What are Hot Wallets and Cold Wallets?
Hot wallets are those that are connected to the internet. They generate and store private keys and broadcast the signed transactions to the network.
Some examples of Hot Wallets are softwares (exodus, electrum), apps (coinbase, bitpay), and web accounts (MyEthereumWallet)
Cold wallets are not connected to the internet. Any transaction initiated online is temporarily transferred to an offline wallet kept on a device where it is digitally signed before transmitting to the online network.
Examples of cold Wallets include USBs, CDs, hard drives, paper formats, and offline computers.
In terms of fiat currency, a hot wallet is similar to your bank account while your cold wallet is similar to a purse or box of money that you hold physically.
How secure are these two wallets?
Hot wallets are vulnerable to attacks, where an attacker trailing the networks may become aware of the private key used to sign the transaction.
Hackers cannot steal digital assets from cold wallets because the private key does not come into contact with a server connected online, during the signing process. Since this is offline, hodlers are deprived of benefitting from market fluctuations.
Depression of security in Hot wallets
People who keep the money in a hot wallet to profit from market volatility are at a risk of being hacked and subject to theft.
The main reason why hot wallets are vulnerable is that they are connected to the internet which is basically a link connecting the whole world. It is synonymous to a house where the entire globe’s population is living and working together with a secret stash for each individual hidden in the cupboard. All one needs is the key to that cupboard.
Suppression of security in Cold wallets
This is a much more secure way of holding your crypto, but the issue of “hodl-ing” in cold wallets is the loss of any possible gain with time. People lose the ability to trade crypto and take advantage of market fluctuations.
Having $100 in your pocket will not lead to an increase in value. As time goes on, the value of money decreases. So what you could buy for $100 today won’t cost you the same one year from now.
Read more: Are cold wallets really safe?
It is quite clear that although cold wallets provide more security, one would still prefer earning more money by storing it in a hot wallet. This has led to the need of a strong security system in order to protect everyone’s hard-earned cash.
One major addition is the presence of an insurance system. An insurance is required to alleviate the fear of theft. It also provides security to the cold wallet with the flexibility of a hot wallet, thus aligning with the crypto-market beliefs.
The main aim for any banking system is to create a safe, secure, and decentralized platform for storing currency. Providing insurance has always been one of the most effective means to gain trust with its customers. When an account has been compromised, the bank should be able to refund the lost or stolen crypto back to the account holder.
As is evident, most currency-storage facilities available on the internet are Hot Wallets.
Cold wallets may be more secure but a loss of the value of money over time is a pressing problem. With Hot Wallets, one can make sure that their amount does not depreciate in value.
There are many companies and a few startups that are trying to build a banking system which is swift, secure and decentralized. They are working on finding strategies where your money is safely protected and its value does not depreciate.
Ideas are propagating through the minds of various hodlers and there has been a significant amount of approaches already taken.
The dream right now for all Crypto-holders out there is the presence of a system where they get the flexibility of a hot wallet with the security of a cold wallet.
Read More: How to Pick the Perfect Bitcoin Wallet?
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