Crypto wallets are online tools that allow you to hold and transact with your cryptocurrencies like Bitcoin, Ethereum, Dogecoin and others. There are different wallet types available with varying degrees of utility and security features. There are hot wallets, there are cold wallets and then there are hardware wallets.
Let us discuss them one by one in increasing order of security.
Hot Wallets/Web Wallets
Hot wallets are cryptocurrency wallets with constant access to the internet. They are hardwired to the web and they can be used for transaction purposes easily. Using them is much less of a hassle and can be carried out pretty instantaneously. This allows exchanges to offer instant deposits and withdrawals remotely.
However, the downside of this instant capability is that it lowers the security level of the wallet because of its direct internet connectivity. Hackers are known to keep an eye on hot wallets. Most of the times when a cryptocurrency exchange is hit, the hot wallets are the main target and the hackers try to get away with as much crypto as possible.
This is why there are now some regulatory laws in place around the world that mandate exchanges to only keep a minimum amount of crypto in hot wallets. That way even if the hackers get access to these hot wallets, they only get away with smaller amounts, not the entire crypto of the company.
Cold wallets are not connected to the internet at all times. They have private keys in offline storage. They can only be accessed when the user intends and until then, they remain inaccessible to hackers and other illegal operators.
Within cold wallets (sometimes also called cold storage wallets) there are two major types of wallets:
These wallets are in most cases USB or Bluetooth operated. They remain disconnected from the internet at all times as the USB lies with the user unattached from the system. However, when the user decides, he can plug the hardware wallet into the system and then conduct transactions. So, hardware wallets are “hot” only for a few moments and that greatly reduces any chance of security lapses.
Ledger Nano series, Trezor, etc are some of the most common hardware wallet types.
Paper wallets use printed information in paper to access the cryptocurrencies. Rather than storing all of the information in one piece, this system normally uses a series of keys, QR codes and passwords to help only the real owner get access to the crypto stash. While paper wallets were once considered the most secure wallets and they still are incredibly secure, their ease of use is not considered among the top methods and therefore, only the most serious cryptocurrency users with long-term HODL strategy use paper wallets.
Overall, security of wallets is often quite an objective manner as cold wallets are proven to be much more safer than hot wallets. However, the security of online wallets is improving and service providers are even insuring some of their deposits so that might be a case for widespread secure usage in the future.
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