Hot Storage vs. Cold Storage: How to Choose the Best Encrypted Storage Solution?

By Rosie Perper, CoinDesk analyst

Whether for security or convenience, choosing the right crypto storage solution can help ensure the safety of your assets. This article will introduce hot storage and cold storage of crypto wallets, compare their advantages and disadvantages, and help investors choose the storage option that best suits them.

After purchasing cryptocurrency, deciding how and where to store your assets is a very important step. Unlike physical currencies, cryptocurrencies run on the blockchain and therefore require a digital storage system called a wallet. Like a cash wallet, a crypto wallet allows you to hold and transfer funds. A crypto wallet consists of public and private keys, which are strings of characters that allow the holder to receive and transfer their crypto assets.

There are two types of storage options for crypto wallets: "hot" storage and "cold" storage. Hot storage is an application or platform that is connected to the internet, while cold storage is offline storage, usually stored on a physical device such as a USB flash drive. While both hot and cold storage systems allow individuals to access their digital funds, they differ in user experience and security levels.

Which option is right for you is a matter of personal choice, and it could be a combination of both, depending on what you want to do with your cryptocurrency in the long and short term.

Hot Storage vs. Cold Storage: Pros and Cons

Hot storage refers to an application or platform connected to the internet that allows you to manage your cryptocurrency assets. Many of these services are free and can be used on a computer or mobile device. Some examples of hot wallets include the following software:

• MetaMask: A popular browser plugin that acts as a wallet for Ethereum (ETH) and other ERC-20 tokens.

• Exodus: Desktop and mobile software that connects to the Exodus decentralized exchange and supports over 150 cryptocurrencies.

• Mycelium: A full-fledged, Bitcoin -centric mobile app with native trading options.

Some cryptocurrency exchanges, including Coinbase ( COIN ), Gemini, and Binance, also offer wallets for seamlessly buying, trading, and selling cryptocurrencies on their platforms.

Thermal storage advantages:

• User-Friendly: Because they are always connected to the internet, these platforms allow you to easily store and access your cryptocurrencies from anywhere.

• Fees: Most hot wallets are free to use.

• Convenience: If you use a hot wallet linked to a specific exchange, you can conveniently interact within that ecosystem.

Thermal storage disadvantages:

• Security: While hot wallets are generally secure, they are connected to the internet and therefore more vulnerable to hacking.

• Accessibility: Since they require a connection to the internet, certain wallet features may be restricted in certain countries or jurisdictions, depending on local laws.

On the other hand, cold storage keeps the user’s private keys offline, therefore adding an extra layer of security from potential hacker attacks. While hardware wallets are not an absolute requirement to move your cryptocurrency into cold storage, most people opt for hardware solutions such as:

• Ledger : A USB-like device that allows users to buy, exchange and stake over 1,000 cryptocurrencies.

• Trezor: A small plug-in device that is compatible with over 1,000 cryptocurrencies and can be used on computers and mobile devices.

Cold storage allows users to have full control over their private keys and assets, but it also comes at a higher price.

Cold storage advantages:

• Portability: Cold storage solutions are usually small plug-in devices that can be carried anywhere in the world and easily logged into decentralized applications.

• Security: Your private keys never leave your device and transactions are signed locally, greatly reducing the risk of your device being vulnerable to cyber attacks.

• Autonomy: Cold storage allows you to be the sole custodian of your crypto assets, eliminating third-party applications from your storage experience.

Cold storage disadvantages:

• Price: Hardware wallets cost between $79 and $255, which is more expensive than online wallets.

• Transferring: Transferring between cold storage devices is slightly more troublesome than transferring between hot storage wallets.

Hot Storage vs. Cold Storage: Which is Most Secure?

While there have been several high-profile hacks involving hot storage wallets, security measures continue to improve. In September 2020, Singapore-based exchange KuCoin suffered a security breach that compromised approximately $281 million worth of crypto assets, but most of the funds were later recovered. In July 2019, Japanese cryptocurrency exchange Bitpoint lost approximately $32 million in user funds in a hack. User data from cold storage system Ledger was compromised in July 2020, but no user funds were stolen.

Finally, there are a variety of factors to consider when deciding whether to use a cold wallet or a hot wallet. Many people use both cold and hot storage options to create a secure and seamless trading experience, and most exchanges, including Coinbase, keep user funds in a variety of cold storage options, which Coinbase calls the "gold standard for cryptocurrency asset security." In general, experts recommend that large amounts of cryptocurrency or cryptocurrency assets that users do not need to access frequently be stored in cold storage.

Compiled and edited by Amy Liu