So you’ve heard about Bitcoin wallets and now you find out there are hot and cold wallets!! What does this mean? Which wallet do you need? How to use them? Lets find out the difference between hot wallets and cold wallets.
So what is a Bitcoin wallet anyway? It’s a place where you store your Bitcoin right? Wrong!! It’s a common misunderstanding. Bitcoins stay on the blockchain. Your wallet contains your private keys which let you access your Bitcoin.
Your private keys are the most important thing about owning Bitcoin. If someone accesses your private key they can gain access to your Bitcoin.
The private key like in the example above is what you use to authorise your Bitcoin transactions. It looks long and complicated but you’ll never have to type it in because it is stored in your Bitcoin wallet. You can protect your wallet with a regular password that is easy to remember.
Hot wallets are software applications. There are lots to choose from. If you go to the app store on your phone and search for Bitcoin wallets you will find lots to choose from. Have a look at the reviews for each to get an idea of the pros and cons for each one.
Some wallets are designed just for Bitcoin or other specific cryptocurrencies. While other wallets can be used with multiple different cryptos.
When you’ve installed your wallet you can generate a new Bitcoin address which then generates a private key.
With a hot wallet your private key is stored in the wallet on whatever device you installed it on. This can be dangerous.
If you have a wallet on your phone which is always connected to the Internet, there will always be a risk that hackers can access it. The same goes for desktop wallets on your computer. There are lots of viruses that can steal your private key.
Hot wallets are fine for small amounts of crypto that you might want to use in day to day transactions. You can think of hot wallets like a current account or checking account. Good for every day use but not where you’d keep your life savings!
Cold wallets are pieces of hardware that plug into your phone or computer. The advantage of a cold wallet is that your private key is kept away from your computer or phone. Even when you use your cold wallet or hardware wallet as their more commonly referred to, your computer or phone will never get access to your private key.
This means that hackers can’t get access to your key when you are using it. Malware on your phone or computer can’t steal it. It’s very safe.
When you are not using your hardware wallet then it’s unplugged and you can keep it somewhere safe, offline, where it it 100% safe and sound.
A cold wallet is essential if you want to hold a large amount of Bitcoin. It needs to be kept safe and secure, offline, away from anyone that may want to steal it!
There are several hardware wallets available. I personally use the Ledger Nano. There is a Nano X and Nano S depending on you whether you want Bluetooth connectivity.
Seed Words & Recovery Words
Whether you use a hot or cold wallet, when you set it up you will generate a list of recovery words.
There’s always a chance that you lose your wallet or it breaks or for whatever reason, you can’t access it. If that happens you can setup a new wallet and input your recovery phrase which is usually a list of 12 or 24 words.
That means that your recovery phrase is as important as your wallet itself. Your recovery phrase should be safeguarded just as your wallet is.
Also, for additional security I would recommend that you separate your recovery phrase into two lists and keep them in separate locations.
If someone got access to your recovery phrase they could setup a wallet, input your recovery phrase and gain access to your Bitcoin. Check out these Bitcoin Safety Tips if you are still unsure.