Many things set crypto investing apart from investing in other assets. One of these differences — in fact, one of the most important differences — is that crypto investors must decide how to store their assets once they purchase them. While crypto isn’t a tangible asset, it does exist in cyberspace. Investors have to keep these assets secure or they risk “misplacing” them — or worse, losing them to a hack. Basically, the crypto wallet you choose can determine just how safe your assets are.
In recent months, choosing the right crypto wallet has also become more important than ever. For one, there’s the sizable uptick in hacks and scams putting assets at risk; per CertiK, more than $2 billion in crypto assets have been stolen so far this year. That’s more than the total stolen in all of 2021 — and there are still some five months left in 2022. Users have lost a lot of funds from choosing a wallet not secure enough to weather this rising wave of crime.
One newer development also making storage important are the withdrawal freezes across different DeFi platforms. The bear market is hurting crypto investors, that’s for certain. But it’s also decimating exchanges, crypto lenders and other platforms that rely on a healthy market. As crypto winter sets in, some of these platforms have halted all withdrawals in order to preserve liquidity. While this outrages investors who want to pull their assets at-will, there’s really nothing they can do until withdrawals resume. Allowing a DeFi platform to keep custody of your assets ultimately means you don’t have full control over your assets.
The two main storage options for crypto investors looking to retain custody of their assets are hot or cold crypto wallets. These both perform the same central function: holding your assets in one place. However, they offer different levels of security and different responsibilities for the user. In order to protect your crypto, it’s best to learn these differences — and to pick the right option for you.
Hot Wallets: The Pros and Cons
The first type of crypto wallet, the hot wallet, is the more popular of the two. This is largely due to its convenience. Unlike cold wallets, hot wallets are entirely online. Most often, they exist as apps or browser extensions. This represents their main pro: they are extremely easy to use. Moving assets back and forth is both simple and much faster than cold wallets, since the transactions take place entirely online.
However, this is also a key downfall of the hot wallet. These online keys are only as safe as a typical password; anybody with the tools and wherewithal to access keys can do so. There have been some huge instances of theft on hot wallets; in May, one person using a Binance (BNB-USD) hot wallet was robbed of 7,000 Bitcoin (BTC-USD) when a hacker obtained their keys.
Of course, many crypto exchanges and other DeFi platforms offer their own hot wallets. Still, as said before, the drawback with these wallets is that the user does not have true control over their own assets. If a given platform were to halt withdrawals, users of that platform’s wallet would not be able to move their assets at all.
Cold Wallets: The Pros and Cons
Cold wallets are a much safer option for storing crypto. That’s because users store their private keys offline. Users store their keys physically, be it on a hard drive, in a notebook, or elsewhere. The only way for a thief to get to these keys is by obtaining the physical copy.
Privacy might be the major pro of cold storage, but the drawback is the major inconvenience. When an investor wants to move crypto in and out of a cold wallet, they must sign for these transactions offline and then send it online to the network. It’s a lengthier, tedious processs.
Since cold wallet keys are physically stored, it’s also still very possible to lose access to your assets. This leads to painful stories, like the man who accidentally threw out a hard drive containing his keys to a wallet that holds thousands of BTC.
InvestorPlace’s Ashley Cassell reports that cold storage is becoming a far more appealing option in the wake of cyber insecurity and distrust in DeFi platforms. Hardware wallets like Trezor are making cold wallet use even easier, with safeguards to alleviate issues like a misplaced key. Some of these options even allow users to stake crypto, a function previously only afforded to online wallets.
Which Crypto Wallet Is Best for You?
Picking the best crypto wallet for your assets really depends on your needs and trading behaviors. Some users might only need one type, others the second type, and others even both.
Given their entirely online existence, hot wallets do have a convenience factor that can outweigh the security flaws. Arbitrage investors looking for gains through buying and selling might opt for a hot wallet. This is because moving crypto online and offline constantly can be arduous. Doing it constantly may not be worth the hassle.
Those who buy and hold long-term, however, might opt for the cold wallet. If the user is not doing anything with their assets other than holding and waiting for them to accrue value, there’s no reason to use a risky hot wallet. Cold wallets keep these assets infinitely safer. And it’s not a hassle to use one if you’re only moving the crypto once in a while.
Think of hot wallets like an actual wallet and cold wallets like a safe deposit box. Hot wallets are great for when you are constantly spending and buying currency — always in your pocket. But cold wallets are much safer, though far more inconvenient.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.