["Blockchain Basics"] What are "cold wallets" and "hot wallets," and how do they differ?

Common cryptocurrency wallets include hot wallets and cold wallets. Today, we will introduce the "cold wallet," which is safer and more secure for storing cryptocurrencies, as well as the hot wallet, which is more convenient for trading and is commonly used by beginners.

(This article is authorized and reprinted from Zombit Notes. Original article here)

What is a Hot Wallet

A hot wallet is a type of cryptocurrency wallet that is actively connected to the internet. This includes exchange wallets, desktop wallets, and mobile wallets. Hot wallets are more susceptible to hacking as they are connected to the internet. Additionally, in most hot wallets, you cannot ensure sole ownership of your private keys. This means that your own cryptocurrency is not directly controlled by you but by the exchange or custodian. However, compared to a cold wallet, hot wallets are much more convenient in terms of operation and user interface.

Here are some of the most common types of hot wallets:

Exchange Wallet

An exchange wallet stores cryptocurrencies in an exchange account, where the exchange collectively holds the cryptocurrency assets in a single hot wallet. However, exchange wallets are considered one of the least secure wallets, as cryptocurrency exchange hacks are not uncommon, with stolen amounts reaching tens of millions of dollars or even higher. Previously, a Japanese cryptocurrency exchange called Zaif fell victim to a $60 million hacker intrusion.

Such hacks often occur when exchanges store the cryptocurrencies of many users in the same hot wallet. Therefore, once the private key of that exchange wallet is compromised, hackers can steal all users' cryptocurrencies. Additionally, some individuals may use weak security passwords or inadvertently fall for phishing sites, leading to breaches and theft. Once hackers gain access to the account, they can transfer the cryptocurrencies elsewhere without the account owner's knowledge.

If you do not frequently trade, it is safer to transfer your cryptocurrencies from the exchange to a more secure cold wallet for storage. For investors who engage in short-term trading frequently, leaving assets in the exchange may be more convenient, albeit with the risk of exchange hacks.

Exchange wallets are suitable for investors who engage in high-frequency trading on exchanges and do not often transfer assets.

Desktop Wallet

A desktop wallet is software that can be downloaded to a personal computer. An example of a common desktop wallet is Bitcoin Core. Although desktop wallets are considered more secure than exchange wallets, they are still vulnerable to various hacking methods.

Any wallet stored digitally and connected to the internet is susceptible to attacks. Many hackers target computers with installed wallets. Once they gain access to the computer, they can steal passwords. Apart from network vulnerabilities, personal devices may also malfunction or become inaccessible, posing a risk of cryptocurrency loss.

Investors using desktop wallets are advised to keep the software up to date and continuously scan for malware on their devices to prevent Trojan attacks.

If privacy is a major consideration, Bitcoin Core desktop wallet is a good choice as it does not rely on any third-party data.

Mobile Wallet

Mobile wallets are a popular choice for many cryptocurrency investors but come with their own risks. These wallets can be easily downloaded as apps on mobile devices. For example, common mobile app wallets include imToken and Jaxx.

The biggest risk with mobile wallets is the frequent loss or damage of mobile phones. Therefore, losing the phone may result in the loss of cryptocurrencies, and hackers still have the opportunity to steal wallet passwords or private keys by hacking into the phone system. However, mobile wallets are convenient, allowing users to carry and use them on the go.

For mobile wallets, it is recommended to choose a wallet with recovery phrase functionality or other recovery features.

With the convenience of smartphones and relatively simple user interfaces, mobile wallets are suitable for investors who dislike carrying additional devices (such as computers, hardware wallets, etc.) and prefer convenience.

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