For almost as long as cryptocurrencies have existed, users have been restricted to just a couple of choices in terms of how they can store those efforts. They can either go with a so-called hot wallet that offers maximum convenience but comes with slightly more risk, or a cold wallet that prioritizes security, albeit with a user experience that leaves a lot to be desired.
Now though, users have a third option with the birth of the so-called “cool wallet” that combines the best aspects of both hot and cold wallets into a single, software-based application.
What Are Hot Wallets?
Hot wallets fall under a number of categories, including mobile wallets (the most common), web-based wallets and desktop wallets. User’s wallets on crypto exchanges are also a kind of hot wallet, but in this case they tend to be custodial wallets, meaning that the private keys are held by the exchange platform itself.
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Hot wallets are really just software applications that provide quick and easy access to your funds, and they have become wildly popular due to the ease in which transactions can be performed on demand. The way they work is pretty straightforward. The hot wallet is an app that stores the private keys that are required to access your crypto funds. It acts as an interface that performs transactions and records them onto the underlying blockchain whenever funds are sent or received.
These days there are literally hundreds of hot wallets available to crypto users, with some of the most popular being Coinbase Wallet, Trust Wallet, MetaMask, Exodus Wallet and Edge. While these wallets offer similar functionality, there are some differences. For instance, MetaMask is an ecosystem wallet that supports Ethereum-based tokens only, but it’s widely used due to the way it can connect seamlessly with almost any Ethereum dApp. Trust Wallet is more inclusive, supporting more than 65 types of cryptocurrencies and tokens, and has built-in functionality that enables users to access various DeFi protocols, stake coins and more.
The main advantage of hot wallets is that they’re free to use and always connected to the internet, making transactions simple to perform. Most hot wallets will offer similar features, such as the ability to store, send and receive funds, and manage multiple kinds of tokens in one place. On the other hand, hot wallets are notably less secure. The fact they’re always online makes them vulnerable to being hacked, which can be done if someone is able to access the private keys to that wallet.
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Most people who perform regular crypto transactions will generally hold the funds they intend to spend in a hot wallet, because it allows them to send or receive funds almost instantly, without any hassles. Trying to do this with a cold wallet would be inconvenient to say the least, as the user would need to find a PC, plug the cold wallet into it, move the funds into a hot wallet, and then make their purchase.
What Are Cold Wallets?
The main difference between hot and cold wallets is that the latter are not internet-enabled. As a result, cold wallets are considered to be much more secure against hacking. It’s this extra layer of security that has made cold wallets so popular, especially among users who want to securely store larger amounts of crypto.
Most cold wallets are hardware devices, similar to a USB flash drive, and can cost anything from $50 to $300 or more. However, there are alternatives to spending money, such as using a so-called “paper wallet”.
Cold wallets enhance security because there’s no way the funds can be moved out of it while they remain offline. The user is required to physically connect their funds to the internet prior to making any transaction.
The most ubiquitous cold wallets are hardware devices sold by companies such as Ledger, Trezor and KeepKey, and users generally have to plug them into a computer via a USB drive in order to access the funds held within them. For those who don’t want to invest in such a device, there is also the option of a paper wallet, which is really just a document that has both the public and private keys printed on it. Paper wallets often also include a QR code that makes it simple to facilitate transactions. A third kind of wallet is known as deep cold storage, which takes additional steps to ensure accessing the funds within is all but impossible to anyone else bar the rightful owner. Such wallets are generally used by crypto whales and institutional investors that rarely need to perform transactions.
The main advantage of the cold wallet is the enhanced security, as users have peace of mind that there’s no way their crypto will be stolen. Users also enjoy the reassurance that they have full control over their funds, as they can literally be kept on their person, locked in a safe, or kept somewhere else that’s secure.
On the other hand, cold wallets are inconvenient for those who want to perform regular transactions and therefore not suitable for day-to-day use. There are also some risks with cold wallets. For instance, if the hardware or paper wallet is lost, damaged or destroyed, then the crypto held within it could well be lost forever. There may also be headaches on the user experience side, as most cold wallets tend to be fairly complicated to use.
Striking a Balance
Given the obvious discrepancies between the two types of wallet, it’s common for many crypto investors to use a combination of the two. The intention is to strike the right balance between accessibility and security, and this is best done by keeping a smaller amount of ‘ready-to-spend’ funds in a hot wallet, with the remainder held more securely in a cold wallet. Indeed, many investors use multiple hot and cold wallets, depending on what they intend to do with the funds held on them. For example, someone might have one hot wallet for spending and receiving crypto quickly, another one that stores their funds for trading crypto, and then multiple cold wallets with funds allocated for long term savings or some other use.
Note that it’s possible to use a smartphone-based hot wallet as a cold wallet by keeping that device offline. The idea is that you only connect the phone when you want to perform a transaction, and then immediately disconnect it once the transaction has been approved.
Introducing the Cool Wallet
Although the combination of hot and cold wallets has become popular, it’s still going to cause a few headaches, especially for new users who are not familiar with how crypto works. It’s for this reason that we’re slowly seeing a shift to a new kind of “cool wallet”, which attempts to marry the best aspects of hot and cold wallets together.
Increasingly, hot wallets are adding more innovative functionality that helps to make them more cold wallet-like, increasing the security of user’s funds. Such cool wallets look and feel like traditional hot wallets, as they’re accessed via a smartphone app and have a similar UI, but they come with additional features that enable them to act as cold wallets.
To understand how this works look no further than the Kresus crypto superapp, which is a hot wallet with cold wallet-style functionality that ensures the highest degree of security for users. This functionality comes in the form of Kresus Vault, a soon-to-launch paid feature within the Kresus app. For just $25 per month, users will be able to separate funds from their always-online hot wallet, and store them in a separate, disconnected wallet that’s safeguarded by time-delayed transfers.
Because Kresus Vault transactions are time-delayed, it means the user always has a window of opportunity to cancel any fraudulent transactions before they’re processed. The user is free to specify for themselves how long this transaction delay period will last, and any transaction can be canceled while that window remains open. In addition, Kresus Vault also supports guardian approvals. This provides yet another layer of security, as every transaction must be approved by a trusted third party designated by the user. In other words, Kresus Vault secures user’s funds as well as any cold wallet, but eliminates the hassle of buying and safely storing a hardware device
Convergence Is Coming
Just as with any other valuable asset, it’s important to think carefully about how you intend to store your crypto savings. Most users will want to strike the right balance between accessibility, ease of use and security, but until now that has always been difficult to do.
With the advent of cool wallets, we’re finally seeing a convergence of the two main types of crypto wallet, where hot wallets gain additional security and cold wallets become more convenient than ever before. It’s a promising development for the crypto industry that provides the best of both worlds, so don’t be surprised to see many more hot wallets adding cold wallet-like capabilities in the near future.
