PAW Documentation

Hot vs Cold Wallets

Hot vs Cold Wallets

Types of crypto wallets

To send and receive cryptocurrencies to and from exchanges, it is necessary to have a crypto wallet to facilitate those transactions. There are two types of wallets available: hot wallets and cold wallets. Both hot and cold crypto wallets secure your private keys, but they do so in different ways.

What is a Hot Wallet?

A hot wallet, also known as a software wallet, is a piece of software you install on your smartphone or computer. It is typically protected by a password set by you, ensuring that nobody can physically access the wallet via your device.

  • Seed Phrase and Private Keys: A hot wallet generates your seed phrase online and subsequently stores your private keys online as well. When you first launch the wallet, it displays your seed phrase on the screen of your computer or phone. The private keys are stored digitally within the wallet application on your phone or computer. Since these devices are always connected to the internet, your private keys are also constantly online.

What is a Cold Wallet?

A cold wallet, also known as a hardware wallet, is a physical device that generates and stores your private keys in an offline environment. It is considered the most secure type of wallet because it would require hackers to have physical access to your device and the associated PIN/Password.

  • Physical Security: Typically in the shape of a USB stick, a cold wallet securely stores your private crypto keys offline. Private keys are transferred from a device with an internet connection to a device without one, keeping the data inaccessible to online threats. This method is popular for businesses, governments, and individuals who need to secure their digital assets.
  • Smart Contracts: A cold wallet never interacts with smart contracts, helping to protect you against malicious attacks.

Hot & Cold Wallet Pros and Cons

Wallet Recovery:

  • Hot Wallets: Can be recovered by entering the wallet recovery phrase into the device (phone or computer) from which you wish to access your wallet.
  • Cold Wallets: Can be recovered in case of loss or damage to the physical device by purchasing a new wallet from the same manufacturer and entering the recovery phrase into the new wallet.

Important Note: NEVER SHARE OR MAKE DIGITAL COPIES OF YOUR WALLET RECOVERY PHRASE. Always purchase cold storage wallets from their official websites.

Popular Cold Wallets:

Some popular cold wallets include Ledger, Trezor, and ELLIPAL Titan Cold Wallet. These devices are designed to provide a secure way to store cryptocurrency offline, making them a popular choice for those looking to protect their digital assets.