Hot vs Cold Wallets 101
Summary
Hot wallets are the most common type of wallets, and allow investors to send, receive, or store cryptoassets.
Cold wallets are physical wallets typically held offline on a device such as a Ledger or Trezor, commonly referred to as hardware wallets.
Hot wallets provide more convenience but are more vulnerable to attacks.
Cold wallets are less convenient but more secure.
Estimated time: 2 minutes
The goal of this piece is to provide you with a high level look at the basics of hot versus cold wallet options. Understanding cryptoasset storage methods is an essential part of understanding the asset class as a whole, and the ways in which it differs from its traditional counterparts. Two forms of cryptoasset storage are available: hot wallets and cold wallets. Advisors must know the pros and cons of each wallet type to best serve clients and determine the most suitable option.
What is a hot wallet?
Simply put, a hot wallet is any crypto wallet (or crypto bank account) that can be accessed online, such as those a client might have at Coinbase or Gemini. Hot wallets are the most common type of wallet, and allow investors to easily send, receive, and store cryptoassets; they are web-based, providing users with fast local access via computer or mobile device. These wallets are mainly accessible at crypto exchanges and used by the majority of retail crypto owners. The downside of hot wallets is that, since they are ‘online’ meaning still connected to the internet, they are more vulnerable to hackers. Hot wallets are slightly less secure than their ‘offline’ counterparts, so advisors should ensure they have the right wallet and reasonable security measures in place when recommending or using one on behalf of their clients.
What is a cold wallet?
Unless you have a discussion with said client about alternative options, a cold wallet that is ‘offline’ is the most secure way to store their cryptoassets. Cold wallets usually take the form of a USB drive with additional security measures and provide investors with a physical medium for offline storage. Cryptoassets are only brought back online to make transactions. This is a great option for clients that are buy and hold investors, looking to own cryptoassets as a long-term legacy holding. You may hear the term hardware wallet used by clients or industry pundits. This refers to the USB stick storing the wallet’s private keys (read more about Public vs Private keys here). This is the most secure option for your peace of mind, and for your clients who want self custody of their cryptoassets. Note: Through our integration with Zabo, Onramp Invest allows you to track client cryptoasset holdings on hardware wallets via our held away feature.
