Types of Bitcoin Wallets: Difference between Hot and Cold Wallets

June 1, 2019 - Expert Commentary, How-To Articles

Bitcoin Wallet

Let’s get this straight: Every cryptocurrency holder needs a wallet. Any coin that operates from a blockchain must have this essential feature for its native currency to serve its purpose. Bitcoin has its wallet, which full node operators get automatically 

Ethereum has its wallet, and so do EOS, Tron, and all other blockchains irrespective of whether they have smart contracting capabilities. Bitcoin is a purely a transaction layer where value can be moved peer-to-peer between jurisdictions without a third party.  

Like your real-world physical leather wallet, a cryptocurrency wallet, in the realm of blockchain, is more of a digital vault that stores a coin’s private and public keys.

A Bitcoin Wallet is Indispensable 

Bitcoin—and all other digital currencies don’t exist in physical forms. Instead you havea digital layer that contains a log of transaction records. A cryptocurrency wallet is like a bank account where the owner can send, receive and transfer value. 

The Public key works like a bank account number, whereas the private key is the password that authorizes transactions from a given public address. Losing the latter means losing control of the former, and that is the reason VBit Technologies Corp., like all other cryptocurrency platforms, emphasizing the need for securing private keys. 

Unlike in the traditional setup where a password can be reset, losing the private keys to your Bitcoin wallet is equal to a permanent loss unless otherwise, there is a recovery of those private keys, or there is an unlikely and a controversial rollback of the Bitcoin network. 

A cryptocurrency wallet is an application that can run from your smartphone or computer because of the digital nature of Bitcoin. In its bare form, a Bitcoin wallet is a link between the user and the Bitcoin network, literally granting the user access to their coins, which are on the blockchain. 

Through it, a user can send and receive money transparently and cheaply through the Bitcoin network.  While sending or receiving funds, the wallet’s software also monitors the account balance—called inputs and output transactions, ensuring that someone doesn’t send what he/she doesn’t have, and double-spending. 

Types of Cryptocurrency Wallets

There are four types of Bitcoin and cryptocurrency wallets:

  1. Desktop wallet: The software of this wallet can be downloaded and installed on one personal laptop or desktop. For security reasons, access is exclusive to only one computer—desktop or laptop. This reason is why a private key should have a physical paper back up and secure storage. Private keys assist in wallet recovery.
  2. Web wallets: These are wallets offered by third-party providers through a cloud. All a user does is sign up, and there is no need for downloading or installing the wallet.The same procedure applies: Securing the wallet’s private key (password). There are more risks to these kinds of wallets because they are more susceptible to hacking, and funds get stolen. Besides, since third parties control them, personal data can be sold to government agencies or other third parties. A cryptocurrency exchange is an example.
  3. Mobile wallet:These wallets work like desktop wallets, but the only difference is that they operate from a smartphone. Access is limited to one device for security reasons. Losing the private key means losing access to the account and hence, money. 
  4. Hardware Wallet: This wallet allows one to store Bitcoins and supported cryptocurrencies in a USB device. It may be a conservative and rigid approach but offers the best security. While all transactions are online, the private key is stored offline-cut away from the internet, meaning it will be virtually impossible for a hacker to break into the device and steal coins. Most hardware wallets support Bitcoin and are compatible with other cryptocurrencies. For all their advantages, hardware wallets are relatively expensive, and corruption in any file can result in loss of value.
  5. Paper Wallet:A variant of a hardware wallet, this is a mechanism of storing Bitcoin private keys offline. Instead of a USB, you print the private keys—in phrases or QR code on a piece of paper.Like a USB hardware wallet, they can facilitate transactions. It is a cheap alternative for those who don’t want to spend money on a hard wallet. All he/she has to do is to prevent the paper from being damaged or lost.

Top consideration for a Bitcoin Wallet

It doesn’t matter your crypto holdings and whether you are a HODLer, trader, or an enthusiast. Your priorities will vary, and whatever you do with your coins is up to you. But, when selecting any wallet, keep in mind the following parameters:

  • Security:This matters considering how frequent breaches are in crypto. If the wallet is not secure, then your private keys aren’t. By extension, that means your money isn’t. If the wallet experiences hacking and private keys stolen, then wave farewell to your money. It’s akin to a bank robbery.
  • Price: In exchange for high-level security, hardware wallets are quite expensive and not available for free. The reason you may have to invest in a hardware wallet varies from person to person. A HODLer has to have a wallet. Meanwhile, traders, because of their constant conversion, are expected to own a multi-currency desktop, mobile, or web wallet.
  • Coins supported: Every time Bitcoin is hard forked, and a new variant emerges, a Bitcoin owner receives a bonus of that fork. Take, for example, when Bitcoin Cash forked from Bitcoin, all Bitcoin owners received an equal number of Bitcoin Cash. 

Difference between a Cold and Hot Wallet

With this in mind, cryptocurrency wallets fall into two main categories: hot wallets and cold wallets.

The distinction between the two is white and black. Desktop, Mobile, and Web wallets (like cryptocurrency exchange wallets) are “Hot” wallets because they are connected to the internet. This fact means that the private keys secured via its software are stored online and susceptible to attacks. They are “hot” because it directly links them to the Internet—a hot zone and from where malicious hackers can make them their playground. It is wiser to store only small amounts of acquired Bitcoins in a hot wallet. Through hot wallets, transactions can be executed on the fly.

A cold wallet is offline, and private keys are stored locally. Save the complicated startup procedure and their rather slow speed—highly dependent on the coin’s blockchain speed; they are very secure. 

A cold wallet is suitable for individuals who stockpile Bitcoins. These can be HODLers and especially regular receivers of mined Bitcoins, or long-term traders who have large amounts of coins. A USB hardware wallet is perfect in this case, while individuals who rarely trade or execute transactions on the Bitcoin network can use a paper wallet.

Being a disconnected gadget that the owner can plug into the network at will and when necessary, they are helpful in that the owners can always keep their coins close—wherever they go. Cold wallets have better security than paper wallets, where private keys are not encrypted.

Even though they cost money, they are small, and confirming ownership can be done discreetly without commanding attention.  Word of caution:Never buy a hardware wallet from eBay. Always buy directly from the company’s website or an approved reseller. If its seal shows tampering on delivery, return to seller and demand for a refund.

VBit Technologies, a marketing technology company that serves the mining industry, will launch a safe, thoroughly audited web and mobile wallet. There are different packages on offer, and from each, mining is transparent. VBit Technologies has partnered with various bitcoin mining facilities. Each of these partners has access to cheap electricity in the US. 

Let the money work for you. Sign up and start mining Bitcoin today!

Also, check out QABU – the Perfect BTC Wallet for Miners

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