Hot Wallet is an online cryptocurrency wallet that is always connected to the internet, and these wallets are used to perform frequent transactions. This makes hot wallets the perfect choice for trades and regular crypto users.
A hot wallet can be a web-based, mobile, or desktop application. These wallets store private keys, using these keys user can access the blockchain address and the assets stored on it. These wallets provide simple user interfaces to authorize and execute transactions.
Hot wallets allow users to access their digital assets easily, and these wallets can be more vulnerable to cyberattacks and hacks when compared to offline wallets.
How do Hot Wallets Work?
Hot wallets are web-based, mobile, or desktop applications that store the public and private keys of the blockchain address. Users can access their holdings with a connected device whenever they wish to perform transactions.
Public keys and private keys exist to protect the assets’ security; think of it as a locker combination: if you know the locker combination, anyone can easily open the locker and access the assets. Public keys let users receive assets (similar to sending something to an email address), and private keys are like passwords that authorize direct access to these assets present in the blockchain. Based on the users’ control over their private keys, there are two kinds of hot wallets.
Custodial Wallets: These wallets are provided by crypto exchanges like Binance and Coinbase. They are centralised cryptocurrency exchanges; they allow users to view their public key, but they (The Exchange) control the private keys. Users can access their assets by logging into the exchange. In such wallets, the user relies on the custodian to access their funds.
Non-custodian Wallets: These wallets provide full control of private keys to access the blockchain to the user. The users can access their assets independently without the help of a custodian. Users receive Seed phrases when they create these accounts, and these seed phrases are directly linked to the private keys. Users can gain access to the wallet even when they lose their device if they know their seed phrases.
How to Protect Your Hot Wallet
These wallets can be accessed by anyone if they know your private keys, so these wallets are targeted by hackers and cyber terrorists, as they can easily withdraw your funds if they have your info.
- Do not hold large amounts of crypto in your hot wallet; move these assets to your cold wallet, and use hot wallets only when trading
- Always use official websites for software updates and mobile applications
- Maximize your security using 2FA (two-factor authentication).
- Don’t follow suspicious links or provide login credentials to any website to prevent phishing scams.
- When using a non-custodial wallet, don’t store your private keys on your devices
- Try to have many wallets and distribute your assets among these wallets to be safe in case one system gets compromised.
- Avoid sharing your private keys with anyone
- Continuously monitor your assets to see if any unusual transactions occur without your approval.
Hot Wallet vs. Cold Wallet
| Hot Wallet | Cold Wallet |
|---|---|
| Always connected to the internet | Offline |
| Less secure, more prone to online scams, hacks, and cyber-attacks. | Highly secure since assets are stored offline |
| Supports frequent transactions, trading, and daily spending | Mainly used for long-term storage, and “holding” large amounts |
| Web, Desktop, and mobile wallets | Hardware wallets and paper wallets |
| Free | Requires purchasing a physical device |
Conclusion
Hot wallets let users quickly access their assets and enable frequent transactions. It is the best-suited wallet option for traders and users who perform regular transactions. But these wallets are more prone to cyber attacks and hacks, less secure compared to cold wallets, as anyone can access your wallet if they find your private keys. So it’s important to take safety measures and use these wallets wisely.
FAQs
Depends on the requirement. If you want to store large amounts of crypto and hold them long-term, then cold wallets are better, but if you need frequent access to your assets, then hot wallets are built for you.
Yes, it’s a self-custody hot wallet. You have complete control over your private keys.
Yes, if hackers figure out the victims’ confidential data, then they can use this info to access their assets.
According to our findings, the Coinbase wallet is the safest crypto wallet.
No. Knowing your address does not give anyone access to your funds.