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With the ever-increasing utilization of cryptocurrency comes a need for a further evaluation on the utility behind how best to view, access, and track your various coins; but this is only a part of the consideration.   Which Crypto wallet to choose from, whether to opt for cold wallets in order to hold your crypto assets in a more secure and traditional manner, or a digital wallet offering a more real-time accessibility of your tokens and exchange ability can be a difficult choice.

Really, it comes down to what you, the user, prefers as your “modus operandi” and what you prioritize as being most critical.  Both options provides you with various security measures, but the manner in which they offer this security differs.  Considering what you dabble with in terms of cryptocurrencies can also factor in when thinking about which type of wallet to use (whether you primarily choose stable coins like bitcoin or Ethereum over the wilder alt coins out there).   

What is a Cryptocurrency Wallet?

A cryptocurrency wallet is an app that allows for the storing crypto and its subsequent retrieval similar to the conventions of how a wallet operates; offering users a medium with which people can store their currency in a singular location for use how and when the user would want. Cryptocurrency wallets also tend to provide their users with a level of security where traditional wallets do not.  

At any given point and at any given time, there is a possibility with traditional wallets of having your assets stolen because the only line of defense is your self.  However, this wallet offers unique protection for cryptocurrency in the form of an amalgamation of words—private keys—that mark individual wallets to individual users; essentially, removing the physical “line of defense” space between your self and your assets; now, to gain access to your cryptocurrency wallet, people would have to know this unique combination of words in a unique sequence within a unique amount of attempts.  

Some types of wallets don’t provide private keys; rather, the wallet is given to you.  These crypto exchange wallets instead create the wallet for you and allow you to access them on their application but there are no private keys associated with them.  Rather than being able to export or import the wallet where the user wants, these wallets are directly integrated into their application and exchange.

What is a Hot (Digital) Wallet?

A digital wallet can be considered a hot wallet in that it is a wallet that is constantly “on”—much like a live wire—essentially rendering any crypto assets as viable and “in play”.  This wallet offers some similarities to a traditional wallet but some of the notable differences between them is that a cryptocurrency wallet has the ability to provide a central location to also engage in cryptocurrency exchanges.  Within the wallet itself, users are able to buy and sell cryptocurrency, send to other wallets, and view tokens that you already have.  

What is a Cold (Storage) Wallet?

By contrast, a cold storage wallet is considered as its name implies; that private keys are stored in a place that is not subject to the same conditions that something turned “on” is—in this way, there is no “live wire” of constant accessibility. 

This wallet operates far more like a traditional wallet in that your assets can be stored on your person in the form of some type of device which can be taken with you at any time—a more analog method of keeping your assets secure.

Another term often associated with cold storage is hardware wallets.  A hardware wallet provides users with a more secure method of storage and can often be taken with you on the go.  Depending on what kind of hardware wallet you end up going with for cold storage, additional benefits can be provided.  As an example, the Trezor Model T not only provides you with the usual security measures that cold storage provides, but also backing up the entire wallet and passwords are individually locked.

How does a cold wallets work?  

A cold wallet typically follows a basic format wherein a user inputs their hardware device and selects the option that they want (whether they want to receive or send crypto).  This will generate an address.  With this address, users can send crypto to it. 

As the cold wallet has both your public and private keys associated with it, once crypto has been sent or received to the identified address, a user can then disconnect the device and remove their information from being online.  The crypto that was sent, the address that it was sent to, the private and public keys all safely in the hands of the user.

Hot Wallets vs. Cold Wallets Compared: How to decide?

Hot wallets and cold wallets may be decided best when the user develops their own individualized risk and reward assessments and/or when reflecting on what their aims are in becoming involved with crypto.

As the hot wallet is consistently connected to the internet, there are some advantages and disadvantages.  For the advantages, a hot wallet is much faster which can allow users to buy, trade, and spend crypto in a much smoother and quicker manner.  As crypto is constantly being traded, coin values can fluctuate, and with the added benefit that some of the apps are mobile wallets, it can offer a great deal of utility.  Additionally, hot wallets often are free to use.  

However, what it provides in terms of easier access and seemingly instant actions on the part of the user, it trades for in possible vulnerabilities.  Since the hot wallets are always connected to the internet, it also means that they are more possible to be attacked via hacking and other cyber attacks.  It does not guarantee losses, but it does guarantee an environment that is possible when using hot wallets since private keys and addresses are stored within the mobile device, desktop, or cloud-based services.

People that opt for the cold wallet have the advantage of better protection for cryptocurrency.  Overall, they are a far safer choice as their offline storage does not permit possible hacking.  There is also an added bonus (depending on how you look at it) of providing more responsibility on the part of the user.  

Some of the disadvantages associated with cold storage is that it can slow down the process of exchanging, buying, or selling crypto in a market that can have some pretty wild swings quickly.  They also typically have a fee structure associated with them (as most cold storage options are hardware wallets which can be quite costly depending on the model and protections it provides) and, if they are lost (just like a wallet), the entirety of your assets may go with it.

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