Hot Storage

The online storage of private keys allowing for quicker access to cryptocurrencies. *see Cold Storage.

What Is Hot Storage?

Hot cryptocurrency storage refers to wallets connected to the internet. They offer easy access to frequent trading and transactions. Hot wallets include mobile/desktop apps, exchange-hosted web wallets and cloud-based services. 

The constant internet connection provides convenience through quick access. But it also creates vulnerability to hacking, malware and theft if the wallet provider is compromised (in the case of custodial wallets). Hot storage suits smaller amounts actively being used.

Benefits of Hot Storage Wallets

Hot storage is more convenient since hot wallets are connected to the internet. That means users can easily connect hot wallets, like MetaMask, to applications like decentralized exchanges and trade from their hot wallet without giving up custody of their coins. Although this is also possible with cold storage, it takes more time and is significantly less convenient to connect a cold wallet to exchanges.

Furthermore, hot storage is free and, therefore, a useful alternative for users that want to remain flexible with their coins. Cold storage requires the purchase of a cold wallet, which can be up to $200. It is also far easier to set up a hot wallet, and coins in hot storage can be accessed from anywhere. Furthermore, these wallets are not at risk of physical loss like a cold wallet would be. 

Risks of Using Hot Storage 

Hot storage is considered less secure when it comes to hacking. Although hot wallets themselves are secure, users are at higher risk of a phishing attack. Users can also more easily fall prey to signing phony transactions that reveal their wallet details and give attackers access to their crypto.

Hot storage is also subject to certain features being tracked, like IPs and wallet addresses. Some jurisdictions may also block users based on their IP address, making hot storage generally a less private form of storing crypto.

Using Hosted Web Wallets for Hot Storage

Web-based hot wallets hosted on cryptocurrency exchanges like Binance allow easy access to your funds anywhere via the website. This facilitates trading and transactions across devices by simply logging into your exchange account online. However, exchange-hosted wallets carry greater risks since you must completely trust the platform’s security practices and responsibility to safeguard user funds. 

Many exchanges over the years have fallen victim to major hacks resulting in the theft of customer funds. Hence, only store small amounts on exchange wallets that you regularly trade or withdraw from the platform. Avoid keeping any significant or long-term holdings on exchange hot wallets.

Best Practices for Safe Hot Wallet Usage 

Given the vulnerabilities of hot wallets, certain best practices should be followed to minimize risks. Use hot wallets primarily for smaller amounts of cryptocurrency you regularly transact with or actively trade – like the cash you carry in your physical wallet. Enable all available security features like two-factor or multifactor authentication, strong and unique passwords, email/SMS withdrawal confirmations and alerts, whitelisting addresses and limiting session lengths. Avoid storing large amounts or holding coins long-term in hot wallets. Spread holdings out across multiple hot wallets to avoid losing everything if one hot wallet provider is compromised. Think of hot wallets as short-term transactional accounts rather than primary long-term savings accounts.

When To Consider Moving to Cold Storage

If your cryptocurrency holdings start to accumulate substantially, it becomes prudent from a security standpoint to move most funds into cold storage. This threshold depends on your personal risk comfort level, but generally holdings over $1000-5000 or more warrant a transition to cold storage. Hot wallets work fine for the smaller amounts you actively transact with for payments or trading. But larger long-term investments deserve the offline security protections of cold storage.

How To Transfer from Hot to Cold Wallets 

When transferring cryptocurrency from a hot to a cold wallet,  make sure to execute the process safely. First, carefully verify your target cold wallet address is entered correctly before initiating any transfer. It is wise to first send a small test amount before transferring larger balances to confirm the test transfer reaches your cold wallet intact. Use proper max send amounts and network fees to avoid potential transaction issues. After confirming your small test transfer’s success, you can then securely shift your larger intended balances from hot to cold wallets.