Hot Wallet vs Cold Crypto Wallet: What’s The Difference?

By Gaurav Roy

When it comes to securing your crypto, the choice between hot and cold wallets represents a crucial decision in your crypto security strategy, with each option offering distinct advantages and tradeoffs for different use cases. Hot wallets provide convenient online access for frequent transactions, while cold wallets offer superior security through offline storage and protection from malicious smart contracts.

Both wallet types serve essential but fundamentally different purposes in the crypto ecosystem. Hot wallets function primarily as gateways to blockchain applications and services, generating your seed phrase in an online environment and storing private keys digitally on internet-connected devices. Cold wallets, by contrast, not only generate and store private keys offline but, critically, never interact with potentially dangerous smart contracts, creating an impenetrable barrier against remote attacks.

In this article, Ledger Academy will dive deep into the differences between hot and cold wallets, examining their security implications, use cases, advantages, and limitations to help you make informed decisions about protecting your valuable digital assets while navigating the expanding on-chain landscape.

Understanding Hot Wallets

What Is a Hot Wallet?

A hot wallet generates your seed phrase in an online environment and displays it to you on the screen of your computer or phone when you first launch the wallet. The problem with this system is that, once your seed phrase (or secret recovery phrase) has been online once, you have no way of knowing who has seen or accessed it remotely. This is the problem with data generated by a hot wallet.

Seed Phrase Generated Online

A hot wallet generates your seed phrase in an online environment and displays it to you on the screen of your computer or phone when you first launch the wallet. The problem with this system is that, once your seed phrase (or secret recovery phrase) has been online once, you have no way of knowing who has seen or accessed it remotely. This is the problem with data generated by a hot wallet.

Private Keys Are Vulnerable to Online Threats

Hot wallets also store your private keys digitally, within their application on your phone or computer. Since these devices are always connected to the internet, your private keys are also constantly online. 

So, to recap, what makes a hot wallet “hot” is the fact that both your seed phrase and your private keys are online. And once these pieces of data have been online, you have no way of knowing they are still secret.

What Is a Hot Wallet For?

Having your private keys online makes transacting very straightforward. It’s simple — just log in and start interacting with online applications. If you’re new to the crypto world, the hot wallet can be an attractive starting point. It’s easy to download, gives you custody of your private key, and makes it easy to interact with crypto platforms.

But all of these great benefits come with some significant security implications.

The Risks of Hot Wallets

Securing private keys online might be convenient for browsing Web3, but it also leaves you vulnerable to hacks deployed via your internet connection. For example, a sophisticated hacker can use your connected device as an attack vector, using it to penetrate your hot wallet and extract your private keys remotely. Securing private keys on a computer or phone means they are always exposed to this type of risk.

Thus, hot wallets are great for making quick and convenient transactions, but they aren’t suitable for securing assets of high value, since private keys connected to the internet are always at risk of being hacked.

Pros and Cons of Hot Wallets

Hot Wallets examples

MetaMask

Metamask is one of the most popular Ethereum hot wallets, boasting tens of millions of downloads. It comes in a few different variants: a desktop version, a browser extension version, or a mobile app. It is also one of the most popular hot wallets supported by Ethereum dApps. While it launched as an Ethereum hot wallet, primarily for protecting ETH and Ethereum tokens, today, it also supports a range of Ethereum L2s and some other networks like Harmony and Avalanche. 

Trust Wallet

Trust Wallet is one of the leading hot wallets for a range of networks. It launched in 2017, at the height of the DeFi craze, and as such, it’s supported by countless DeFi protocols and platforms. Since then, Trust Wallet has expanded its offering, meaning most NFT marketplaces and minting platforms also support it. It comes in two main variants: a browser extension version and a mobile app. To help you stay safe, it also offers security alerts and allows you to record your seed phrase using its encrypted cloud backup. In addition, it also claims not to track user data. 

Coinbase Wallet

Coinbase Wallet is a hot wallet created by the centralized crypto exchange, Coinbase. However, unlike default exchange wallets, Coinbase Wallet does offer users self-custody. Essentially, it works like any other hot wallet you may be accustomed to: it allows you to manage private keys yourself and provides the tool you need to interact with decentralized apps and platforms. However, it also has a range of extra features. Coinbase’s self-custody wallet comes in two main types: a mobile wallet and an extension wallet. The mobile wallet is available on iOS and Android, whereas the extension version is available on Chrome and Brave browsers.

Understanding Cold Wallets

What Is a Cold Wallet?

Let’s start with some clarity. A cold wallet is commonly misunderstood to be simply the opposite of a hot wallet, but this is inaccurate. While a cold wallet does generate and store your private keys in an offline environment, it also has another essential trait: it never interacts with smart contracts.

This defining feature means a true cold wallet goes beyond simply keeping your keys offline; it also air gaps you from potentially malicious smart contracts as well.

What Is a Cold Wallet For?

The purpose of a true cold wallet is to act as a vault for the bulk of your crypto, isolating it from all potential risks. You can think of it as a “savings” account, where you keep the majority of your funds but don’t actively transact.

Why Do You Need a Cold Wallet?

As you know, an offline private key is the only way to secure yourself against hacks and malware. But there are some risks that even offline keys cannot protect you from.

Using dApps and Web3 usually means interacting with smart contracts. And whenever you interact with a smart contract, you expose your crypto wallet to the conditions of that contract. If you make a mistake – i.e., if you don’t read the conditions properly or sign something you don’t quite understand – you’re effectively opening the door to the contents of your wallet.

Mistakes happen, and since not all smart contract transactions can be displayed clearly, even an advanced crypto user can fall prey to this type of error.

So, how can you remove the risk posed by smart contracts while continuing to explore Web3 platforms? The answer is – you can’t. 

