Cold and hot cryptocurrency wallets

For storing currency, a person can use either cash or a bank account registered to them. Cryptocurrencies fundamentally differ in this regard because they are decentralized. There is no company that handles the registration and servicing of "cryptocurrency accounts." Instead, there is the "blockchain." A cryptocurrency wallet is a memory cell that confirms the existence of an asset, access to which is only available to the creator.

Currently, investors from all over the world are interested in purchasing cryptocurrency: it is a valuable asset with high volatility. For example, Bitcoin alone can easily double or triple in value within a couple of years. But a reasonable question arises: "How should one store cryptocurrency?". The most popular options are using "hot" and "cold" cryptocurrency wallets. Let's understand how they differ, which option is safer, and how to create them.

Cold cryptocurrency wallets are autonomous and do not have direct internet access. Therefore, they cannot be hacked or stolen. Such wallets are presented in the form of physical devices on which a memory cell from the blockchain is recorded. To access it, a seed phrase is required, known only to the creator. Therefore, even if a cold cryptocurrency wallet is stolen, the perpetrator cannot do anything with it, nor can they steal the assets.

Previously, regular computers were used as cold cryptocurrency wallets. Blockchain was downloaded onto them, then a cryptocurrency account was registered, funds were transferred, and then they were physically disconnected from the internet "on-demand." This method was inconvenient and complex for inexperienced users. Such wallets are commonly referred to as "thick" because they store information about the entire blockchain, which may require terabytes of free space on the storage device.

An alternative to this storage method became specialized hardware wallets. They look like ordinary USB flash drives. Using the developer's software, cryptocurrency assets can be transferred to them. The most popular manufacturers of such devices are:

• Ledger;
• Trezor.

And these are "thin" wallets. They do not store the entire blockchain; only the memory cell required to confirm ownership of the asset is recorded. The advantages of such hardware wallets are their compactness, ease of use, and the durability of the storage device against mechanical, thermal, and other damage.

First, it is necessary to purchase the cold cryptocurrency wallet itself. It is strongly recommended to do this only from the manufacturer's official partners! It is quite simple to go to their website and find out which dealer networks the company collaborates with.

Next, the process of creating a cryptocurrency account will be roughly as follows:

• connect the hardware wallet to the computer or smartphone;
• launch the application from the developer (often it is stored on the wallet itself for security reasons);
• specify which accounts need to be created (for which tokens, which network);
• transfer tokens to the wallet;
• disconnect the wallet.

This conditional scheme is applicable to all cold hardware cryptocurrency wallets.

"Hot" wallets are programs that allow access to cryptocurrency assets from any compatible device. For example, from a smartphone running Android or iOS. Hot wallets are much more convenient since they provide access to stored cryptocurrency from anywhere in the world with internet access. But theoretically, they can be hacked. Especially if the user installs unlicensed software on the device where the hot wallet is stored. In simpler terms, a virus can be "picked up." This is the main difference between cold and hot wallets.

The most popular hot wallets today are:

1. MetaMask. Available as a smartphone app or browser extension. Used by around 30 million people worldwide.
2. Trust Wallet. Developed by Binance exchange. Available as a smartphone app.
3. Coinbase Wallet. Developed by Coinbase exchange.

Although hot cryptocurrency wallets are theoretically considered less secure, their developers provide many additional tools to protect assets. The most popular option is to use two-factor authentication.

Anyone can create a hot cryptocurrency wallet, and it takes literally a couple of minutes. As an example, Trust Wallet can be mentioned. The process of creating a wallet looks like this:

1. Install the application on your smartphone. It can be downloaded for free from Google Play or the App Store.
2. Launch the application, select "Create Wallet."
3. Choose the preferred option for storing keys — seed phrase. You can save the encrypted file in your iCloud or Google Drive. Or simply write down the seed phrase on a piece of paper, then store it in a securely protected place. It should be noted that if you lose the seed phrase, you will simply not be able to restore access to the wallet, and the assets will be permanently lost!

That's it, the basic wallet is created. Further in the application, you can activate support for various currencies, specify the on-chain network, and so on.

The principle of creating other hot cryptocurrency wallets is similar and does not differ radically.

Here are some general recommendations to reduce the risk of hacking your hot cryptocurrency wallet:

1. Use only licensed software.
2. Regularly scan all installed software on your device using antivirus software.
3. Avoid using public Wi-Fi hotspots. These often have a firewall installed that intercepts traffic. While the likelihood of hacking in this way is extremely low, cybercriminals regularly come up with new methods to steal digital assets.

Experienced investors do not recommend storing large sums on hot wallets. It's better to use them for everyday transactions. For example, if you're planning a trip abroad, transfer 2000 USDT or other stablecoins to such a hot wallet. Large amounts of cryptocurrency are best stored on cold hardware wallets with multi-level protection.

In conclusion, cold wallets are safer for storing digital tokens. However, they are not very convenient to use. For example, transferring cryptocurrency requires a laptop or smartphone to which the storage device is connected. Then, the transaction is carried out using special software. Hot wallets, on the other hand, are much more convenient but less secure. Although their developers regularly improve security, the number of unauthorized access cases to such assets is decreasing. Hacking most often occurs due to lack of awareness or mistakes made by the owner. For example, installing a hot wallet registration program from an unknown source (downloading the installer from a forum link provided by a cybercriminal).