What is a Hot Wallet?

by Kristen Cotton

Getting crypto is one of the most exciting experiences in life - but don't get too ahead of yourself, you'll need a place to store it first! A hot wallet is a crypto storage solution that allows you to store and send your digital assets quickly, conveniently, and securely. Read on to find out more about how they work, why they're important and much more!

What is a Crypto Wallet?

Just like a physical wallet, a crypto wallet is used to store funds. But unlike regular wallets, crypto wallets don't hold physical coins. Instead, the wallet stores your public and private keys which allow you to access your digital assets and transact with them on the blockchain network.
Think of crypto wallets as a kind of online bank account. You can use them to store and transact with cryptocurrency, just like you would with regular money in a traditional bank account.
The public key is used to receive funds from others, and the private key (which should be kept secure) is used to access your wallet and send funds. The wallet also allows you to view your balance, check transaction history, and more.

What is a Hot Wallet?

A hot wallet is an online crypto storage solution that allows users to quickly, conveniently, and securely store their digital assets while still being able to easily access them when needed. Unlike a cold wallet which requires physical access or hardware wallets that require additional setup steps before use; hot wallets are much more user-friendly and accessible.
Hot wallets are also known as web wallets, because they are usually cloud-based applications that can be accessed from any device with a web browser. They are typically used to store small amounts of cryptocurrency as they offer lower levels of security than other wallet types.

How Do Hot Wallets Work?

Hot wallets work using two layers of encryption; the public key, which is visible to anyone who has access to your address and allows them to send funds, and the private key, which you must securely store yourself and use to access the wallet and make transactions. Private keys are like passwords - they should never be shared or given away! When making a transaction from your hot wallet, the application will generate a string of code (known as a ‘transaction signature’) using your private key which will allow you to securely send funds from the wallet.
Hot wallets are an important part of any cryptocurrency user's portfolio, as they allow quick and easy access to digital assets while still providing a high level of security. They also offer users more flexibility in how they store and use their funds, as well as increased privacy - since no third-party is involved in making or receiving payments.

Private Vs Public Keys

So far, we've discussed public and private keys; let's take a closer look at what they are and how they work.
Public key: A public key is a unique code that is generated by your wallet application which allows you to receive funds from other users. This code can be shared with anyone who wants to send you money, and it tells the blockchain network where funds should be sent.
Private Key: The private key is the opposite of the public key - it is used to access your wallet and send payments securely. It should never be shared or given away as this would allow someone else access to your funds! The private key also produces a ‘transaction signature’ for each transaction you make, so that only you can initiate payments from your wallet.

Pros & Cons of Hot Wallets

Like any other type of cryptocurrency storage solution, hot wallets have pros and cons that must be considered before using them.

Pros
1. Ease of Access - With hot wallets, you can easily access your wallet and funds from any device with a web browser.
2. Quick Transactions - Hot wallets usually have faster transaction times than other types of wallets, making them ideal for day-to-day transactions.
3. Greater Flexibility - Hot wallets allow you to easily store and manage multiple cryptocurrencies at once.
4. Increased Privacy - Since no third-party is involved in making or receiving payments, your transactions can remain private.

Cons
1. Lower Security Levels - As hot wallets are always connected to the internet, they are more vulnerable to hacking than other types of wallets.
2. Limited Funds Storage - Hot wallets usually have lower storage capacities than hardware wallets or cold storage solutions, so they may not be suitable for long-term use.

Types of Hot Wallets

There are several different types of hot wallet available; these include web/cloud wallets, desktop/mobile wallets, and paper wallets. Let’s look at each of these in more detail.

• Web/Cloud Wallets: Web wallets are cloud-based applications that can be accessed from any device with a web browser. They usually offer users increased flexibility and convenience, as well as easy access to their funds. However, they have lower levels of security than other wallet types, so should only be used for small amounts of cryptocurrency.
• Desktop/Mobile Wallets: Desktop and mobile wallets are downloaded and installed on your computer or smartphone respectively. These wallets give users greater control over their funds whilst still providing easy access - however, desktop wallets must always remain connected to the internet in order to function properly.
• Paper Wallets: Paper wallets are physical documents that contain your public and private keys, as well as a QR code that can be scanned to access your funds. They offer users offline storage, meaning they are highly secure - however, they are vulnerable to physical damage or theft, so it is important to keep them in a safe place.

Hot Wallet Security Tips

Although hot wallets have lower security levels than other types of cryptocurrency storage solutions, there are steps you can take to ensure the safety of your funds:

1. Use two-factor authentication (2FA) whenever possible - this requires an additional code or fingerprint scan before accessing your wallet.
2. Regularly back up your wallet data - this will enable you to restore any lost data if something goes wrong.
3. Be aware of phishing scams - never enter your private key or PIN on a website you do not trust.
4. Avoid public wifi networks - these are more vulnerable to hacking than private connections.
5. Set up a secure password and/or PIN - using a complex combination of numbers, letters and symbols will make it harder for hackers to guess.

Hot wallets are a great way to store and manage your cryptocurrency, as they offer users quick access and greater flexibility than other types of wallet. However, due to their lower security levels, it is important to take precautions when using them - such as setting up two-factor authentication and regularly backing up your data. With the right measures in place, hot wallets can be a secure and convenient way to store and transact with your crypto assets.


About the author of What is a Hot Wallet?
Kristen Cotton is a cryptocurrency investor and an Investment consultant. She obtained her BA Economics from the University of British Columbia, with special emphasis on environmental and industrial economics. She recognized the opportunity in cryptocurrency early in her career and has been invested in it since 2015. In addition to investing, Kristen has worked as a research analyst at various organizations.