Cold Wallet vs. Hot Wallet: What’s the Difference?

Upwards of $2.2 billion worth of cryptocurrency was stolen in 2024 alone, according to recent Chainalysis reporting. Compromised private keys accounted for nearly half of thefts, highlighting the critical importance of security. 

A key decision for institutional investors is how to store cryptocurrency in cold wallets vs. hot wallets. There are pros and cons to each, but we’ll cover what fits best where, and for what types of investors.

Key Takeaways

• Wallets store private keys which allow you to send and receive crypto. Keys can be managed via software that is always online (hot wallets) or hardware that isn’t (cold wallets).

• Hot wallets are more convenient to trade with, connected to the internet for ease of use, but come with cybersecurity risks.

• Cold wallets store your crypto keys offline to keep them safe from online threats, but can still be lost or stolen and take a little longer to access than a hot wallet.

• Institutions typically use both. Hot wallets store their daily liquidity needs, while cold wallets store significant long-term holdings.

At a Glance: What Is a Wallet?

Cryptocurrency wallets store public and private cryptographic keys, allowing investors to access and trade their assets. They’re important because cryptocurrency isn’t actually stored on exchanges or inside wallets; they live on the blockchain.

A wallet holds the private keys, which prove ownership of the coins. Think of it like a keyring: it doesn’t store the coins; it holds the keys that unlock them on the blockchain. There are important differences between hot vs. cold wallets. But whether you use a piece of hardware, an app, or a simple piece of paper, you can’t control your crypto without the keys.

Hot Wallet vs. Cold Wallet

There are two types of crypto wallets: hot and cold. The key difference is internet connectivity.

• Hot wallets stay connected to the internet, making transactions fast but exposing assets to cyber threats.

• Cold wallets are kept offline, providing stronger security but requiring extra steps to access funds.

Cold and hot wallets each have strengths and weaknesses, and the right choice depends on how you want to manage and use your assets.

Hot wallets are designed for frequent use. They remain connected to the internet and are convenient for day-to-day transactions. But because they’re always online, they’re more prone to risks like hacking, malware, and phishing attempts. 

Cold wallets, on the other hand, are meant for long-term secure storage of high-value holdings. They’re offline by default and only connect when you need to move funds. The offline nature protects cold wallets from online threats, but they can still be physically lost or stolen, and are less convenient to trade with. 

If you lose your wallet, you can recover funds with a properly backed up “seed phrase,” regardless of whether you store keys with a cold or hot wallet.

Types of Cold Wallets

Cold wallets come in a variety of shapes and forms. 

• Hardware wallets: Some wallets resemble flash drives (Ledger), while others look like car key fobs (Trezor) or even credit cards (Tangem). Each device will work a little differently, but in general, you’ll connect them to the internet only when it’s time to make a trade.

• Air-gapped devices: Some cold wallets never connect to the internet at all. You initiate transactions online, export the details to the cold wallet with a QR code or flash drive, and return the now-verified transaction with the same QR code or flash drive. The wallet itself signs transactions without ever being online.

• Paper “wallets”: These are low tech and low security. It’s not common, but you could theoretically write your private keys on a piece of paper.

The person or organization managing the key matters as well. 

• Custodial wallets: A third-party, like BitGo, manages keys for you. This is a necessity for institutions managing assets on behalf of investors; just like in traditional finance, you have to adhere to qualified custodian rules.

• Non-custodial wallets: Users retain complete control over keys. It’s less expensive than a custodian, but you’re also responsible for managing security and backups.

Pros and Cons of Cold Wallets

Cold wallets require extra steps to access funds vs. hot wallets, cost money, and can be physically lost or stolen. However, offline storage protects against hackers and the risk of hot wallet applications failing or being hacked. They’re widely considered safer — but less convenient — than hot wallets. 

If you hold considerable assets, BitGo’s custodial wallets add another layer of protection to cold wallet security in insured, qualified custody. We generally maintain keys in cold storage on your behalf. When you request to move funds, our team will guide you through security protocols. Subject to those checks and applicable policies, your transfer request will be approved.

Types of Hot Wallets

Nearly all hot wallets are free to download. Some are coded as browser extensions, while others are mobile- or desktop-friendly apps. The key to understanding the different types is knowing they’re designed with particular cryptocurrencies, ecosystems, or trading platforms in mind.

For instance:

• MetaMask is designed for the Ethereum ecosystem of coins.

• Phantom Wallet is designed for the Solana blockchain. 

• Blue wallet is designed for the bitcoin ecosystem.

Not all hot wallets offer the same level of privacy, security, or developer expertise. Before using one, research the team behind it, their track record, and their commitment to protecting users.

