What is a hot wallet?
Hot wallets are online cryptocurrency wallets connected to the internet and used to manage, store, send and receive crypto assets. Hot wallets are commonly used for cryptocurrency trading and payment purposes.
Hot wallets are widely used due to their convenience, allowing users to access their assets quickly and easily. However, because they require an internet connection, they are often vulnerable to attacks and theft.
hot wallet
Based on classification, hot wallets will be divided into different types:
Depending on the device used: web wallet, mobile wallet and desktop wallet.
Control based on private key: custodial and non-custodial.
By device
Hot wallets are divided into three categories based on the device used, management and access methods:
Web Wallet: A wallet that is accessed and managed via a web browser. User data and credentials will be encrypted and stored on the wallet provider’s servers.
Desktop Wallet: A wallet that is installed and stored on the user’s computer software. The data is encrypted and stored on your computer's hard drive. To protect their wallets, users need to install protection measures such as strong passwords and antivirus software. This was the first type of hot wallet developed before the advent of web and mobile wallets.
Mobile Wallet: A wallet installed and stored on a smartphone or mobile device such as a tablet. This type of wallet is usually available in the form of a mobile app. The data and private keys are stored on the device and users can authenticate access using a PIN or fingerprint.
Currently, web and mobile wallets are more commonly used than desktop wallets due to their convenience and ease of access.
controlled
Hot wallets will be divided into two categories based on private key access and control of user wallet addresses:
Managed wallet: The wallet’s private keys are managed by a third-party service provider. They have full control over user assets, are responsible for managing wallet keys, and sign transactions when wallet owners make transactions. Typical examples of custodial wallets are exchange wallets (e.g. Binance, Bybit, Crypto.com).
Non-custodial wallet: The wallet’s private keys are managed by the wallet’s creator. Users have full control over their assets, store their own keys and sign transactions. No one (not even the wallet provider) can access the wallet except the wallet owner. Some examples of non-custodial wallets include Super App Wallet, Metamask Wallet, Trust Wallet.
How hot wallets work
First you need to understand how a cryptocurrency wallet works.
Cryptocurrency wallets are based on two types of keys: public keys and private keys, where:
The public key serves as the wallet address, allowing users to receive cryptocurrency assets into the wallet. Public keys can be shared publicly.
The private key serves as the key to open the wallet, allowing users with wallet access to deposit and withdraw assets in the wallet. The private key is kept secret and not shared with anyone.
When sending cryptocurrency:
The sender uses the private key to access the wallet and sign transactions on the wallet.
Nodes will verify and send the transaction to the blockchain.
The transaction is recorded on the blockchain and the cryptocurrency is sent to the recipient’s wallet.
Basically, the operation process of hot wallets is the same as that of cryptocurrency wallets, but there will still be some differences depending on the wallet type.
For custodial wallets, the transaction signing step will be done by a third party as they are the custodians of the private keys. Transactions are slower because more people are involved in the transaction process.
For non-custodial wallets, the transaction signing step will be completed by the user themselves, and the transaction speed is also faster.
Advantages and Disadvantages of Hot Wallets
advantage
Hot wallets have the following advantages:
Ease of use: Hot wallets typically have intuitive interfaces that are easy to set up and use.
Convenience: Users can conduct daily transactions quickly and easily.
Online access: You can access your wallet account from anywhere and on any device as long as you have an internet connection.
Flexibility: Hot wallets often support multiple cryptocurrencies across blockchains, making portfolio diversification more flexible.
Low cost: Most hot wallets allow users to use them for free or for very low fees.
Multiple forms of asset management: With custodial or non-custodial wallets, users can choose to control assets themselves or delegate control to a third party.
shortcoming
However, hot wallets still have some disadvantages, such as:
Low security: Hot wallets are always directly connected to the internet, making them vulnerable to viruses or hackers. This makes hot wallets less secure and may impact the assets stored within them.
Dependence on the Internet: To access the wallet and conduct transactions, users require an Internet connection. Using a hot wallet may become difficult and inconvenient if the network is interrupted or has slow speeds.
Compare hot wallets and cold wallets.
Corresponding to a hot wallet, a cold wallet is a physical wallet that does not require an internet connection and is used to store cryptocurrencies. Cold wallets are generally divided into two categories:
Hardware wallets: These are hardware devices used to store private and public keys that can be connected to a computer or mobile phone via USB or Bluetooth and used to transfer electronic money. Some popular hardware wallets are Trezor and Ledger.
Paper wallet: The public and private keys of the wallet are printed on a piece of paper and presented in the form of a QR code, which can be scanned when you need to make a transaction.
How to Securely Protect a Hot Wallet
Since hot wallets are always connected to the Internet, their security is more limited than cold wallets. However, if you know how to secure it, a hot wallet can be a very good asset storage support tool.
Here are some ways to protect your hot wallet:
Do not store large amounts of assets in hot wallets, use them only for trading purposes.
Allocate and store assets on various hot wallets to prevent the loss of all assets in the event of an attack.
Always double-check and make sure you download the app or software update from the project's official website.
For non-custodial wallets, it is necessary to store the private key or mnemonic phrase in a safe place and do not share these two types of keys with anyone.
Two-factor authentication (2FA) should be enabled if supported by the wallet.
Avoid visiting unknown websites or links to prevent phishing attacks.
It is recommended to create a separate wallet and store a small amount of assets for airdrops or interact with decentralized applications (dApps). Avoid using a common wallet to store all assets and perform airdrops and other operations.
Hot Wallet FAQ
Are hot wallets safe?
The security of a hot wallet depends on many different subjective and objective factors.
Subjective factors come from the user: how to manage private keys, connect to unfamiliar platforms, take security measures, etc…
Objective factors come from the outside: network connection risks, wallet storage device risks, service provider system attack risks, etc...
Therefore, hot wallets may be convenient when conducting daily transactions, but users need to understand the risks and ensure the highest security for their assets.
Can hot wallets be hacked?
If hot wallets are not properly protected or follow necessary security measures, they can still be hacked. To minimize the risk of being hacked, users should follow the above security measures.
When should you use a hot wallet?
Hot wallets are typically used in the following situations:
A small amount of cryptocurrency assets needs to be stored.
Make everyday transactions quickly and conveniently.
Use a service that accepts cryptocurrency payments.
Participate in airdrops and interact with decentralized applications (dApps).
in conclusion
Hot wallets are widely used due to their convenience, allowing users to access their assets quickly and easily. However, since they require an internet connection, they are often vulnerable to attacks and theft. But a cold wallet will be safer because there is no network connection and it is difficult to be attacked and stolen. It is suitable for people who invest in coins for a long time.
