Hot Wallet: Definition, Benefits, and Safety Tips

What is a Hot Wallet?  

A hot wallet is an app or platform that allows you to send and receive crypto. In function, it is similar to an online banking app. 

Your crypto hot wallet is a unique address on the blockchain that is always accessible online. It allows you to easily trade, withdraw cash, send, or receive crypto.

Metamask app for sending crypto
Metamask is one of the best decentralized apps for sending crypto | Source: Metamask 

How Does a Hot Wallet Work?

A hot wallet, meaning an app connected to the internet that stores the keys you need to access your crypto on the blockchain, allows you to send and receive cryptocurrency. 

A key mechanism in hot wallets is public and private keys, which are both random strings of letters and numbers. 

Public crypto keys function as a wallet address, where someone can send you crypto, similar to your bank account number. To better illustrate this concept, here’s an example of sending crypto to a wallet address. 

1. Log in to your hot wallet. MetaMask is shown here as an example. Click on the “Send” button. 

Screen showing the Metamask wallet features - buying, selling, swapping, and more
Choose the crypto transaction you need to complete | Source: Metamask

2. Ask the recipient for their public wallet key, starting with “0x” and enter it in the “Send to” field. 

Screen showing how to send crypto on Metamask
Enter the wallet address you’re sending crypto to | Source: Metamask

3. Specify the currency and amount you’re sending, review the fees and details for accuracy, and then complete the transaction.

Screen showing sending crypto through Metamask
Review your crypto transactions before sending | Source: Metamask

Private keys are secret to you, and verify that you own the wallet. You’re given a secret key when you create your wallet, and you should never share it with anyone for any reason. 

Some exchanges also provide crypto wallets, such as Coinbase Wallet. There are also dedicated hot wallets like MetaMask, which is not connected to a centralized exchange. 

Hot Wallets: Pros and Cons

Pros

  • Free to use, whereas cold wallets cost money 
  • Allows instant and easy crypto transactions 
  • Access your crypto from anywhere 

Cons

  • More prone to hacks and security failures than cold wallets  

Hot Wallet Security

A key question is, are hot wallets safe? Generally speaking, yes, they are safe to use, especially if you choose a reputable platform and take the following precautions. 

  1. Save your secret key in a secure location that can’t be accessed, for example, an encrypted password tool like 1Password or on paper kept safe in your home. 
  1. Set up two-factor authentication (2FA). 
  1. Change your password regularly.  

The main security risk of hot wallets is that someone could potentially access them remotely in the event of a data breach or hack.

Like in every piece of software there could be errors in the code creating vulnerabilities that can be exploited by malicious actors or causing a design flaw that can serve as an open door for fraudsters.

(Pokrovsky, 2020).

As long as you follow the recommended security measures mentioned above, the risk of online attacks is quite low. 

Are Hot Wallets Safer Than Exchanges? 

Crypto wallets are considered safer than leaving your crypto assets on an exchange. 

Hot wallets give you full control over your funds and wallet keys, rather than giving exchanges, a third party, control. This is inherently more risky as the exchange owns your wallet keys and data, and if anything happens to the exchange, like a liquidity issue or hack, it impacts your crypto holdings. 

The collapse of FTX and the subsequent $477 million hack demonstrates the need to keep your funds in an independent wallet rather than a crypto exchange.

(Sigalos, 2022). 

Types of Hot Wallets

The key types of software wallets are: 

  • Exchange-specific hot wallets, which live on a crypto exchange for convenience, and are either exclusive to the exchange or can be used for holding other funds (i.e Coinbase crypto wallet)  
  • Blockchain-specific hot wallets, also called ecosystem-specific, store any crypto from a certain blockchain (i.e. MetaMask hot wallet for Ethereum, Bitcoin Core wallet for Bitcoin) 
  • Non-custodial hot wallets, refer generally to a wallet separate from an exchange or centralized body (i.e. Trust Wallet supports 70+ networks) 
Coinbase's native hot mobile wallet
Coinbase has a native hot mobile wallet | Source: PCMag

Hot Wallet vs Cold Wallet

The defining feature of a hot wallet vs cold wallet is that they exist offline and online, respectively. 

A hot wallet is an app connected to the internet that lets you actively use your crypto for transactions. It’s similar to your bank account.  

A crypto cold wallet, or hardware wallet, is a physical device that allows you to access your crypto fully offline. It can be compared to a safe, which stores physical money and valuables, and can only be accessed in person. 

Cold wallets and hardware devices offer better security but you risk losing your funds should anything happen to it.  

How to Transfer from Hot Wallet to Cold Wallet? 

Crypto holdings are transferred back and forth between hot wallets and cold wallets through a physical cord or Bluetooth connectivity. 

Using a cord to connect to the cold crypto wallet is more secure, as even Bluetooth can be intercepted and hacked. 

Conclusion

Hot wallets are a necessary tool in the crypto world, functioning as a storage method and a convenient way to make a cryptocurrency transaction. For maximum security, use a cold wallet to store at least a portion of your digital assets, especially if you own large amounts of crypto. 

Article Sources

Pokrovsky, P. (2020). Hot wallet security assessment essential for safe and compliant transactions. Blockchain Security Group, Kasperky, 3. 

Sigalos, M. (2022). FTX says it’s removing trading and withdrawals, moving digital assets to a cold wallet after a $477 million suspected hack. CNBC