If you’ve been interested in cryptocurrency for any period of time, there’s a good chance you’ve heard the term “wallet,” and you probably realize that it doesn’t quite mean the same as it does in everyday life.
A wallet in crypto terms is somewhere for the owner of crypto to store their coins.
Sounds pretty simple, right? Well, it’s not quite that easy, but with a little bit of knowledge, even a novice trader can keep their precious crypto coins out of the hands of would-be thieves.
Hot or Cold?
This is a term that confuses quite a lot of people who are relatively new to the world of crypto.
What is a ‘hot’ or ‘cold’ wallet?
Quite simply, a hot wallet is connected to the internet. It is considered less secure to an extent because of that, and while instant access is a real positive aspect of this type of storage, it does pose a threat to your privacy and security.
Hot wallets are also considered more user-friendly.
A cold wallet is, as you may have guessed by now, an offline storage system. A cold wallet is also known as ‘cold storage,’ and resemble more of a vault or safe in the real world than anything else.
When asked the question of which type of wallet is best, the answer is not straightforward, as it really does depend on your personal circumstances.
In fact, many crypto traders tend to use a mixture of both hot and cold wallets, keeping their day to day trading funds in a hot wallet for easy access, and placing more substantial sums that they wish to save in cold storage, away from thieves and hackers.
Which brings us to exchanges, which is where a lot of crypto owners tend to hold their funds.
Holding funds in an exchange
This has long been considered a bad idea, and with various hacks over the past few years it’s easy to see why people would think that way, but the truth is that many exchanges have learned lessons from the mistakes made by others in the past.
The lack of regulation and threat of hacking is a concern that won’t be going away any time soon, but holding coins in an exchange wallet is very convenient, so there’s always going to be people who do it.
So, while choosing the correct cold or hot wallet is an essential aspect of your crypto housekeeping, you should also be making sure that the exchange you use is up to par with its own safety and security.
It’s all too easy to become dazzled by the ‘offer of the month’ that promises free access to a premium membership level if you sign up today, or a deal on withdrawal fees for a limited time.
Do your homework. Make sure that the exchange is doing all it can to keep your funds safe during the time they have them in their care.
You’re looking for an exchange that holds their assets in cold storage, for reasons explained earlier in this article, as well as utilizing SSL encryption and possibly even a distributed server cluster, which helps in dealing with periods of high trading volume and stability.
Do your homework
Top exchanges such as Coinbase and RightBTC handle tens of millions of dollars worth of transactions and are pretty safe bets as far as security measures go, so you can certainly look into those two, along with others that are rated highly such as Binance and Huobi.
There are smaller exchanges out there, many of whom are just as credible an option, but there are other factors to take into account such as your location, which cryptos you wish to trade, and how they measure up as far as customer service goes.
In conclusion, you should do your homework on any exchange that you decide to work with, looking beyond the benefits and the offers at what security measures they have in place, and you should also look at the idea of storing the vast majority of your funds in a cold wallet, especially if you have a sizeable amount of capital.
There really isn’t a “one size fits all” answer to this issue, but if you carry out your research, you’re less likely to run into problems.
Aubrey Hansen is a freelance writer, a graduate of Aarhus University and crypto enthusiast. She writes about blockchain technology, Fintech and cryptocurrencies. She’s been researching major developments in the crypto world in past couple of years.