Hot Wallet

Dec 23, 2022 | Updated Dec 23, 2022
A hot wallet is a crypto wallet that secures crypto private keys within an interface that is connected to the internet.

What is a Hot Wallet? 

A hot wallet is a type of crypto wallet that is connected to the internet at all times. It can be web-based, or a mobile or desktop app. These wallets store the private keys that provide access to your blockchain address and the digital assets stored on it. Users  authorize and execute transactions via the wallet interface. 

Hot wallets are best known for their convenience; they allow users to access their digital assets quickly and easily. However, they are also more vulnerable to cyber-attacks and hacks compared to offline wallets. 

How Does a Hot Wallet Work? 

A hot wallet is an online interface that stores the public and private keys for a blockchain address. It allows users to access their crypto holdings from any connected  device. 

Public and private keys are critical to your assets’ security. Functionally, public keys allow users to receive assets (like sending something to an email address), and private keys authorize direct access to assets within a blockchain address(like an email password). There are two broad categories of hot wallets, based on how users can access their account’s private keys. 

Custodial wallets: Custodial wallets are usually crypto exchange wallets like Binance and Coinbase. They allow users to view their public keys, but the custodian or wallet provider (the exchange) controls the private keys. The user accesses their wallet via login credentials – but has no direct link to the adress on the blockchain where the funds are stored. They rely on the custodian to facilitate their access.

Non-custodial wallets:Give users absolute control of their assets by leaving the user in charge of the private key for this blockcain address. This means users have direct access to their blockchain address, independently of the wallet. 

Users get a seed phrase (12-word recovery phrase) when they set up their wallet. This seed phrase encodes their private keys and helps a user regain access to the wallet if they lose their device. An example of a non-custodial hot wallet is Metamask. 

How Do I Keep a Hot Wallet Secure? 

Here are some tips to help keep a hot wallet secure: 

  • Don’t store large crypto holdings in your hot wallet. Instead, move most of the assets to a cold wallet, and only use a hot wallet for trading purposes. 
  • Try to distribute your crypto holdings across several wallets in case one system is compromised.
  • Always download your mobile apps and software updates from the official website.
  • For non-custodial wallets, keep your recovery phrase secure, preferably offline.
  • Don’t share your private keys with anyone.
  • Activate 2FA on your wallet if available.
  • Don’t follow suspicious links or connect your wallet to any website to avoid phishing or attacks.
  • Learn to understand smart contract functions, so you always know what you’re approving.

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