.svg)
After learning about the space, new blockchain users often want to find out more about how cryptocurrency is used practically to complete financial transactions. Using both hot and cold wallets provides crypto users with an added layer of security, functionality and certainty when exchanging currency.
A hot wallet is simply a cryptocurrency wallet that is active within a blockchain network by being connected to the internet. That means all currency within this wallet can be exchanged with other users at any time. Conversely, a cold wallet stores currency and is not connected to the network, so it is offline. Although this currency cannot be actively used, it is made more secure by being disconnected. This can be likened to having a cheque account[P5] and a savings account with a traditional bank. In a cheque account, you would only store the amount of currency that you are actively looking to spend in your hot wallet, whereas you would keep funds you are not actively spending in a cold wallet like a savings account. In essence, hot wallets are digitally stored whereas cold wallets are physically stored.
Cold wallets are peculiar in the blockchain ecosystem in that they are stored on hardware rather than digitally. This is often facilitated by a cold wallet provider that will disseminate custom-made hardware devices to store a user’s cryptocurrency. This hardware stores a user’s currency offline; it is only brought back online when a user plugs the hardware back into a node and activates it.
By contrast, hot wallets are often maintained by third-party wallet software, meaning a user does not have full control over their currency. They are therefore viewed as a less safe storage option because they are theoretically more vulnerable to bad actors on the network. The upside, however, is that they are comparatively very easy and convenient to use.
In practice, the majority of regular cryptocurrency traders tend to maintain both a hot and cold wallet simultaneously, splitting their funds between both. As is the case with traditional cheque and savings accounts, traders tend to only keep the amount they are actively trading in their hot wallet while holding the rest idle in a hardware cold wallet. If funds then become low in their hot wallet, users can always top it up with funds from their cold wallet.
Most exchange companies will keep the majority of the funds on their platform secure in offline cold wallet reserves for added security. It is important for any user to do a background check on the third-party exchange they choose to use to ensure they have such security measures in place.
Algorand has its own native hot wallet and cold wallet optimised for users to store their ALGOs. The Algorand hot wallet is designed for convenience and ease of use with a slick user interface. Users can enjoy Algorand’s native features, including rapid transaction confirmation and low fees. Algorand has also established a partnership with Ledger Nano X as its preferred cold wallet supplier. As such, there is built-in functionality for users to quickly and easily send assets between their online Algorand Wallet and their Ledger Nano X hardware device.
