You’ve probably seen this on social media, but what does it mean?
If you’ve ever seen the phrase “Not your keys, not your crypto” and you’re not sure what it really means, this could be the article you’re looking for.
Hot & Cold Wallets
The difference between a hot and a cold wallet is simply internet connectivity. For those of you who are unfamiliar with this let me go into a little bit more detail;
Hot wallets are crypto wallets such as Metamask, Trust Wallet etc. That are decentralised wallets that are connected to the internet via your phone or computer. Although you still have a keyphrase to access them, they’re still vulnerable to hacks due to the fact they’re “online” 24/7.
The huge difference between hot and cold is that your crypto is accessible all the time with a hot wallet.
A cold wallet is a hardware device that is “offline”. It can be connected to the internet via a USB lead, but it generally stays disconnected and “unhackable”.
Ledger is a good example of a cold storage wallet.
The main ‘“con” to a cold wallet is that to access your crypto you need to plug-in and go through the login process every time. This can be a pain if you want to access or trade your crypto.
Cold wallets are great for the Hodlers who buy and hold for long periods of time.
A centralised exchange wallet (CEX) is a wallet that you have access via your email/username and a password. Binance is a good example of a CEX.
Although these wallets are probably the most susceptible to hacks, plus you’re in the mercy of a company staying afloat.
We’ve seen recently in the news about Voyager, the crypto exchange that filed for bankruptcy which took a lot of peoples crypto down with it. Or the issue with FTX where the founder decided to use it as his personal piggy bank and used its users crypto.
CEX wallets are great for short term holders who trade their crypto regularly.
What About Keys?
Both hot & cold wallets require you to store a keyphrase. This is usually 12-24 words in a particular order (very hard to hack into). Storing your keyphrase on your phone or a file on your computer is dangerous as that can still be hacked. I recommend writing it down in a notebook and storing it somewhere safe.
CEX wallets usually just requires a username/email and a password, although you can go a stage further and use your mobile phone as a way to further protect yourself. Or you can use a key such as a Yubico which requires the user to physically plug in and press the button to allow access to the wallet.
CEX vs. Hot Wallet
If you need regular access to your crypto, or you like trading it then a CEX wallet or hot wallet is the way forward. With a hot wallet you can use decentralised exchanges (DEX) to trade instead of transferring crypto to a CEX. There are many different DEXs depending on what blockchain you’re using i.e. Ethereum, Cardano, Avalanche etc.
More on DEXs in a later article.