What Is Hot Storage?

Hot cryptocurrency storage refers to wallets connected to the internet. They offer easy access to frequent trading and transactions. Hot wallets include mobile/desktop apps, exchange-hosted web wallets and cloud-based services. 

Understanding Hot Storage

The constant internet connection provides convenience through quick access. However, it also creates vulnerabilities to hacking, malware, and theft if the wallet provider is compromised (in the case of custodial wallets). Hot storage is suitable for small amounts that are actively used.

Benefits of Hot Wallet Storage

Hot storage is more convenient because hot wallets are connected to the internet. This means users can easily connect their hot wallet, like MetaMask, to applications such as decentralized exchanges and trade from their hot wallets without surrendering ownership of their coins.

Similar to Cold Storage

Although this is also possible with cold storage, cold storage takes longer and is far more inconvenient for connecting a cold wallet to an exchange. Hot storage is also free, making it a useful alternative for users who want to stay flexible with their coins.

Cold Storage Requires a Minimum Deposit

Cold storage requires purchasing a cold wallet, which can cost up to $200. Besides, it is much easier to set up a hot wallet, and coins in hot storage can be accessed from anywhere. Moreover, these wallets are not at risk of physical loss as cold wallets might be.

Risks of Using Hot Storage

Hot storage is considered less secure in terms of hacking. Although the hot wallet itself may be secure, users are at a higher risk of phishing attacks. Users are also more susceptible to becoming victims of fake transaction signatures that reveal their wallet details and give attackers access to their crypto.

Features Tracked

Hot storage is also subject to several tracked features, such as IP addresses and wallets. Some jurisdictions can also block users based on their IP addresses, making hot storage generally a less private form of crypto storage.

Using Exchange-Hosted Web Wallets for Hot Storage

Cryptocurrency exchange-based web wallets like Binance allow easy access to your funds anywhere via the website. This facilitates trading and transactions across different devices by simply logging into your exchange account online.

However, exchange-hosted wallets carry a greater risk because you must fully trust the security practices of the platform and its responsibility for safeguarding user funds.

Risks of Storing on an Exchange

Many exchanges have been victims of major hacks over the years, resulting in customer fund theft. Therefore, only store small amounts in exchange wallets that you regularly trade or withdraw from the platform. Avoid storing large amounts or long-term holdings in exchange hot wallets.

Best Practices for Safe Hot Wallet Use

Given the vulnerabilities of hot wallets, several best practices should be followed to minimize risk. Use hot wallets primarily for small amounts of cryptocurrency that you regularly transact or actively trade - like the cash you carry in your physical wallet.

Activate All Available Security Features

Such as two-factor or multifactor authentication, strong and unique passwords, confirmation and withdrawal notifications via email/SMS, whitelist addresses, and limit session lengths.

Avoid storing large amounts or holding coins long-term in hot wallets.

Spread Your Asset Holdings Across Multiple Hot Wallets

To avoid losing everything if one hot wallet provider is compromised. Think of hot wallets as short-term transactional accounts rather than main long-term savings accounts.

When to Consider Moving to Cold Storage

If your cryptocurrency holdings start to increase substantially, it becomes wise from a security standpoint to move the majority of funds to cold storage. This threshold depends on your personal risk comfort level, but generally, holdings above $1000-5000 or more are enough for the transition to cold storage.

Hot wallets work well for small balance amounts you actively transact for payments or trading. But larger long-term investments are worth considering moving to cold storage for the good offline security protection cold storage offers.

How to Move from Hot Wallet to Cold Wallet

When transferring cryptocurrency from a hot wallet to a cold wallet, ensure to run the process securely. First, double-check that the cold wallet address you've entered is correct before initiating any transfer.

It's wise to first test sending a small balance before transferring a large balance to ensure the test transfer to your cold wallet goes smoothly.

Use the correct maximum send amount and network fee to avoid potential transaction issues. After confirming the success of a nominal small test transfer, you can then safely move larger balances from the hot wallet to the cold wallet.

Also Read

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Get to know the Co-Signer in Multi-Signature Wallet

What is a Dusting Attack?

DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.