If you have ever used a cryptocurrency exchange, you may have come across the term 'Hot Wallet'. You may have also heard how risky they can be, and if you've done your research, read horror stories about hackers stealing stupid amounts of cryptocurrency directly from exchanges. So what is a hot wallet? And what distinguishes it from its counterpart - a cold wallet? What are they used for and, if you already own cryptocurrency, is it currently stored in an active wallet? If you just came across this article, you may be wondering what temperature has to do with wallets in the first place! About the Author Nick Percoco is Director of Security at Kraken
The basics of the hot wallet
Let's start from the beginning. In many ways, cryptocurrencies, like Bitcoin, are very similar to the money you keep in your back pocket. They can be divided into small units of exchange that can be used for private transactions. Just like cash, cryptocurrencies can be sent directly between two parties without an intermediary (a bank, for example) having to process or approve the transaction for you. But just like you keep money in your wallet, cryptocurrencies need to be kept somewhere. This is where a wallet comes in. In its most basic form, a cryptocurrency wallet is software that contains a public and private cryptographic key; something comparable to an account number and a PIN code. In any transaction, the recipient shares their public key with the sender, so they know where to send the money. The sender then signs the transaction with their private key, which effectively authorizes it. Once everything matches, the transaction is complete and the crypto is transferred from the sender's wallet to the recipient's wallet, much like taking a note out of your wallet and handing it to someone else, who deposits it. yours. So while the public key identifies wallet addresses, a private key is the crucial information that confirms that the transaction is actually valid. Like a PIN, it is essential that wallet holders never give away their private keys, as this allows anyone, anywhere with an internet connection to easily access cryptocurrency and money. use as if it were your own. This is crucial to understanding what exactly makes a cryptocurrency wallet “sexy”. Basically, a hot wallet is one that is connected to the Internet. They come in many shapes and sizes and include mobile wallet apps as well as the wallets used to hold your crypto when you sign in to an exchange. Since active wallets are connected to the internet, they can easily be used to buy and sell cryptocurrency. This is important: Back then, sellers often had to connect with real-life buyers to complete transactions. What makes a hot wallet so useful is that the parties to the transaction can buy and sell directly with each other. Without them, Bitcoin would be a very difficult asset to trade.
The dangers of using hot wallets
But of course, what makes Hot Wallets so valuable, as a way to seamlessly buy and sell cryptocurrency, also makes them vulnerable. Being connected to the Internet, the public and private keys of an active wallet are stored online. This means that they can be, and are, targeted by hackers. As with other cybersecurity, the risks largely depend on how well the wallet owner has implemented sufficient security measures. Poor password management, using a simple phrase that has also been used for other Internet accounts, for example, makes active wallet owners much more vulnerable to attack; as is the lack of two-factor authentication. A promising development in recent years has seen cryptocurrency holders start using multi-sig wallets that require two or more private keys, making them much more secure. The fact that exchanges hold hundreds of millions, if not billions of dollars worth of cryptocurrencies means that they are often targeted by hackers. Unfortunately, swapping attacks are still common. You can set up as much security as you like, but you also need to make sure your exchange has adequate protection. If they are hacked, there is no guarantee that you will ever see your cryptocurrencies again. It is very important that you thoroughly research any trading platform; make sure they take the security of your assets as seriously as you do.
Cold wallets
But what is the cold room and what distinguishes it from a warm wallet? It's simple: a cold wallet holds cryptocurrency, like a hot wallet, but keeps the cryptographic keys offline. They can take many forms: among the most popular, hardware wallets look a bit like USB drives. Often the owner of the wallet saves the private keys on an encrypted flash drive, a smart card, a computer not connected to the Internet, or even just a piece of paper. By keeping private keys off the internet, cold wallets are protected against hacking attempts. If a cryptocurrency holder uses a hardware wallet, he simply plugs the device into the computer whenever he needs to access his cryptocurrency. Since the private keys remain offline, the wallet is secure even when connected to a computer. Of course, there is a compromise. Since you are not connected to the internet, accessing and moving cryptocurrency in and out of a cold wallet can be a tedious process. That is why many holders use them in conjunction with hot wallets. Holders transfer the small amounts they need to trade into a hot wallet and keep the rest of their crypto wealth safe in a cold wallet. In fact, this is also largely what exchanges do, albeit on a much larger scale, to minimize the risk of attack.
Key points to remember
So what should you take away from this piece? First of all, if you want to buy cryptocurrency, adopt a security mindset. Check who you buy your coins from and make sure you never give your private keys to anyone. Second, consider, if you haven't already done so, moving any crypto assets you have that you aren't using off of your exchange account. Live wallets are a valuable part of the crypto infrastructure, without them trading would be tedious and time consuming, but they are not tight from a security standpoint. The best way to protect yourself against theft of your assets is to get a cold wallet. As long as you follow basic security protocol when it comes to your private keys, without posting them on Facebook, for example, you will keep your private keys safe from hackers.