Cold wallets exist to mitigate that risk. By having an account that doesn’t encounter these sorts of dangers, you can store your most valuable digital assets with confidence.

How does that work exactly?

Well, there are several types of cold wallets, including paper wallets and sound wallets. However, people typically opt for the easiest cold storage solution: hardware wallets.

Why Is a Hardware Wallet a Good Cold Crypto Storage Solution?

While many people use the term “cold wallet” interchangeably with “hardware wallet”, these two concepts are not the same thing. To explain, a hardware wallet is a physical device. However, it tends to be a popular option as a cold wallet due to its key features: It never connects to the internet and secures your private keys in an offline environment. 

This is an important detail since it ensures your keys cannot be accessed remotely. Even the most sophisticated hacker cannot penetrate your hardware device – it is simply out of reach. 

Another key reason hardware wallets make great cold wallets: They don’t require any special technology other than the hardware device you already have and some commitment on your part.

Using your Ledger device, you can set up multiple accounts, with each account having a specific use. That means you can set up an account on your Ledger device that you designate as a cold wallet, simply for sending and receiving assets. 

As long as you don’t connect that account to apps and services, it will stay protected from malicious smart contracts.  Be warned, though, when you’re using a hardware wallet, whether your account connects to an app or not is completely down to you.

Pros and Cons of Cold Wallets

Cold Wallets examples

Ledger Stax

Ledger Stax is a premium hardware wallet designed by the Godfather of the iPod, Tony Fadell. It embodies multiple industry firsts: the first organic TFT screen built at under 100 degrees Celsius, the first secure touchscreen driven by a Secure Element chip, and the first curved E Ink® touchscreen ever mass-produced. 

Ledger Stax delivers a whole new experience of personalization and crypto security. This premium device boasts wireless Qi charging, battery life lasting several weeks, a customizable lock screen, and a display that remains visible even when on standby, as well as Bluetooth, NFC, and USB-C for versatile connectivity.

Ledger Flex

Ledger Flex is the entry point into Ledger’s next-generation secure touchscreen hardware wallets, offering secure self-custody with an improved user experience. Its 2.8”, customizable E Ink touchscreen benefits from the secure touchscreen technology introduced with Ledger Stax, and like all Ledger hardware wallets, it’s powered by a Secure Element chip and runs on Ledger’s secure OS. Ledger Flex also allows you to customize its E Ink touchscreen, with the choice to set the lock screen to whichever image, NFT, or digital art piece you like.

Ledger Nano S Plus

Ledger Nano S Plus is an entry-level Ledger with all the essential features you need to secure your digital assets. It doesn’t have the next-gen features of Ledger Stax and Ledger Flex, but it’s a great, affordable beginner option for people just dipping their toes into crypto. 

Ledger Nano X

The Ledger Nano X is the best-suited hardware wallet for on-the-go use, leveraging all the features of the Ledger Nano S Plus and adding Bluetooth and iOS connectivity, plus a battery life of up to 5 hours. Like the, it supports multiple cryptocurrencies and digital assets.

Key Differences Between Hot Wallets and Cold Wallets

Conclusion: Should You Use a Hot Wallet or a Cold Wallet?

So now you know, hot and cold wallets are for completely different use cases. While software (or hot) wallets are designed primarily as a gateway to blockchain apps and services, cold wallets exist for the complete opposite reason. In short, cold wallets offer a way to store valuable assets securely.

Freedom means not having to choose between exploring Web3 and staying secure. With a Ledger and some basic wallet organization, you can manage the risks your crypto faces, even as you embrace the growing ecosystem of dApps and services.

Stay informed and stay secure – YOU are in control of your crypto.

FAQs about Hot Wallets vs. Cold Wallets

Hardware wallets vs software wallets: Which is more secure?

Hardware wallets are more secure than software wallets because they store private keys offline, reducing exposure to online threats like hacking and malware. They also require physical access to authorize transactions, adding an extra layer of security. Many hardware wallets include secure elements and PIN protection, further safeguarding sensitive data. In contrast, software wallets are connected to the internet, making them more vulnerable to cyberattacks.

Hot Wallet vs Cold Wallet: Which is Better?

If you’re asking yourself this question, you shouldn’t be. There is no need to choose between a hot and cold wallet because you can access the utility of both from the same Ledger device, while your private keys remain offline. 

Ledger devices allow you to create unlimited accounts (individual wallets with private keys) for each blockchain asset. Each of these exists independently, protected from the approvals of the other. This enables you to segregate your crypto assets into different wallets, designating one as a secure vault and another for interacting with Web3.

Hot Wallet vs Cold Wallet: How To Set Them Up

Say you’re securing 10 ETH with your hardware wallets like the Ledger Nano S Plus, Ledger Nano X, Ledger Flex, or Ledger Stax. To keep risks to your assets at an absolute minimum, you should secure the bulk of your ETH in a wallet that never interacts with smart contracts. 

To do this, you’ll simply create two ETH accounts within your Ledger, designating one as a vault that never interacts with Web3. This is your cold wallet, and you’ll name it clearly to make sure it stays that way.

Meanwhile, you will designate the other ETH wallet as an active Web3 wallet (also clearly named), using it for smart contract transactions and exploring Web3. You will only transfer ETH into this wallet when you need it, and only the specific amount you require. 

Although this is not a hot wallet – because its private keys are still secured offline, inside your Ledger device – you can still use it to connect to hot wallet interfaces to interact with blockchain apps outside of the Ledger ecosystem. For example, you can connect your Ledger to MetaMask to interact with countless dApps on the Ethereum network.

Ledger also supports several other third-party wallets across multiple chains, such as Electrum, MyEtherWallet, Yoroi Wallet, Phantom, Temple, and Kukai, so you’re free to explore with peace of mind.