Hot Wallet Definition
What Are Crypto Hot Wallets?
A hot wallet is a cryptocurrency wallet that is in some way connected to the internet.
The contrast of a hot wallet is a wallet kept in cold storage, where the cryptocurrency is not
connected to the internet.
Hot wallets are used to provide instantaneous payouts and withdrawals. Some also use hot
wallets to refer to coins kept in an exchange where they can be taken out at any time. The
analogy many people make is comparing hot wallets to cash. When you have cash, you can
instantly spend it on anything you want with easy access. So also with hot wallets, the crypto
funds are always available for immediate withdrawal.
However like cash, hot wallets are at risk of theft. When cryptocurrencies are stolen out of a hot
wallet, they are often unrecoverable.
Benefits and Difficulties
Hot wallets in general are not as safe as cold storage. This is due to the fact that most
computers have loopholes and vulnerabilities that can be taken advantage of. Hackers can find
these holes and exploit them to steal your cryptocurrencies. Therefore, it is unwise to store large
sums of crypto in a hot wallet, as the majority of crypto losses and hacks that take place are due
to the funds being stored in a hot wallet.
In light of this, most crypto withdrawal services keep a super small number of crypto in a hot
wallet. The purpose is for immediate availability to withdrawal the funds. Also, these crypto
withdrawal services take more leg work and longer transaction times to process a more sizable
withdrawal. This is because larger sums of crypto aren’t actually stored in your account, but in a
“storage” account. Thus the crypto has to be transferred into your account in order to be
transferred out entirely.