Wallets are the start of every trader's crypto journey. They are an essential component of interacting with the blockchain, storing both private and public keys. So, beginners need to understand what a crypto wallet is and what the differences are between hot and cold storage.

What are Wallets?

Contrary to popular belief, crypto wallets do not directly store your cryptocurrencies. They are an access point to funds that are directly recorded on the blockchain. 

Wallets use a security system called asymmetric encryption to keep funds safe. A wallet holds 2 keys - public and private.

• Public Key - Public keys are the address that everyone has access to. This is the address that users provide in order to receive funds from other users. This key is also recorded on the blockchain for everyone to see, thus making it public. 

• Private Key - Private keys are what users need to access their funds on the blockchain. This must never be shared with anyone or ever saved online because holding a private key will grant anyone access to the associated wallet. 

It is important to note that wallets are not universal. Different networks such as Ethereum and Solana require separate wallets and have different addresses. They do not overlap. Sending Ethereum to a Solana address will result in those funds being lost forever.

Cold Wallet

A cold wallet is a type of hardware that is used to store private keys offline and requires physical interaction before making a transaction. Trezor and Ledger are the most popular hardware wallet companies. 

Pros 

1. Private Key is stored offline

2. Stores keys from different networks

3. Password protected

4. The safest way to hold large amounts of liquidity

5. Transactions require physical approval

Cons

1. Cumbersome and inconvenient to use 

2. A Private Key is only as safe as the wallet’s security

3. Hacking a cold wallet is possible  

4. The device can be lost

5. Must be bought

You can read more about the Ledger Nano here.

Hot Wallets

A hot wallet is a wallet that exists as software online. These programs are often browser extensions. Metamask and Phantom are the most common hot wallets. 

Pros 

1. Hot wallets are free 

2. Convenient to use

3. Hot wallets can be installed on multiple devices

Cons

1. Funds are more at risk

2. Can only access one network

3. Transactions do not require physical approval

Other Types of Crypto Wallets

Hot and cold wallets are not the only options. Few others exist that are also common.

1. Non-Custodial Wallet

A non-custodial wallet is a wallet that is used on a crypto exchange such as Coinbase. It is considered to be less safe than either a cold or hot wallet because the keys belong to the exchange and not the user. Hence, “not your keys, not your crypto.”

It is generally advised that crypto purchased on an exchange is sent from a non-custodial wallet to a cold or hot wallet as soon as possible so that traders can have full control over their funds. 

In essence, non-custodial wallets are considered centralized because ultimate control of the wallet’s funds belongs to another entity. 

2. Paper Wallet

A paper wallet is a piece of paper with a private key written down on it (as opposed to the seed recovery phrase). Nothing is stored online besides the public key. 

Paper wallets are considered the safest, if not the most extreme, method to store a private key. It is also the original way that bitcoin was stored by users before better wallet technology emerged. 

Take note, this wallet type is extremely risky and putting your private key onto a piece of paper makes it subject to multiple risks such as fire and water damage, or even a simple smudge making the key illegible. 

Which wallet is best for you?

To decide which wallet is best for you, it is important to know what you want to do with crypto. Neither wallet type - hot or cold - is superior to the other. They both offer similar utilities that are best suited for specific purposes. 

If you want to buy, hold, and simply store cryptocurrencies without actively using them daily then a cold wallet is your best choice because it offers the strongest means of protection for dormant wallets. 

However, a hot wallet is going to be much more convenient for a trader that is actively buying and selling crypto and NFTs. Having a wallet stored directly on a browser makes it much easier (and faster) for traders to participate in time-sensitive situations. 

Either way, both wallet types offer access to the blockchain and provide full custody over liquidy so long as users follow the appropriate cautions. 

You can read about burner wallets here.