Hot Wallet

Concept

A hot wallet is a type of wallet (crypto wallet) that is always connected to the network (via internet) or another online device/ portal/ terminal. Unlike cold wallets (hardware-based), hot wallets are software-based, typically connected to the network for the purpose of enabling regular transactions to be conducted. Hot wallets are cryptocurrency wallets that are connected to the internet. This constant connectivity allows for real-time transactions, balance checks, and asset management. Hot wallets are typically used for daily interactions with the cryptocurrency network. Depending on the connected device, hot wallets take many types including mobile wallets, desktop wallets and web wallets.

Modus operandi

Hot wallets operate using private keys to access and control crypto addresses. Users willing to send or receive cryptoassets (e.g., cryptocurrencies) utilize their private keys to sign transactions. Hot wallets, being internet-connected, are usually more exposed to cyber attacks than cold wallets. Hackers and attackers attempt to breach various vulnerabilities to gain unauthorized access to such wallets so that they can transfer cryptoassets away from the users’ wallets. Hot wallets are apps that run on a smart device or a computer, and are online connected as long as such devices remain connected. Hot wallets provide an instrumental option for users who prioritize convenience and need to frequently access their digital assets.

The private keys used represent the secret codes that prove ownership of a user’s digital assets — on an internet-connected device or terminal. For a transaction to be conducted, the wallet software uses these keys to sign a transaction for the user, establishing the existence of ownership and authorizing the digital assets to be transferred. Certain hot wallet apps may be well programmed to deploy additional layers of security such as PINs or biometrics.

Hot wallets versus cold wallets

In use, most crypto wallets belong to the category of hot wallets. These include all connected devices such as mobile wallets, desktop wallets and web-based wallet services. All of these store their own private keys online. However, keeping private keys stored online expose digital assets to network threats as well as fraud and liquidity issues, particularly in case the underlying service provider gets busted (out of business), among others. Cold wallets, on the other hand, are connected to the internet only if and when the user chooses to move assets onto or off of the device. For cold wallets, no third-party trust is required. Hence, the users remain in control of their assets, enjoying unrestricted access to their funds and assets at all times, irrespective of market developments.