Cold vs. hot storage in cryptocurrency

Whether you’re dabbling in cryptocurrency, or an experienced trader looking to diversify, knowing the difference between hot and cold wallets is one of the most important aspects of crypto. If you’re familiar with cold storing food, the difference may make sense - you’re ‘freezing’ your crypto assets to keep them safe long term. We’ll take a look at what the difference is between cold vs hot wallet, how to transfer crypto from hot wallet to cold wallet, pros and cons of hot vs cold storage, and how you can use BTC Markets’ storage options to ensure the safety of your cryptocurrency.

What is a cold crypto wallet?

Definition of a cold wallet

Cold storage, or cold wallets, are the ultimate in security if you’re holding your cryptocurrency long term. Cold wallets come in a wide variety of forms, the simplest being a “paper wallet” which is your public and private keys written down for accessing later, others can include external storage like USB sticks or hard drives. The common factor with cold wallets is that they are offline storage with a focus on enhanced security.

How do cold wallets work?

Cold wallets can be as high- or low-tech as you require - the most basic version can be simply your private and public wallet keys written down on a piece of paper that you keep safe. Ideally, you’ll want a cold wallet that uses the best security available, such as Ledger and Trezor; physical storage devices that both support thousands of cryptocurrencies, can link to multiple exchanges, and are an affordable way to keep your crypto safe.

Pros and cons of using cold wallets

Cold wallets are ideal for peace of mind if you’re storing crypto long term, making it possible to ‘set and forget’. A lot of the infamous security issues with cryptocurrency are negated by using a cold wallet; these include issues surrounding phishing attacks, exchange hacks, and malware. The major downside to cold storage is you are not able to easily access the crypto for transactions, having to transfer them out of cold storage into a hot wallet to spend or sell them. BTC Markets makes it easy to set up and facilitate smooth transfers to and from cold wallets.

Cold vs hot wallets: key differences

Security

The real difference between the security of cold vs hot wallet storage comes down to internet security at large. As hot wallets are always connected to the internet, you face the same security risks as any other internet-based activity. This is enhanced by the potential monetary gain to hackers associated with crypto wallets. While cold wallets are inherently better are protecting against hacks and phishing, hot wallets do still carry advanced encryption and password security to minimise risk.

Usability and accessibility

The two main factors to balance when deciding on cold vs hot storage are usability and accessibility - cold wallets are secure and safe for long-term holders, but usage and access are limited. Hot wallets can be quickly and constantly traded with, but security isn’t as high. With BTC Markets, crypto traders use their hot wallets to conduct transactions and trades, then shift crypto into their cold wallets when they want to hold for longer-term periods, knowing they will be safe.

How to transfer crypto from a hot wallet to a cold wallet

Step-by-step guide

Knowing how to transfer crypto from hot wallet to cold wallet isn’t as complex as it may seem, but it is a process that you’ll want to be meticulous about. Firstly, you’ll need to log into your exchange or hot wallet from a secure connection. Next, double- or triple-check the wallet addresses involved in the transfer/s, as this is where issues could arise if you get anything wrong. Initiate the transfer, and then check that the transaction is ‘confirmed’ on the blockchain. At this point, the transfer will be completed and your crypto will now be secured in your cold wallet. This is all made much simpler with BTC Markets, with our user-friendly platform that makes transfers fast and secure.

Important considerations during transfer

The most important consideration during the transfer of crypto between hot and cold wallets is making sure you have the addresses right. Things to keep in mind when transferring are the impact of transaction fees, confirmation times, and the level of security you're using. BTC Markets provides multi-factor authentication and the ability to whitelist addresses to minimise your risk exposure.

Why is cold vs hot storage important?

Securing your assets

The main aspect to keep in mind with cold vs hot storage is how easily you want to access your crypto. Using both and splitting your funds gives you the best of both worlds, letting you protect a large amount of crypto while you keep some in your hot wallets for day-to-day trades and transactions.

Risk management in cryptocurrency

Cold wallets are excellent for mitigating risk, especially if the market is volatile or exploits or hacks are happening. BTC Markets recommends moving your crypto into long-term cold storage to keep safe when you don’t need immediate access, that way mitigating almost all risk to your funds.

Which wallet should you choose?

Unless you're purchasing crypto to hold long-term as an investment, you'll want to utilise both hot and cold wallet storage. By using a mixture of the two, you'll be able to keep the majority of your funds safe and secure offline, while still retaining the ability to trade or make transactions instantly with a hot wallet. By signing up with BTC Markets, you can do all this without stressing over whether you have enough security, or enough access to funds when needed. Keeping as much crypto in your hot wallet as you need on a day-to-day basis and storing the rest offline is the best way to mitigate risk.

Secure your crypto with cold and hot wallets on BTC Markets

Rather than thinking about cold vs hot storage, using both wallet types to diversify your crypto storage and achieve the best overall outcome is the right strategy. Using a hot wallet for fast, easy access if you’re trading or conducting constant transactions, and using a cold wallet for maximum security for long-term investments, especially with an exchange like BTC Markets, will give you the best results.