Pros and Cons of Hot Wallets

Hot wallets provide fast and convenient access to crypto vs. cold wallets, making them ideal for frequent trading. They’re usually free to download and require no extra hardware.

However, their always-online status carries security risks. Weak passwords or successful phishing attacks can lead to stolen cryptocurrency, making hot wallets less suitable for long-term storage of significant funds. 

If you’re a trader, BitGo offers hot wallet convenience with institutional-grade security. Our multi-signature system lets you maintain liquidity without sacrificing security. Simply start a trade with your self-managed key, and if it matches your pre-set policies, we’ll countersign and authorize the transfer. 

Best Practices for Crypto Storage

Whether or not you choose a hot or cold wallet, there are a handful of universal safety practices to keep in mind.

• Back up your seed phrase. Because your key is your crypto. And if you lose it?  Funds are gone. Seed phrases protect you from the worst-case scenario.

• Use multi-sign wallets, always. Multi-factor authentication adds an extra layer of security, and investors should never risk their assets over a small inconvenience.

• Don’t keep large amounts on exchanges. They’re good for trading but can potentially be a risk for long-term storage. 

• Beware of phishing attempts. They’re the #1 attack vector for crypto hackers.

• Institutional investors should separate roles and enforce access rules. No single person should have full control, users receive role-based access, and large transfers should go through approval layers. 

Can You Use Hot and Cold Crypto Wallets Together?

Yes. And if you own significant assets, you absolutely should. Each type serves a different purpose, and combining them lets you balance convenience with security in a way that fits how you actually use crypto.

A hot wallet is ideal for funds you want quick access to: regular trades, paying for services, or moving small amounts between platforms. Cold wallets, on the other hand, play the opposite role. It’s where your long-term holdings should live. 

Together, they form a two-tier system. 

You keep a small operational balance in a hot wallet for flexibility, while the bulk of your portfolio stays safely stored offline. Most of your portfolio remains safe from hacks, malware, and phishing attempts while you still have quick access to as much as you might regularly need.

Cold vs. Hot Crypto Wallets: Which is Best For Me?

When deciding between a cold wallet vs. hot wallet, it comes down to risk tolerance, trading frequency, and asset size.

What matters most? How do you plan to use your crypto?

• If security is your top priority, a cold wallet is the safest option.

• If convenience matters most, a hot wallet offers quick access.

Institutions often rely on cold wallets as the backbone of their custody strategy. They’re protected from cyber risks, use service providers who insure assets against theft or misuse, and utilize financial controls restricting access to only those who actually need it. 

Hot wallets still play their role, however. Exchanges, OTC trading desks, and asset managers need quick access for day-to-day liquidity needs, and multi-factor authentication enabled hot wallets offer the right balance of security and convenience. 

BitGo is an industry-leading choice for insured, regulated, and qualified custody of your assets. We offer self-custody hot wallets, qualified custody cold storage, and other advanced security solutions designed to safeguard your digital assets. Read our custodial wallet guide to learn more about the relationship between wallets and custodianship.

FAQs

As a corporate treasurer, how do I decide what percentage of our digital assets should sit in hot vs. cold wallets?

Allocate only what you need for daily operations to hot wallets, perhaps with a small buffer, while keeping long-term holdings and significant assets in cold storage. Base the mix on transaction velocity, settlement needs, and internal risk thresholds.

What operational controls should a CISO or Head of Security put around hot wallets to make them acceptable for institutional use?

Restrict access to those who actually need it, enforce role-based approval, multifactor authentication, withdrawal limits, monitoring, and real-time alerts.

How should an institution think about withdrawal speed from cold storage without sacrificing security?

This is a tricky question, but in general, institutions should actually prioritize security over withdrawal speed. It’s worth waiting a bit longer to make sure a large transaction is done safely.

What does a good disaster-recovery plan look like for institutions using both hot and cold wallets?

The key elements are backup seed phrases (allowing you to recover funds if you lose your keys), restricted access protocols, and storing funds with qualified third-party custodians who insure assets against theft or misuse.  

For a trading firm, how do we reconcile on-chain balances across multiple hot and cold wallets with our internal books?

Treat individual wallets like you would treat separate bank accounts in traditional finance. Segregate wallets and balances on your books, and reconcile accounts at the end of every month to make sure everything matches up.

How should a compliance officer document the rationale for our chosen hot/cold mix for regulators and auditors?

Hot wallets are riskier than cold wallets, so it’s important to demonstrate why you need quick access to such balances. Additionally, you should document governance controls, approval workflows, and monitoring systems that demonstrate you follow prudent asset management practices.