- Beginner's Guides
The Difference between Hot Storage and Cold Storage for Cryptocurrency
If you’re a crypto day trader or even a crypto investor, you should ask yourself the following question: is your cryptocurrency as secure as it could be?
You might be under the impression that your cryptocurrency storage needs are dictated by how you use your cryptocurrency and what for. However, if your answer to the above question was ‘no,’ we are here to tell you that your cryptocurrency storage needs should be dictated by various security concerns that you should keep in mind.
For day traders, in other words, those people who trade their cryptocurrency in exchange for other crypto tokens on an online crypto exchange, and even for those who use crypto in their daily online spending, it makes the most sense to use a hot wallet. A hot wallet is another term for an online wallet hosted by a crypto exchange. Hot wallets make the lives of daily crypto users and traders much easier because it means you have cryptocurrency on hand all the time.
However, if you have been holding a ton of cryptocurrency on your hot wallet, you may need to reconsider your cryptocurrency storage needs. While hot wallets certainly provide efficiency and convenience, they are subject to security threats by online hackers and other people with malicious intent. In the worst-case scenario, which by the way, is not unheard of, a malicious actor living on the other side of the world can use phishing scams and malware to compromise the security of your hot wallet and empty all your digital funds.
Here we see the single biggest advantage of cryptocurrency becoming a huge disadvantage. It’s not so much that hacking into a crypto trader’s online hot wallet is easy. In fact, it’s very difficult as passwords and multi-factor authentication protect hot wallets. The problem is that if someone does manage to trick you into emptying your hot wallet, the decentralized nature of cryptocurrency means that there is no way in the world that you can retrieve those funds again.
Enter, cold wallets. A cold wallet is simply a hardware device on which you can store your cryptocurrency offline. Typically speaking, cold wallets are more useful for crypto investors and those holding on to many cryptocurrencies for the long term. Cold wallets allow you cryptocurrency storage in a way that nobody but yourself can have access to unless you share your password with them. Nobody can hack into your cold storage device without having it physically on hand.
However, as secure as cold wallets are compared to hot wallets, they come with a single drawback. Since they allow you to store your funds offline, cold wallet storage can be rather inconvenient, especially for those who want to engage in day trading or use crypto to buy products online.
Nevertheless, given that more and more incidents of digital currency theft from hot wallets are being reported nowadays, cold wallet storage for your cryptocurrency is worth looking into. We aren’t saying you should exclusively store your crypto in a cold wallet. We are saying that you should be well informed enough about the security risks to make the crypto storage decision that is right for your needs.
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