Crypto Hot wallets have been in existence since the creation of blockchain and cryptocurrencies. Satoshi Nakamoto released the first wallet program, simply called Bitcoin and sometimes referred to as the Satoshi client, as open-source software in 2009. Hot wallets are a vital means of interacting with digital assets that reside on the blockchain like cryptocurrencies and NFTS among others. In this article, we will find out how crypto hot wallets work, what hot wallets are, how to keep hot wallets safe, and more!
What are “Hot Wallets”?
Crypto Hot Wallets are wallets that can be accessed when connected to the internet. This type of wallet is also connected to the cryptocurrency network. It has an interface that can be used to view how many tokens you have (although these tokens reside in the blockchain). You can also buy, send, store, receive, and swap tokens conveniently.
Hot wallets have a public and private key, which aids in transaction processing. The public key is your receiving address and is used to receive tokens into your wallet. Just like the way a bank works—to get money deposited in your account, you have to present your account number to receive the funds—so does a public key. The private key, on the other hand, is what helps you sign transactions and also signifies ownership of funds and should be kept private at all times, hence the name private key.
How hot Wallet Works
Before buying a cryptocurrency, you have to set up a wallet with which can use to facilitate transactions conveniently. The wallet is created to store your cryptocurrencies and it contains both a public key and private key. The public key helps your receive tokens into your wallet while the private key shows that you have ownership and helps you sign transactions. Without either of these keys, the wallet is effectively useless.
To interact with hot wallets you must be connected to the internet. They basically provide an interface for you to interact with the blockchain. Hence, every token you see in a wallet doesn’t reside in the wallet but in the blockchain. They help you store, receive, send, and swap tokens with ease.
When a transaction is initiated Instead, its the key role of the wallets private key is to sign and authorize the transaction and after it has been validated by the blockchain nodes its then propagated into the cryptocurrency network. Eventually, the record is then stored on the blockchain and hence becomes part of the shared public ledger.
How are Hot Wallets hacked?
Being connected to the internet posses a pool of risks that Crypto hot wallets can be subjected to. An unauthorized party can compromise hot wallet services with gaping security holes. Importantly, the end user’s behavior greatly influences the safety and security of the hot wallet. Hot wallets are vulnerable to security issues because their public and private keys are stored on the internet.
For example scammers create phising sites (a clone of a major website) that will require you to give access of your private keys to interact with the platform. Some crypto users have fallen victim to this and have lost huge amounts of their funds in the process.
Also, a single bottleneck system, such as a hot wallet server or an internet server where the end user’s verification takes place, increases the possibility of message interception and online spoofing. It is possible to steal virtual funds from a hot wallet if the username and password are compromised.
As a cryptocurrency investor, it is advised to keep only a small portion of your holdings in a hot wallet. Investors may choose to keep funds in their hot wallets that they intend to use frequently like buying cryptocurrencies, trading etc. While the remaining funds should be kept in their offline cold wallet along with backups of the private keys until they are needed.
Notwithstanding the risks they poses, hot wallets are used because of the ease and convenience they provide. If you’re a crypto trader it helps facilitate the movement of your funds from the exchange you’re trading with conveniently.
How to keep Hot Wallet Safe
While the majority of Crypto hot wallets today incorporate various security measures, you shouldn’t rely solely on their promises. There are steps you can take to improve security and reduce the likelihood of your data or access being compromised.
Below are some security measures to improve your crypto hot wallet security:
- Some hot wallets exploits comes from the end users. So maintaining the safety of hot wallets is also dependent on the end user. As a user ensure you keep your private keys, private. Also be mindful of site (phising sites) you visit or interact with telling you to input your private key.
- Add an extra layer of security like enabling 2 factor-authenticator using Google Authenticator. This extra layer of security will necessitate a code for each login attempt, making it more difficult for any hacker to gain access.
- Backuping your wallet is also essential by writing down your seed phrase somewhere safe, preferably in an offline environment.
- Instead of storing all of your NFTs and cryptocurrencies in a single wallet, split them into at least two. Use one “hot” wallet for day-to-day transactions and one “cold” wallet for long-term investment.
What is Hot wallet vs Cold wallet
There are many ways of storing cryptocurrencies. Besides Hot wallets, one of the other most popular methods is known as “Cold wallet.” A cold wallet, also known as cold storage, stores a digital wallet on a platform that is not connected to the internet, protecting it from unauthorized access, cyber hacks, and other vulnerabilities that a system connected to the internet is vulnerable to.
What is the difference between hot wallet and cold wallet? Find out in the table below.
|Hot wallets are connected to the internet
|Cold wallets are kept offline
|Mobile wallets, Web wallets, and Desktop (extension) wallet
|Paper wallets, Hardware wallets, Sound wallets, and Offline Software wallets
|It's vulnerable to hacking and online attacks
|Reduced threats from hacking and online attacks
|Easy and convenient to use
|Less convenient and more expensive
|Best suited for beginner crypto investors and traders who need to trade in exchanges and make quick payments
|Best suited for crypto investors holding large amounts of crypto over a long period of time
Hot Wallet Examples
Examples of hot wallets include:
MetaMask is one of the most popular Ethereum wallets, with over 30 million monthly active users. This could be due to its ease of use and accessibility: The wallet has an appealing and straightforward design for new investors looking to store and send Ethereum-compatible cryptocurrencies and interact with decentralized apps (dApps).
MetaMask is also notable for its compatibility with other blockchain solutions. Users can add almost any blockchain network to the app. The wallet fully supports popular Web3 networks such as Polygon, Binance Smart Chain, and Avalanche. Users can also connect to popular NFT marketplaces like OpenSea and swap a variety of collectibles by connecting them directly to the wallet.
Anyone who uses Google Chrome, Microsoft Edge, Mozilla Firefox, or Brave can install the wallet as an extension. You can also get the MetaMask app for your Android or Apple device.
Trust Wallet is a popular mobile online crypto wallet as well as the official mobile app of Binance, one of the world’s largest cryptocurrency exchanges. Despite its connections to Binance, the wallet is non-custodial, which means it does not keep your private keys and you are responsible for keeping them safe. It supports over 65 blockchains, which allows it to store a diverse range of digital assets — over 4.5 million coins and tokens, the most on our list.
Trust Wallet is also a great mobile option for those interested in NFT and decentralized apps. The wallet includes a Web3 browser that allows users to access dApps and blockchain games directly from the app. This feature simplifies the process of purchasing NFTs by allowing users to search for, purchase, and store tokens using the integrated decentralized exchange without leaving the app.
Exodus crypto wallet supports over 100 cryptocurrencies. Exodus provides a wealth of educational materials and explanatory videos for those new to cryptocurrency.
You can also trade and stake cryptocurrency directly from your wallet using Exodus’ built-in exchange, which functions as a DEX. DEXes are less regulated and have lower liquidity when compared to centralized exchanges. The advantage of a DEX is that it allows crypto trading via decentralized apps and may not require a large number of credentials to sign in.
If you need offline storage, the Exodus wallet is integrated with Trezor, a highly regarded cold storage solution. The wallet also includes a growing number of apps that are being released to diversify the wallet’s functionality, such as apps for live charts, crypto staking, and crypto deposits.
Crypto Hot Wallets: Bottom line
Crypto Hot wallets are essential for day to day transactions. These wallets provide an interactive interface that helps you facilitate, store, send, receive and swap cryptocurrencies conveniently.
However they can be easily susceptible to hacks due to their online nature. The following safety measures outlined above will add an extra layer of protection to your crypto and internet activities.