What is the Difference Between a Hot and a Cold Wallet?

Up until recently, investors in digital assets were faced with the choice between storing their digital assets in “hot” or “cold” wallets. In brief, the difference between "hot" and "cold" comes down to whether or not the wallet is connected (hot) or not connected (cold) to the internet.

Hot wallets: Pros and cons

The main benefit of a hot wallet is convenience. Web-based wallets, mobile wallets, and desktop wallets are all typically hot wallets. Ease of access to your assets is the primary reason people are attracted to hot wallets. For example, many people use mobile hot wallets to trade or make purchases with various cryptocurrencies.

The main detriment to a hot wallet is security. Because hot wallets are connected to the internet, the digital assets therein are more vulnerable to theft. Wallets on crypto exchanges are technically hot wallets. The more reputable exchanges generally have robust security measures. They typically store the majority of their customers’ digital assets offline in a matrix of cold wallets, and then keep a certain amount needed for withdrawals in hot wallets.

Cold wallets: Pros and cons

The inverse is true for cold wallets: they're less convenient and more secure than hot wallets. 

Generally speaking, cold storage hardware wallets are quite secure. Envision a small to medium-sized, password protected USB stick that isn't connected to the internet, likely stored in a secure bank vault. Stealing digital assets from that cold wallet would mean a thief would have to take physical possession of the USB stick, and then either know or be able to hack the password.

Cold storage hardware wallets are designed to be difficult to hack. Even if the USB stick is plugged into a computer or connected via bluetooth, the digital assets stored on the wallet should not be vulnerable to theft. While technically connected to the internet, the "signing" of transactions is done “in-device,” and subsequently broadcast to the network via the computer’s internet connection. A “signature” allows the original owner of the digital assets to assign new ownership to the recipient of the cryptocurrency transaction, and the private keys never leave the USB stick. This process protects the original owner from malware and makes it essentially impossible for a thief to “sign” a transaction in an attempt to steal digital assets stored on the cold storage hardware wallet. 

Institutional grade custody

Investing in any of Galaxy Fund Management's funds solves the question of how best to keep your digital assets safe and secure. We work with Bakkt, Gemini, and Fidelity Digital Assets, all premier service providers, to offer our investors institutional-grade custody.