When you first learn about cryptocurrency, the topic seems alienating and strange; the very nature of the blockchain is hard to parse, and it’s natural to question the validity of a currency that literally exists only in the form of 1s and 0s.
As you learn more, you typically come to trust in the future of cryptocurrency and build a foundational understanding of how this system works. You’ll also start freely buying, selling, and spending cryptocurrency because you have a thorough understanding of how these transactions function.
But if you want to get the most out of your crypto endeavors, you need to expand your knowledge even further and take advantage of cryptocurrency in every way you can. For most investors, that means using a cold wallet as your primary form of storage.
So why is this the case? And how can you get started?
Hot Wallets vs. Cold Wallets
If you're already deep into the world of cryptocurrency, you can skip this section. We're going to go over the differences between hot wallets and cold wallets, so you can get a better idea of how each functions in a crypto environment.
Hot wallets are the most popular type of cryptocurrency wallet. These wallets are always online and are typically managed by a third party. You can create an account with these third parties, just as you can create a brokerage account with a financial institution, and you can use an app or a web service to manage transactions in that hot wallet as well.
With a hot wallet, you can conveniently buy new cryptocurrency, sell your existing coins, and even manage transactions, issuing requests and sending money to other addresses.
Because these wallets are intuitive and convenient, many people rely on them for almost everything related to crypto. But there are some important tradeoffs to keep in mind; you're essentially trusting your security to a third party and potentially opening yourself up to new drawbacks and vulnerabilities, based on the actions of that third party.
Cold wallets, in contrast, are held completely offline, usually on a flash drive or similar device. Much like a physical wallet, cold wallets keep your currency contained in one place. Instead of entrusting your private keys to a third party, you'll be responsible for keeping them private and secure. And if you ever want to use the currency in your cold wallet, you'll need to take it online.
The Advantages of Cold Wallets
These are some of the best advantages that cold wallets can offer, and the main reasons why every crypto enthusiast should be using them:
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Security. Cybersecurity should be a top priority for everyone, in every context. We like to imagine that hackers are some covert groups of super elites, super intelligent technological masters, but in reality, most hackers are mere opportunists, looking for low hanging-fruit to steal. If your third-party hot wallet provider mismanages your keys, or if you aren't thoroughly secure with your login credentials, a hot wallet can render your holdings vulnerable. While cold wallets still require you to pay attention to security fundamentals, they are generally much more secure.
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Recovery. If your account gets locked or is rendered inaccessible, your hot wallet is functionally useless. In contrast, your cold wallet can be used anywhere that you have an internet connection. No matter what happens to third-party hot wallet providers, or how crypto is regulated, you can recover and use your cryptocurrency anywhere you can get internet.
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Offline storage. Some people also take comfort in the fact that cold wallets are a true form of offline storage. Yes, these currencies are still digital, but they're stored digitally on a physical medium. Admittedly, this does open some new potential risks (such as property destruction), but it also means you get to hold your own currency in your hands.
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Total decentralization and independence. One of the biggest advantages of cryptocurrency is its decentralized nature. Crypto operates outside of the scope of central banks and governments of the world. No organization, institution, or individual has the power to control this currency. If this is an advantage in your eyes, why would you give up that potential advantage by surrendering control to a third-party entity? Keeping your crypto in a cold wallet is the only true way to remain decentralized and independent.
Are There Disadvantages?
So, are there any disadvantages to cold wallets?
Of course. But these disadvantages are manageable.
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Lack of flexibility.
There are many good reasons to love hot wallets, and the best one is arguably their flexibility. Hot wallets require no technical knowledge, and they allow you to easily buy, sell, spend, and convert cryptocurrency at any time.
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Difficulty and accessibility.
Creating a cold storage crypto wallet isn’t hard, per se, but it may seem daunting to a newcomer. Most amateurs don't want to go through the effort to learn this process when hot wallets are available.
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Custodial responsibility.
When you create and manage a cold wallet, you're taking on responsibility for your own currency. You're the one in charge of keeping your cold wallet secure and keeping your private keys private.
Tips for Using a Cold Wallet
As you get started using a cold wallet in your crypto endeavors, make sure you follow these tips for your own security and to maximize efficiency:
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Do your research.
Make sure you fully understand how cold wallets work, why they're different from hot wallets, and which one is best for your needs. Don’t assume one is better than the other in every way.
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Use cold wallets as long-term storage.
If you’re spending crypto actively, or if you like making trades throughout the day, hot wallets are superior. But cold wallets are usually better if you're going to keep your crypto in long-term storage.
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Keep your keys secure.
Your keys are what give you access to your currency, so you need to keep them as secure as possible. Never give out your keys to anyone and take great care to remember your keys so you can use them when you need them.
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Keep your physical assets secure.
Store your cold wallet intelligently so it can’t be easily stolen or destroyed.
Cold wallets aren't a perfect fit for every crypto user or every situation, but they're inherently and objectively superior to hot wallets in most ways. If you've historically relied on hot wallets exclusively, now could be the time to keep at least some of your long-term crypto stashes in a cold wallet. Otherwise, make sure you fully understand the pros and cons of both hot wallets and cold wallets so you can use each to its fullest potential.