallet. If youre serious, buy a hardware wallet, at $60-100 it will give you greater security than the options above. Id suggest getting a cold wallet for long-term investments and a hot wallet to use when you want to make trades on exchanges.

Cold Wallets

Cold wallets are the safest route to store your crypto because your coins are stored offline. If you dont need access for months or years at a time, cold wallets are the safest choice as long as theyre used correctly. Theres two options when it comes to cold storage, paper and hardware wallets.

Paper Wallets

Paper Wallets are free to set up and very safe if used correctly. That said, there is room for error. Unlike hot wallets and hardware wallets, theres no way to retrieve your private key if you lose it. Or if your paper wallet gets destroyed, for example, in a house fire, you lose your money. Paper wallets are single use, so good for storing money long-term.

Hardware Wallets

Hardware wallets are more powerful and convenient than a paper wallet. Both of these options integrate nicely with a hot wallet, allowing you to connect and move funds when its trading time.

The Trezor and Ledger Nano S are both solid long-term storage options that connect to a computer via USB. The key advantages to these hardware wallets are usability, multiple coin support, and security.

As popular storage choices, both wallets are still the target of hackers and phishing scams, so be vigilant about keeping your information private and only buy a hardware wallet directly from the source.

Trezor

Trezor‘s integration with Myetherwallet makes it easy to move ERC-20 tokens over to cold storage. Both the Trezor and Ledger offer 2 factor authentication and a way to restore your private key if you lose it, making both solid options for protecting your investments, but Trezor is a better choice if you dabble in new coins often and want to migrate them easily to cold storage.

Ledger

Ledger Nano S has more supported wallets and tends to adopt new coins a bit faster than Trezor. Ledger has its own way of storing ethereum and ERC-20 tokens. You have to install a separate app for each coin you want to store, but you can only install up to four apps at a time. Because of this, its somewhat tedious transferring in coins four at a time though this might not be a big deal if you dont move funds often. Ledger also features a more sleek design and costs about $30 less.

Whatever wallet(s) you choose, dont broadcast where you store your money. Obviously, dont ever share your private key or passwords. Have fun, and stay safe out there, its still the wild west.

Leslie Ankney is a cryptocurrency investor, writer, and digital nomad. Follow her adventures on Twitter and Instagram at @CryptoLeslie