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Best Choice For Investors Among Hot, Cold & Exchange Wallet

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  • Crypto Wallets serve as the means to access your digital assets stored over a blockchain.
  • Based on risk appetite, any investor can choose among hot, cold, or exchange wallets. 

The collapse of the banking sector in 2008, which led to a domino effect and caused chaos for more than 400 banks, evaporated the little faith people had in traditional financial institutions. Around the same time, a person or group who went by Satoshi Nakamoto released the whitepaper of Bitcoin, which went on to become the first cryptocurrency. 

More than a decade later, the crypto space is continuously developing with hundreds of blockchains running and tackling special problems with equally unique solutions. Cryptocurrencies are digital tokens that are stored over a blockchain network and the inherent properties of blockchain make them secure and immutable. 

However, accessing these digital tokens and claiming a right over them requires people to remember a private key and seed phrase. These are the same as password and security questions people answer while entering a payment channel. The public key is the wallet address which, as the name suggests, is visible to all.

The private key is not to be shared with anyone and is kept safely. Losing it will no longer allow you to access your funds and most of the scams and frauds are related to hackers stealing private keys or misleading innocent people to share them. 

As cryptocurrency became popular and the need for storing private keys became a necessity, several options became available to investors. The popular options among people were cold wallets, hot wallets, and crypto exchanges. Any naive investor should be well informed about them and choose the one for him accordingly. 

Types of Wallets

Hot Wallets

These are software, application, or extension-based wallets that are connected to the internet. They are online wallets connected to the blockchain infrastructure and serve as an interface for you to access your funds. Although internet connectivity makes them easily accessible, there are also increased chances of cyberattacks and fraud.

Popular examples include Coinbase Wallet, Edge Wallet, and extension-enabled Metamask. 

Cold Wallets

These are also called offline wallets because they are not connected to the internet. The private keys are stored in physical devices like USB drives, hard disks, or custom-designed hardware. People also considered writing their private keys on paper and storing them, however, it has reduced because of their fragility. Popular examples include Ledger Nano X, Trezor Model T, Coolwallet Pro, and others. 

wallets
                      Difference between hot and cold wallets (Source: phemex)

Exchanges

Crypto exchanges are online platforms that serve the purpose of converting users’ cash into cryptocurrencies, facilitating exchange between different coins, and converting coins back to cash. Any account on such exchanges, like Binance, Coinbase, Kraken, and others, can be called a crypto wallet. However, more specifically these are called custodial wallets as these exchanges have the custody of your tokens. Users do not have their private keys and need to trust the third party. 

The cases of attack on Mt.Gox, the bankruptcy of FTX, and several other incidents are enough to sow the seeds of doubt in investors’ minds. 

Choosing the right wallet for you can be a challenging task, however, investors can narrow their choices based on some factors. They should read the wallet recovery policy properly, check the history of the platform, assess the user interface, and find out whether there is insurance in case of cyberattacks.

Conclusion

Owing to its popularity and value, hackers often see cracking private keys as a honeypot. Although several platforms claim to have advanced security and unique features, the crypto space is filled with examples of its vulnerability and risks. 

Cold wallet must sound most assuring among all the alternatives, however losing the physical device may lead to permanent loss of your digital assets. Investors can go with their preferred choice based on their personal taste and risk appetite. 

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