A crypto wallet is a tool that lets you manage and keep cryptocurrency using private keys. Hot wallets keep those keys on internet-connected devices, while cold wallets keep the keys offline.
In this guide, we'll explain what hot and cold wallets are and how they work.
What Is a Cold Wallet?
A cold wallet is a cryptocurrency wallet that keeps private keys isolated from internet-connected systems. This approach is called cold storage.
Private keys are cryptographic credentials used to authorize cryptocurrency transactions. By keeping them offline, a cold wallet reduces their exposure to online threats, such as malware and remote attacks.
A cold wallet doesn't physically hold cryptocurrencies. The assets remain recorded on their respective blockchains. The wallet protects the keys needed to control and transfer them.
Cold wallets are commonly used for long-term cryptocurrency storage, especially when funds don't need to be accessed frequently.
How Does a Cold Wallet Work?
A cold wallet allows users to authorize transactions without exposing their private keys to an internet-connected device.
The process typically works as follows:
- Key generation: A wallet generates private keys in an offline or isolated environment. Learn more about secure crypto key generation in our cold wallet safety guide.
- Transaction preparation: A transaction is created using a connected application or another device.
- Offline signing: The cold wallet signs the transaction without exposing its private key to the connected device.
- Broadcasting: The signed transaction is transferred to an internet-connected device and broadcast to the blockchain network.
For example, a hardware wallet may connect to a computer to receive transaction details and return a signature.
Types of Cold Wallets
There are several approaches to cold cryptocurrency storage.
Hardware wallets
Hardware wallets are physical devices designed to generate and protect private keys. Many use secure hardware components and require users to confirm transactions directly on the device.
Security models may differ, so users should review the manufacturer's documentation before choosing one.
Paper wallets
A paper wallet is a physical record of a private key or other wallet recovery information, sometimes represented as text or a QR code.
Paper wallets were more common in Bitcoin's early years. Today, they're generally considered an outdated storage method because paper can be lost or damaged, and importing private keys securely can be difficult.
Air-gapped wallets
An air-gapped wallet uses a device that remains physically isolated from internet-connected networks.
Transactions may be transferred between devices using QR codes or removable media. The offline device signs the transaction without directly connecting to the internet.
Air-gapped setups can reduce remote exposure, but their security still depends on the device, software, and transaction-verification process.
Some approaches overlap: for example, a hardware wallet can also operate in an air-gapped environment.
What Is a Cold Wallet Used For?
Cold wallets are primarily used to protect private keys when cryptocurrency doesn't need to be moved regularly.
Common use cases include:
- Long-term storage of large amounts of cryptocurrency. Learn more in our guide on how to store large amounts of Bitcoin securely.
- Holding cryptocurrency reserves for individuals or businesses.
- Keeping private keys isolated from everyday internet-connected devices.
- Managing funds that require additional transaction authorization procedures.
Cold storage can reduce certain online risks, but it doesn't eliminate every threat. Users can still lose their recovery information or approve malicious transactions. Another risk is purchasing tampered hardware wallets, as demonstrated by the Ledger CryptoBilis incident.
What Is a Hot Wallet?
A hot wallet is a cryptocurrency wallet that operates in an internet-connected environment. It allows users to access their crypto assets, prepare transactions, and interact with blockchain networks through connected devices or services.
Hot wallets are commonly available as mobile apps, desktop programs, and browser extensions. They are widely used for everyday cryptocurrency activities, including sending tokens, receiving payments, and interacting with decentralized applications (dApps).
Hot wallets can be custodial or non-custodial, depending on who controls the private keys. Learn more in our guide to custodial vs. non-custodial crypto wallets.
The term hot wallet describes the wallet's online operating environment. It doesn't automatically tell you who controls the private keys.
What Is a Hot Wallet in Crypto, and How Does It Work?
A hot wallet provides an interface for interacting with blockchain networks.
For a typical non-custodial hot wallet, the process looks like this:
- Wallet setup: The application creates or imports the credentials needed to control blockchain assets.
- Transaction creation: The user enters a recipient address, selects an asset, and specifies an amount.
- Transaction signing: The wallet uses the private key to authorize the transaction.
- Broadcasting: The signed transaction is submitted to the relevant blockchain network.
- Confirmation: The network processes the transaction according to its consensus rules.
Since a hot wallet runs on an internet-connected device, users can usually send transactions directly without switching between devices.
However, its security depends on how private keys are protected, how secure the device is, and how carefully the user handles transactions.
Types of Hot Wallets
Hot wallets come in several forms.
Mobile wallets
Mobile wallets are smartphone applications that let users manage cryptocurrency.
They may support features such as QR-code payments, token swaps, NFTs, and access to decentralized applications.
For tips on protecting your crypto on a smartphone, check out our mobile crypto security guide.
Desktop wallets
Desktop wallets are installed on computers. Depending on the software, they may offer advanced transaction settings.
A desktop application isn't a cold wallet. If its private keys are accessible within an internet-connected operating environment, it's a hot wallet.
Browser wallets
Browser wallets are typically extensions that connect users to blockchain applications.
They are commonly used to interact with decentralized exchanges and other Web3 services.
Can You Use Both Hot and Cold Wallets?
Yes. A person can use multiple cryptocurrency wallets for different purposes.
For example, someone might keep a smaller amount of cryptocurrency in a mobile wallet for frequent transactions, but store longer-term holdings using a hardware wallet.
Funds can be transferred between wallet addresses through ordinary blockchain transactions.
Neither type guarantees complete protection. Device security remains important regardless of the storage method.
