Hot Wallets: Everything You Need to Know
Before you start investing in Bitcoin, you’ll need to set up a wallet so you can store any Bitcoin you want to trade, receive, sell, or buy.
There are several types of wallets; hot wallets, cold wallets, and paper wallets. All three have different functions as well as different pros and cons.
In this post, we’re going to take a look at the most popular type of wallet, hot wallets.
What Is a Hot Wallet?
A hot wallet functions in a way similar to the physical wallet you keep in your back pocket, except it’s online. An online hot wallet is always connected to the internet and the crypto network.
They can be used to store, send, and receive Bitcoin as well as certain altcoins. Although some crypto will need special types of hot wallets. For example, you can’t keep BTC and ETH in the same wallet as the hosts won’t allow it, so you may need to open separate wallets from time to time if you have a diverse cryptocurrency portfolio.
You can also check your hot wallet anytime you want to see your balance.
How Hot Wallets Work
All online transactions for cryptocurrency must go through a wallet, so you won’t be able to do anything until you have opened one up and obtained your unique wallet address. You’ll receive your wallet address as well as the seed which is like your wallet’s password.
This seed should never be shared with anyone as anyone in possession of your seed can then transfer the balance out of your wallet into theirs.
You’ll also not be able to get another seed if you lose yours. If you lose it, you’ll be locked out of your hot wallet with no way back in.
Alongside the seed or private key, you’ll receive a public key also. The public key is like a personal identification number for your wallet rather than your actual identity. The public key is there to confirm that your wallet is the correct one when making transactions.
Once you’ve set up your wallet and received your keys, you’re ready to get going. You can use your wallet to just store any BTC that you buy or receive, or you can spend it like you want fiat currency for any goods and services that accept BTC.
Options for Hot Wallets
Since there’s a high demand for hot wallets, there are plenty of platforms to choose from that provide the wallets free of charge. The hosting platforms and exchanges include:
- Edge Wallet
These options are for a variety of crypto, for example, Coinbase is for BTC, Metamask is for Ethereum and Edge is for all your digital assets. These are all free to download and use and you’ll usually operate them through an app just like you do your banking app or something similar.
Because different hot wallets (there are more options than just those listed above) have different features, functions, and security measures, and are only compatible usually with certain cryptocurrencies, it’s important that you do enough research to know which one is right for your needs.
While hot wallets are the most common type of wallet, they are not as safe as cold or paper wallets just because they are connected to the internet. Anything that is connected to the internet is always at risk of hacking. And although there are security measures in place by the hosts to protect people’s crypto, it’s still worth being cautious when using your hot wallet.
A cold wallet or paper wallet are both stored offline either using a USB-type device or a piece of paper.
These both aren’t as convenient as hot wallets as you can’t just quickly log in to check your balance or make transactions but they are safer because they cannot be hacked.
If you have a larger amount of BTC, it can be a good idea to own several wallets and spread your assets out over online and offline wallets to get convenience and safety at the same time.
If you had a large bank balance, you wouldn’t keep it all in one bank account, you'd spread it out over however many accounts are needed to be protected by the bank as well as not risk losing it all if there were ever a breach on your account. The same rule applies to any type of cryptocurrency.
Important Points to Takeaway
- Hot wallets are a cryptocurrency storage solutions that are always connected to the internet
- You can store, send, and receive cryptocurrencies into your hot wallet as long as the hot wallet is compatible with the crypto you’re using
- Hot wallets have security measures but can still be hacked (although this is rare) because they are connected to the internet
- If you have a large amount of crypto, it’s better to keep your balance stored in several wallets including offline storage options such as cold wallets and paper wallets as they are unhackable
The Most Frequently Asked Questions About Hot Wallets
Is a Hot Wallet a Good Option for Long-term Storage
In short, the answer is no. If you plan on investing in Bitcoin as a long-term investment and, therefore, won’t be spending or processing transactions very often, then it’s far better to store your balance in a cold storage solution.
One of the advantages of a hot wallet is the convenience of being able to check your balance and make transactions quickly without having the hassle of retrieving your cold storage and going through the process.
However, if you’ll rarely be using your BTC, then the long process involved with cold storage won’t matter.
Can I Exchange Bitcoin from My Hot Wallet?
Yes, if you would prefer to cash in your Bitcoin or part of your Bitcoin and exchange it for your preferred fiat currency, you can do so with your wallet on an exchange platform.
The process is just like buying vacation currency with your bank account. Choose how much Bitcoin you want to exchange and the exchange will send you the equivalent in the fiat currency to your bank account.
Can I Make My Hot Wallet More Secure?
Yes. Firstly, only keep small amounts in each wallet. Open several hot wallets if you prefer. Next, ensure you back it up, keep the software up to date, encrypt it, and keep your password secure to make sure your wallet or wallets are always as safe as possible.
Can I Use an Exchange as Storage Instead?
Yes, this is possible with the right exchange. Some exchange platforms will store your cryptocurrency within their infrastructure, essentially making them a hot wallet provider.
While there are advantages to this, you must keep in mind that if the exchange platform is ever hacked, then your cryptocurrencies are also at risk.
What’s worse, the platform may have you tick a box to say that if they lose your tokens due to a cyberattack then they are not responsible for refunding you.
Can Hot Wallets be Hacked?
The setup and security measures already in place for hot wallets make them extremely hard to hack. But not impossible. Like all situations that involve money, there will always be people trying their best to take it from you.
There are some common cryptocurrency scams that you can read about here. Being cautious is always essential when dealing with your account, wallets, and seed.
Are Hot Wallets Worth Using?
Yes, absolutely. The risk of hacking is minimal, especially if you follow good security practices while using it. Hot wallets are also incredibly convenient if you make BTC or other cryptocurrency transactions a lot.
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