How to Decide on a Hot Wallet or Cold Wallet for Your Crypto, and Whether You Need One at All

An image to accompany a story about hot vs. cold crypto wallets Getty Images/Illustration/NextAdvisor
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Keeping your crypto on the exchange where you bought it is probably the easiest way for investors to hold their coins.

But for those who want to level-up to a more secure option, a cryptocurrency wallet can provide more protection. Using a wallet is a bit more complicated, but for some investors it is worth the trouble. 

[READ MORE]: A Crypto Wallet Can Help Keep Your Coins Safe. Here’s How to Decide If You Need One

Though there are plenty of wallet programs and hardware to choose from, they generally fall under two main types: hot and cold wallets. They vary in levels of security, accessibility, and other features. Here’s what you need to know when choosing between a hot and cold crypto wallet, and whether you need one at all:

Cryptocurrency Wallets Explained

BEFORE YOU INVEST IN CRYPTO

Experts say it’s smart to keep your crypto investments under 5% of your overall portfolio. Crypto prices fluctuate wildly by the day, and experts also say you’d be smart not to invest more than you’d be OK losing if the market dropped out altogether. Crypto investments should also never get in the way of other financial priorities like saving for emergencies, paying off high-interest debt, and saving for retirement using more conventional investment strategies.

You can’t buy cryptocurrency in a traditional brokerage account like Fidelity or Vanguard, so you’ll have to use a cryptocurrency exchange like Gemini or Coinbase. When you buy your Bitcoin, Ethereum, or other crypto, you’ll have the option to leave it sitting in the exchange where you bought it, or you can move it into another sort of storage system called a cryptocurrency wallet. 

Cryptocurrency wallets can offer more protection for investors. A wallet will come with two important pieces of information: a public and private key

A public key is how you send and receive money to your account — like a bank account number. This is also called your “wallet address.” Your private key is like your bank password, and how you access your account to move around or do other things with your crypto. 

Technically, any cryptocurrency you leave in a cryptocurrency exchange will be held in a type of wallet, and experts say it’s OK for people to leave it on the exchange, especially those with smaller investments. However, if you’d like a more secure option, you can look for a crypto wallet. You should also consider whether or not you want to move your holding out of your exchange — as a hot or cold wallet will require — before you choose an exchange, since not all will allow it.

What Is a Hot Wallet?

A hot wallet can also be called a software wallet. It’s a form of digital storage that you can access on your computer or phone, and is connected to the internet. Because of the internet connection, hot wallets are not as secure from hackers as their counterparts — cold wallets. Some exchanges will offer a separate hot wallet in addition to letting you keep your crypto in the exchange.

“They’re often connected with an exchange, they’re oftentimes user-friendly, and they’ve really opened up the space to a more mainstream market,” Nicole DeCicco, founder of CryptoConsultz, a consulting practice for individuals and organizations learning about crypto and blockchain technology told NextAdvisor recently. “But there’s many risks to keeping your funds online.”

Hot wallets can make it easy to transfer crypto back to an exchange to do more trades or to cash out your holding, and they are more secure than keeping your coins in your exchange account. Plus, many are free. 

But they still aren’t an ironclad way to prevent digital attacks. Price is also a consideration here — hot wallets are usually free, while cold or hardware wallets generally cost from $50-$200.

What Is A Cold Wallet?

A cold wallet, otherwise known as a hardware wallet or cold storage, is a physical device that keeps your cryptocurrency completely offline. Many look like USB drives. 

Taking your holdings offline helps protect from hacking and online attacks, but you can also risk losing your holdings. There is no back up to this form of storage; if you misplace your wallet, you lose access to your investments. Cold wallets also can cost up to $200 (though there are definitely cheaper options). 

While a cold wallet makes hacking much more difficult, it’s still a possibility. Make sure you buy your hardware wallet directly from a manufacturer instead of secondhand, as the device may have been tampered with in a way that leaves it vulnerable, DeCicco warns. 

Cold storage can make more sense if you plan to buy and hold cryptocurrency for a long period of time. But if you’re looking to buy and trade, or are not totally sold on cryptocurrency and think you might want to cash-out your holding after a little while, then a hot wallet — or even leaving it on an exchange — can make more sense. 

Do You Need a Wallet At All?

Most exchanges allow you to purchase cryptocurrency right after signing up, and it’s held in a wallet on the exchange — meaning finding an additional wallet is not necessary. But moving it to a hot wallet or more-secure cold storage can offer more security. 

In general, experts agree it’s probably OK to leave your crypto on the exchange if you’re using a mainstream exchange like Coinbase and have a relatively small amount of crypto within your broader investment portfolio. So when should you consider using a wallet?

“Move it if you can’t sleep at night because you think you’re going to lose it,” says Theresa Morrison, a CFP with the Beckett Collective, a financial planning firm in Tucson, Arizona. “That’s an individual thing.” 

If you’re constantly worried about your holding being stolen or exposed to fraud, and more security would give you peace of mind, then a hot or cold wallet might help you feel more secure. 

Is One Type of Wallet More Secure Than the Other?

Since cold wallets are offline devices, not connected to the internet, they are considered more secure than hot wallets. But there are other trade-offs to consider. 

If you worry about keeping track of a physical item like a cold wallet, then you may be better off with a hot wallet. Hot wallets can also offer a more user-friendly experience and are often connected to cryptocurrency exchanges, making transferring your holding simpler than using a cold wallet.

Both forms of wallets are generally considered more secure than storing crypto on the exchange where you buy it, but as with any investment strategy, there are many factors to determine what makes sense for you. For an investor holding a few hundred dollars on a major exchange like Coinbase, it’s probably OK to leave it on the exchange. For investors holding thousands of dollars worth of crypto, the extra security of a wallet might bring extra peace of mind.