In the previous article, we mentioned that not all exchange platforms offer bitcoin wallets – platforms on which you can trade all sorts of cryptocurrencies (see cryptocurrency trading – II for an introduction). It is essential for these platforms to provide customers and investors with a high level of safety and security as, although still volatile, one bitcoin is worth thousands of dollars today. Various wallets and storage devices provide their clients with different levels of security with the ability to store different types of cryptocurrencies. The two most familiar terms when it comes to wallets are Hot Wallets and Cold Wallets.
Hot wallets are known for platforms enabling their clients to perform fast transactions. This is perhaps due to the fact that they are connected to the internet, while this is not the case with cold wallets. Hot wallets allow traders to store, send, and receive tokens. This might look like the commonly used, online money transfer platform, while in fact, there are no centralized banks securing the transactions. Instead, hot wallets are linked to the public and private keys expediting/easing the transactions, and simultaneously securing the blockchains these transactions are a part of (see the previous article of these series). The overall fact that Hot wallets are connected to the internet, however, makes them more vulnerable to theft and hacks. Professional investors usually store their cryptocurrencies in both Hot and Cold Wallets for security reasons. But individuals who tend to perform basic transactions online are more willing to store their cryptocurrencies in Hot Wallets. Thus, majorly how you may wish to conduct transactions decides on which Wallet to go for. It is noteworthy that we do not intend to leave the impression that the sole fact of being connected to the internet makes a Hot Wallet less secure than a Cold Wallet. Being isolated from the internet, in its own ways, can be even more dangerous as anyone out of the internet environment can access your cryptocurrency if they get their hands on it.
As stated above, Cold Wallets offer ways to store your cryptocurrency offline. Therefore, basically, this storage method is for reducing the risk of your tokens being stolen by hackers down to zero. You might ask why there is such a huge concern about securing your cryptocurrency that has made a whole new method working offline becoming an attractive storage choice. The main reason is that, if you lose your cryptocurrency is stolen, by any means, you will not be able to get back your money as there are no centralized banking systems safeguarding your capital. In order to close a transaction, the buyer and seller should exchange their public keys. Once the miner of the blockchain confirms the validity of the information shared, the sellers can receive their funds through their private keys. Private keys stored on the internet – in a Hot Wallet – are vulnerable to hacks. Cold Wallets take care of this issue by storing the information on any physical platform, such as computer hardware, USB stick, paper, files to download, etc. which can be isolated totally from the internet and be maintained personally. Although this might seem more convenient, we shall point out in the next articles why Cold Wallet has its own complications.