What types of wallets are available to users, and when should each be used?
Cryptocurrency wallets fall into two main categories, hot or online and cold or offline. In most cases, online wallets are recommended for frequent traders, whereas their offline counterparts are better suited for significant holdings planned to be held for a long time.
Crypto wallets vary from physical devices to pieces of paper to online software; however, among the most common for new users are the built-in exchange services that make it easy for users to store their assets directly through the platform. These diverse offerings will fall under one of two types of storage, hot or cold, both of which offer different benefits and drawbacks for their users.
On one side, hot or online wallets are primarily known for their ease of use, especially for those that participate in frequent trading. Within this category are web-based wallets, desktop wallets and mobile wallets, all of which are always connected to the internet and therefore do not require a transition between an offline and online wallet to undergo a transaction. The secondary benefit is that these offerings take the pressure of storing a user’s private key off of the user and onto the provider.
However, this is often a double-edged sword as exchanges are often the target for hackers, leaving a user’s private keys subject to risk. A cold wallet, such as the paper wallet mentioned above or a hardware alternative, eliminates these risks but opens cryptocurrency holders to other concerns, such as the loss of such a device.