Fiat and cryptocurrency may differ in countless ways, but both assets share one basic need: a secure place for you to store them.

Secured by cryptography and governed by code, crypto wallets have one primary function: to keep your cryptocurrency safe. That said, not all crypto wallets store digital assets in the same manner. 

Two main wallet types exist: hot wallets and cold wallets. Both protect cryptocurrencies with layers of encryption, but their functions, security features and conveniences greatly differ. Understanding exactly how the two differ is the first step to choosing the wallet that best suits your needs. 

In this guide, we'll explain hot wallets versus cold wallets and their similarities and differences to help you choose the type of wallet that's best for safeguarding your digital assets.

What is a hot wallet? How do hot wallets work?

Hot wallets are software-based crypto storage solutions connected to the internet 24/7. Because these wallets are always online (or “hot”), users can instantly and efficiently manage their digital assets via the wallet’s app. This makes hot wallets ideal for those who need quick and frequent access to their cryptocurrency, whether for trading or interacting with decentralized applications (dApps).

While hot wallets are user-friendly, their convenience comes with risks. Even with security features like biometric login or two-factor authentication (2FA), hot wallets store a critical code called the “private key” on the associated desktop or mobile device. 

A hot wallet’s private keys prove ownership of the crypto in the wallet, and anyone with access to them can steal tokens. Since hot wallets remain online 24/7, they are constantly vulnerable to hacking attempts, malware, and phishing scams.

Types of hot wallets

Not all hot wallets provide the same control over digital assets or offer identical integrations. Understanding the features of different varieties of hot wallets will help you select the ideal tool for crypto custody.

• Mobile hot wallets: For most traders who prefer managing their portfolios on a smartphone or tablet, mobile wallets are the most convenient option. These downloadable apps work on iOS and Android devices, allowing users to handle cryptocurrency on the go. Examples of mobile-friendly wallets include Metamask, Trust Wallet, Coinbase Wallet, and Exodus.
• Desktop hot wallets: Like mobile wallets, desktop wallets are software apps that give users control over the private keys for their crypto. The key difference is that desktop wallets are installed on a computer as an independent application or browser extension rather than a smartphone or tablet. MetaMask is a popular example of a browser-based wallet within the Ethereum (ETH) ecosystem.

What is a cold wallet, and how does it work?

Like hot wallets, cold wallets store a user’s private keys needed to access their cryptocurrencies. But unlike hot wallets, cold wallets aren’t continuously connected to the internet. Instead, cold wallets keep private keys offline, often on hardware devices or as a paper QR code. While traders use their private keys to sign transactions with online sources, cold wallets never connect to the web.

This separation between the internet and a cold wallet’s private keys makes cold wallets more immune to online threats such as hacking and phishing attacks. However, they're typically less convenient to use than hot wallets, which offer an additional layer of security in case of theft.

Although cold wallets are more costly and generally involve a steeper learning curve, they remain the top choice for traders who prioritize security over convenience.

Types of cold wallets

All cold wallets are intended to be hack-proof by design, but they store private keys differently. Understanding how to access your cold wallet’s private keys is essential to avoid mishaps when transferring crypto.

• Hardware wallets: Shortly after Trezor launched the Model One in 2014, hardware wallets became a leading cold wallet option, thanks to their convenience and accessibility. These USB-like devices connect to a computer or link via Bluetooth to a software app, storing private keys within the physical device. Besides Trezor, popular hardware wallet manufacturers include Ledger, KeepKey, and BitBox.
• Paper wallets: For a more budget-friendly cold wallet, paper wallets allow users to print physical copies of private keys and public addresses using an offline tool. While they were among the first cold wallet types and remain an affordable option, they have fallen out of favor due to risks like damage from fire, tears, or smudges.
• NFC wallets: Short for “near field communication,” NFC wallets use radio frequencies to securely store and transmit private key data on physical devices like smart cards or chips. When transferring crypto, users interact with NFC-enabled devices, such as smartphones, similar to tapping a digital card. Although less common than hardware wallets, NFC wallets are a secure and portable choice for traders.

Key differences between hot and cold wallets

From a technical perspective, the primary difference between hot and cold wallets is whether they store private keys online or offline. However, several other factors set these wallets apart and influence your preferred option.

• Average cost: Most hot wallets are free to download, though some may charge subscription fees. In contrast, cold wallets like hardware devices or NFC wallets require an upfront purchase. Printing a paper wallet is the only free option for cold storage.
• Ease of access: While finding and buying quality cold wallets has become easier, they’re less convenient for quick transactions. Cold wallets require users to plug in or scan the device to sign a transaction, adding a step to the process. Conversely, hot wallets are always online, making them more accessible for mobile and desktop use.
• Security features: Hot wallets offer standard security measures like passwords, 2FA, and encryption but remain vulnerable to cyberattacks, such as hacks or malware. Cold wallets excel in security, as their offline nature eliminates exposure to internet-based threats.
• Intended use case: Both crypto wallet types serve as storage solutions, but their use cases differ. Cold wallets are ideal for long-term savings due to their superior security, while hot wallets are better suited for smaller holdings, frequent transactions, and dApp interactions. 

Choosing between hot and cold wallets

Overall, cold wallets are the gold standard for long-term crypto holders. Their offline design makes them far less vulnerable to internet-based threats, offering a higher level of security for storing crypto over the years. However, cold wallets don’t provide the swift and seamless transfer experience that hot wallets offer. For traders focused on frequent cryptocurrency use – such as yield farming or short-term trading – hot wallets deliver greater convenience, though with increased exposure to online risks.

Ultimately, the choice between hot and cold wallets comes down to an investor’s personal use case and risk tolerance. Traders who prioritize security and plan to hold their crypto long-term often consider cold wallets the better option. On the other hand, traders who need quick access to their cryptocurrency for regular use or trading will likely prefer the accessibility and ease of hot wallets.

FAQs 

Is Trust Wallet a cold wallet?

Trust Wallet is a hot wallet known for its user-friendly mobile app and connection to the CEX Binance. However, users can connect hardware wallets like Ledger to the Trust Wallet extension, combining the security of cold storage with the convenience of Trust Wallet’s app.

Are hot wallets safe? 

Even the best hot wallets are generally less secure than cold wallets because they’re always connected to the internet, making them vulnerable to online threats and hacks. That said, many high-quality hot wallets include multiple security measures – such as 2FA, biometric login, and passwords – to enhance safety.

Can cold wallets be hacked? 

While hardware wallets are far more secure than software wallets, hacking isn’t impossible. In rare cases, individuals with advanced technical skills may exploit vulnerabilities. More commonly, anyone could gain access by obtaining a user’s private key. Although cold wallets aren’t 100% hack-proof, they remain the most secure option for storing digital assets and significantly reduce the risk of attacks.

Your crypto, your choice

Whether you use hot wallets, cold wallets, or both, tracking your crypto gains and losses is essential. CoinTracker’s free Portfolio Tracker makes it easy to stay on top of your crypto net worth. By linking your wallets and exchange APIs, you’ll get an instant overview of your crypto positions. CoinTracker also simplifies tax reporting by organizing your data into compliant tax forms that are ready to use with a crypto CPA or tools like TurboTax.

Create your CoinTracker account today and see how easy it is to manage your web3 portfolio.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.