Hot Wallet

A cryptocurrency wallet that is connected to the internet for hot storage of cryptoassets.

What Is a Hot Wallet?

A hot wallet is a cryptocurrency wallet connected to the internet for the storage of cryptoassets. The ability to store, secure and transact crypto assets makes hot wallets a convenient and accessible choice to interact with the digital asset economy.

How Does a Hot Wallet Work?

A wallet is an indispensable tool after purchasing or acquiring cryptocurrency. Hot wallets are connected to internet servers and can be used to transact cryptocurrencies via a browser. Users can sign and authorize financial transactions of digital assets by using their private keys. A public key identifies a user’s wallet while a private key is used to access the wallet, check balances, swap and transact crypto and more. Both keys are needed to use any type of wallet.

Thus, the hot wallet is the interface you use to access and store your cryptocurrency. For the blockchains, a hot wallet transmits transactions that are recorded to the ledger.

In contrast to cold wallets, they only work with an internet connection. Another difference is that cold wallets store private keys offline, making them a more secure way of storing your digital assets. However, hot wallets are often preferred for their convenience and ease of use. They can also be used to interact with decentralized exchanges and smart contracts.

Hot Wallets: Pros and Cons

Hot wallets have several pros and cons. For starters, they can be subdivided into mobile wallets, desktop wallets and web-based wallets, like MetaMask. All of these wallets are potentially vulnerable.

The pros of hot wallets include their convenience. For instance, because hot wallets are connected to the internet, there is no transition between using the wallet online or offline. Thus, it is faster and easier to use a hot wallet for simple transactions. Cold wallets, on the other hand, need to be connected and take significantly longer time.

Another upside is that hot wallets can be more readily used to receive airdrops. Although airdrops can technically be received on any type of wallet, hot wallets are especially suitable because of their convenience and speed of use. On the other hand, users need to make sure not to store too much cryptocurrency in a hot wallet.

One con of using a hot wallet is the higher degree of vulnerability to cyber attacks. A golden rule of cryptocurrency storage is to never keep too much in one wallet and particularly not in a hot wallet. These types of wallets are vulnerable to attacks like phishing, where private keys get stolen. For that reason, exchanges store the bulk of customer deposits in cold wallets. Only a tiny fraction of user deposits is actually stored in a hot wallet to allow users to withdraw from their custodial accounts.

Are Hot Wallets Safe?

Generally, hot wallets are just as safe as any other type of wallet. They are considered higher risk because users sign more transactions with different smart contracts, increasing the chance of becoming a victim of an attack that steals private data. As a rule of thumb, users expose themselves to many more potential attacks simply because they use hot wallets a lot more often than other types.

How Do I Keep My Funds Secure on a Hot Wallet?

A key rule is to limit the amount of funds stored in a hot wallet. For instance, you should never store more in a hot wallet than you are willing to lose in a hack. Furthermore, safely storing your private key and keeping your browser updated are also considered mandatory security practices.

Can Hot Wallets be Hacked?

Hot wallets themselves can be hacked, however, the biggest risk factor is the user. Attackers generally try to trick users into involuntarily revealing their data via a phishing attack or fraudulent smart contracts that users interact with. Therefore, you should always pay attention to the transactions you are signing and make sure to keep your personal security level high when using your hot wallet.

Is a Hot Wallet Safer Than an Exchange?

Hot wallets and exchanges both come with their own types of security risks. Both can be at risk of phishing or hacker attacks, although exchanges are probably more exposed because they control more user assets. On the other hand, exchanges are more convenient for users since you do not have to store your private key. Ultimately, it is a matter of preference, and most users have both exchange accounts for trading and hot wallets for storing and transferring cryptocurrencies.

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