Are you curious about cold and hot wallets? Which type of wallet is the best to store your cryptocurrency? Keen on learning why they’re key to the Ethereum ecosystem? Great! You’ve come to the right place. To learn blockchain development and be certified I recommend visiting Ivan on Tech Academy.
Blockchain is currently #1 ranked skill by LinkedIn. Because of that, you should definitely learn more about Ethereum to get a full-time position in crypto during 2020.
In my first and second pieces, I’ve discussed Ethereum 2.0 and the best tools for developers. In my third and fourth articles, I’ve discussed quadratic voting and open governance models. Then, in my fifth piece, I’ve looked into Swarm’s infrastructure.
In my sixth, seventh and eight ones, I’ve dove-deep into consensus algorithms and the blockchain trilemma. Lastly, I’ve looked into blockchain sharding technology, which projects are making it thrive and I’ve done an intro to Plasma and Looms.
This week I’ve disucussed the value of cryptocurrency networks. Today I’m looking into the key differences between hot and cold storage systems. Why should Ethereum developers care about hot and cold wallets?
Cryptocurrency storaging systems
Hot and cold wallets are a key piece of the cryptocurrency ecosystem. It is often said in the cryptocurrency universe, “not your keys, not your coins”. Andreas Antonopolous, the one who coined this term (pun intended), meant to say users need to pay attention to coin storing systems. Wallets are a very personal choice when it comes to storing funds.
Below, I look at the differences between cold and hot storage and the benefits of using alternative types of wallets. There are several trade-offs, benefits, and negatives to both. At the end, it all comes down to your own priorities.
Do you prefer ease of access, or strong security?
Hot wallets (online): easy to use, less security
Storing your cryptocurrency in a hot wallet comes with a lot of risk, but it is simpler than setting up a cold wallet. Some of the best online wallets promote easy-to-use interfaces, high availability and instant transfer times.
However, keeping all of your crypto in an online wallet creates a larger surface attack area, which means there is an increased risk of being hacked.
If you plan to consistently move your crypto around to different exchanges for trading purposes, then a hot wallet might be right for you. To give yourself a little extra protection, you can install additional security measures. Two-factor authentication is probably the best method to add an extra layer of security. But even then, don’t expect your funds to be 100% protected from hacks.
Hot wallets generally provide a more user-friendly experience, which is why many who are not heavily knowledgeable about cryptocurrencies generally use them. If you want to use a hot wallet, try to store a minimal amount. By storing most of your cryptocurrency in a cold wallet and just a small amount in a hot wallet, you can get the best of both worlds — ease and quickness of use as well as the security the cold wallet provides.
Cold wallets (offline): harder to use, more security
If you highly value security and you’re wary of losing your hard-earned crypto, then using a cold wallet is the way to go. By keeping your Bitcoins offline, there is a much-reduced threat of being hacked. If you have or plan to buy Bitcoin, or any other currency, and “hodl” for the foreseeable future without trading then a cold wallet could be one of the best wallets for your cryptocurrency.
One of the most secure ways of setting up a cold wallet is by using a paper wallet or brain wallet. By using a paper wallet, the only way to access your Bitcoin would be through this piece of paper where your key is written down. Brain wallets mean memorizing your access. The main risks are if you lose that piece of paper in a fire or through bad housekeeping, then accessing your Bitcoin is impossible. Or worse, if you forget your keys.
Having a few spare copies in places you and only people you trust know about could be one way to counteract this.
Instead of basic paper wallets, a hardware wallet provides a great amount of security but for a financial cost. Depending on the make and model, you could expect to spend up to $100, if not more.
One essential tip when buying a hardware wallet is to ensure you are buying from a reputable vendor. When you receive your wallet, make sure that the wallet hasn’t been tampered with or opened in any way. Malicious actors could upload malware onto these wallets if they are able to get their hands on the hardware before you yourself do. The best wallets for cryptocurrency will be supported by positive reviews from other users.
Keep in mind, according to recent research from GlassNode, a great deal of Bitcoin has been lost in cold wallets. There is an estimate of around 1 to 3 million BTC lost in cold wallets.
There are positives and negatives to both hot and cold storage. If you want quickness and ease of use, go for a hot wallet. If you want security and long-term storage, use a cold wallet. Completing your own research before purchasing cryptocurrency is essential for your own security and storing your it safely is key to protecting your investment.
- Ivan On Tech Academy,
- Ivan On Tech ETH 2.0 code review,
- Build a blockchain in SECONDS,
- Functional programming in blockchain,
- ETH 2.0 discussion,
- Ethereum projects analysis,
- Role of consensus algorithms,
- Ethereum Plasma.
- tBTC paper.
This article is not financial advisement