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Hot Wallet

Updated on January 5, 2024
Article byRutan Bhattacharyya
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Hot Wallet?

A hot wallet refers to a virtual currency wallet that always remains connected to the cryptocurrency network and the internet. It facilitates the transfer of different cryptocurrencies, for example, Bitcoin and Ethereum, between owners and end-users. Moreover, it enables individuals to check the number of tokens remaining.

Hot Wallet

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Such a wallet stores and secures digital assets, offering convenience and accessibility of financial transactions in a virtual economy. Many such wallets are available online and can be downloaded for free. That said, one may find that certain virtual currency wallets work with a specific ecosystem or cryptocurrency. Moreover, certain cryptocurrency exchanges accept transfers involving specific cryptocurrencies only.

Key Takeaways

  • The hot wallet refers to an online virtual currency wallet that has the ability to work on multiple blockchains and enables one to send, store, and receive cryptocurrencies. The main feature of this cryptocurrency wallet is that it is always connected to the internet.
  •  A key difference between hot wallets and cold wallets is that the latter is not connected to the internet, unlike the former. 
  • Individuals can consider linking the wallet with cryptocurrency exchanges and storing only a small portion of their cryptocurrency holdings. This helps them avoid drawing the attention of hackers.

Hot Wallet Explained

The hot wallet refers to a cryptocurrency wallet that is connected to the internet at all times through one’s phone or computer. Individuals can use this type of wallet to store their crypto assets securely. Moreover, they can have control over their digital assets all the time.

When individuals mine or purchase any cryptocurrency, they must set up a wallet to perform transactions if they use them to make purchases. This wallet stores the private keys that individuals use to access their cryptocurrency when the ecosystem transfers ownership to them.

When persons own a cryptocurrency, they get private keys identifying the digital asset as theirs. The private keys are like personal identification numbers, allowing one to initiate transactions, check balances, access the wallet, and more. On the other hand, public keys are like account usernames. The cryptographic codes help identify the virtual currency wallet, enabling users to receive crypto tokens without disclosing their identity. A hot wallet for cryptocurrency is practically useless if any of these keys are not there.

As noted above, such a wallet always remains connected to the internet. Additionally, it stays linked with the cryptocurrency infrastructure that allows individuals to use it. For users, this virtual currency wallet is an interface for storing and accessing digital assets. The cryptocurrency network facilitates alterations to transaction records on the decentralized ledger, irrespective of which cryptocurrency one uses.

A key role of such a wallet is signing and authorizing financial transactions digitally. Once a digital asset holder chooses to mine a cryptocurrency, the virtual currency network imposes a chronological order to safeguard the cryptocurrency system’s neutrality.

Then, the holder decides how and where to store the digital assets, thus forcing the transaction to be signed digitally. After that, the transaction gets propagated into the cryptocurrency network. The records stored on the blockchain eventually become the shared public ledger’s part.

Most hot wallets are free to download and available as mobile-based applications or browser extensions. Exodus and Trust Wallet are two examples of this type of virtual currency wallet. A key advantage of such wallets is the user-friendly interface; one can easily operate them.

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Examples

Let us look at a few hot wallet examples to understand the concept better.

Example #1

Suppose Josh wants to start trading cryptocurrencies. He must have a cryptocurrency wallet that allows him to easily access the funds at his convenience to fulfill his purpose. So, Josh looks at the various hot wallets available online. He picks a wallet that is free to download to store his cryptocurrency securely and make transfers easily.

Example #2

In April 2023, the Bitrue cryptocurrency exchange announced that it suffered a hot wallet hack. The attackers were able to withdraw cryptocurrency assets worth nearly $23 million. The online platform promised to provide full compensation to the users impacted owing to the incident. Per Bitrue’s announcement, the list of cryptocurrencies in the exploited wallet included Quant, Shiba Inu, Polygon, Ether, and Quant.

Security Issues

The services of hot wallets for cryptocurrencies with enormous security holes can become exposed to an unauthorized entity. One must remember that the security and safety of such wallets largely depend on the behavior of the end user. These virtual currency wallets become susceptible to security problems because private and public keys are not stored on the internet.

For instance, let us take the example of single bottleneck systems like internet servers where end-user verification takes place. In such cases, the possibility of online spoofing and message interception rises. If fraudulent persons can access the password or username, they may steal the cryptocurrencies from the wallet.

Safety Solutions

One can keep the following tips in mind to ensure the security and safety of their cryptocurrencies:

#1 – Store A Small Portion Of The Holdings In Such Wallets

Experts recommend keeping a small part of the holdings in such a wallet to minimize the chances of suffering significant losses. Individuals can keep the coins they plan on utilizing soon in this type of wallet. Whereas they can choose to store the rest of the crypto coins in a cold wallet, making sure to keep backups of their private keys.

#2 – Keep The Assets Linked With An Exchange 

Individuals can keep their crypto tokens linked with an exchange they use. A few cryptocurrency exchanges store digital assets within their infrastructure. That said, one must note that if individuals keep their tokens in an exchange account and a fraudulent person gets to access the exchange network, the latter may steal the assets.

#3 – Exchange The Cryptocurrencies

If individuals maintain a substantial cryptocurrency balance, they accept the risk of losing a significant part of their holdings in an attack initiated by hackers.

Top cryptocurrency exchanges enable individuals to transfer between multiple cryptocurrencies and fiat currencies. Hence, one can decide to hold a small amount in this type of wallet and convert the remaining funds to their nation’s currency. Then, they can keep the amount in their bank account.

Hot Wallet vs Cold Wallet

Understanding the concepts of hot and cold wallets is crucial for individuals to store their cryptocurrencies safely and securely. One must know their key differences to know their meaning and purpose. That’s why the table below highlights the distinct features of the concepts.

Hot WalletsCold Wallets
These are predominantly free to use.One must purchase an external device to utilize a cold wallet. 
Since these wallets are connected to the internet, they offer lower security than cold wallets.  These offer more security as one cannot access them online. 
Accessing funds in this type of wallet is easier as it is always connected to the internet.Getting access to the funds is not as easy as in the case of hot wallets.  
It is suitable for individuals who trade cryptocurrency and need to access the holdings frequently.Such a wallet is suitable for individuals looking to store cryptocurrencies for the long term. 
This type of wallet always stays connected to the internet.It is entirely offline. 

Frequently Asked Questions (FAQs)

1. How do hot wallets get hacked?

Hackers can access the funds in such wallets utilizing malware, phishing, and other hacking strategies. For example, in 2022, individuals using the MetaMask wallet received phishing emails seeking personal details.

2. How to keep hot wallet safe?

To ensure the safety of such wallets, one can take the following measures:
– Keep small portions of their holdings in this type of a wallet
– Back it up 
– Ensure to Keep The software updated 
– Encrypt it and keep all passwords secure

3. Is mobile wallet a hot wallet?

Mobile wallets, desktop wallets, and web-based wallets are generally hot wallets. Among these, a web wallet is the least secure option. That said, one must remember that all these wallets are prone to online attacks.

4. Are hot wallets insured?

Some hot wallet providers claim that the funds kept in their wallets are insured. That said, before deciding to keep tokens in any of the wallets, one must review the fine print to determine whether they would receive compensation for lost keys and theft.

This article has been a guide to what is a Hot Wallet. Here, we compare it with cold wallet, explain its examples, security issues, and safety solutions. You may also find some useful articles here –

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