Understanding Hot Wallet vs. Cold Wallet for Crypto Assets

By Nick Marshall


Crypto owners typically face two recurring challenges. On the one hand, there’s the need to establish title as a defense against asset seizures or scams. To fulfill that purpose, we’re proud to have created the first offchain title registry in cryptocurrency to help secure your assets. On the other, any crypto investor must protect their coins from the relentless threat of hackers. Almost a fifth of Bitcoin in circulation has been lost or stolen, and often it’s a vulnerability in the wallet that is to blame.

Hot Wallet vs. Cold Wallet in Crypto

Safety is paramount when storing crypto assets. Experienced investors know that only a minimum quantity of coins should be kept on the exchanges where trading occurs. To take advantage of private key encryption and put further distance between your assets and hackers, the prudent approach is to move your coins to a hard or cold wallet. What’s the difference between the two?

What Is a Hot Wallet?

Also known as a software wallet, a hot wallet is accessible online so that the user can store, send and receive tokens. Security comes in the form of private and public keys stored on the internet and within the wallet itself. 

Because a hot wallet is always connected to the internet, it is potentially vulnerable to hackers who could compromise your mobile device, laptop or WiFi connection, for example, or hack into the company that stores your private keys on its servers. However, you can only access a hot wallet to check the balance or make trades if you have the private key. That also means that if you mislaid your private key, your hot wallet would be useless.

The key advantages of hot wallets are that they are usually free to download, and reasonably intuitive to use for making trades on exchanges. Some, like Coinbase or Edge, are specifically designed to work with a particular platform. 

What Is a Cold Wallet?

Hardware wallets, on the other hand, are not connected to the internet, which is why they are considered “cold.” In this case, your assets are stored offline on a drive or USB stick and when you do make a transaction, the private keys are signed in an offline environment, out of the reach of hackers. 

Unlike hot wallets, cold wallets are not free. Trezor and KeepKey, two of the most popular ones, cost between $50 and $250. The key advantage the cold wallet offers in return is the extra layer of security. Access to your crypto is limited to a single point of access that no malware or virus can penetrate. 

In theory, it is still possible to hack a cold wallet, but the criminal would need to a) have the USB or drive in their possession, and b) know the password. Perhaps the bigger risk is losing your cold wallet yourself. The case of the UK bitcoin investor who accidentally allowed a 20GB hard drive storing 7,500 Bitcoin to go to a landfill is the stuff of cryptocurrency legend, but it illustrates the importance of storing your cold wallet somewhere safe. 

How Can You Unlock the Benefits of Each?

Most crypto investors will combine the convenience of a hot wallet with the resilience of a cold wallet. In short, the bulk of your crypto assets should be stored on a cold wallet. When you are ready to trade, transfer just enough for that purpose to your hot wallet to complete the transaction on the exchange. You should always avoid leaving crypto assets on the exchange itself. Ultimately, the goal is to establish as many security “firebreaks” between your crypto assets and hackers, without compromising on convenience. 

A common rule of thumb is that you should switch to a cold wallet when the value of your assets is greater than the cost of an offline wallet. Whatever solution you’re using, TransitNet allows you to monitor movement in all your linked wallets so that you’re alerted if your assets are compromised. To find out more about protecting your crypto assets across hot and cold wallets, sign up today.


Time – How to Decide on a Hot Wallet or Cold Wallet for Your Crypto, and Whether You Need One at All

Investopedia – Hot Wallet Definition