Cold Storage vs. Hot Storage: Storing Cryptocurrency

Cryptocurrency — or “crypto” — is a digital type of asset that requires a storage system to hold and protect it. These storage systems are called “crypto wallets,” and types of storage include ones that are “hot wallets” or “cold wallets,” depending upon whether they’re connected to the internet or not. (Warm storage wallets can combine features of both types; in this post, we won’t be addressing warm storage or other iterations of wallets that exist. The focus is on cold storage options vs. hot storage ones.) Crypto tokens within the wallets can be accessed by private and public “keys,” which are strings of letters and numbers that act like a password and allow the wallet holder to send and receive crypto.

When choosing a wallet, one important question to consider is its type and, in this post, we’ll share the pros and cons when you’re deciding between these two storage types: cold storage vs. hot storage.

Cold Storage vs. Hot Storage: The Pros of Each

Cold storage solutions (cold wallets) are stored offline in physical devices like a thumb drive that are portable and, because they’re not connected online, they come with more protection against hacking and other actions by people with malicious intent. To obtain or send funds, the wallet owner would need to physically have access to the offline storage device along with their keys.

Hot storage solutions (hot wallets), meanwhile, are apps connected to the internet, which can provide ease of access as holders of crypto use their smartphones, laptops, and desktops to more seamlessly conduct crypto transactions. This continuous access is therefore a more convenient setup for more rapid transactions.

Cold Storage vs. Hot Storage: The Cons of Each

Cold storage solutions aren’t the ideal choice when you want the most rapid trading possible; not being connected to the internet can make it a bit more cumbersome. The trader would need to plug their cold wallet into a computer, transfer the amount of crypto needed for the transactions to a hot wallet, and then conduct the crypto transactions.

Hot wallets, though, can make it easier for people with malicious intent to illicitly take funds. Depending on the locale, there may also be laws restricting their usage.

Cold Storage vs. Hot Storage: Using Both Types of Wallets

Some people choose to use both types of wallets, keeping crypto that they don’t intend to transact in the near future in a cold wallet as a form of long-term storage and other tokens and coins in a hot wallet to benefit from the ease of use. This way, they can benefit from the accessibility and functionality of a hot wallet along with the security associated with a cold wallet.

BitGo’s Wallets

Information in this post is a very high-level look at cold storage vs. hot storage. At BitGo, we offer wallets for investors from family offices to hedge funds to market makers and banks as well as builders: exchanges, retail aggregators, platforms, and crypto startups.

If you fit into these categories and want to discuss how to safeguard and deploy your assets, please reach out to BitGo’s expert team. We offer hot wallets, custodial wallets, self-managed cold wallets, and NFT wallets. If you’re interested in offering more to your users without having to hire additional blockchain engineers, talk to us about wallets as a service and BitGo APIs.

Cold Storage Vs. Hot Storage FAQs

Which is better: cold storage vs. hot storage options?

It’s not a question of one option being “good” and the other being “bad.” Instead, when considering cold storage vs. hot storage, what’s most important is to consider your needs and then choose the option that dovetails with them. If, for example, the ability to rapidly conduct transactions isn’t necessarily important to you, then the cold wallet can make sense — and, by going this route, this helps to maximize security. If more rapid transactions are key to your activities, then a hot wallet can be a more seamless choice because it’s always connected to the internet and more ready to go.

To get the best of both worlds, though, the real question may not be about choosing between cold storage vs. hot storage. Rather, it could be about how to use a combination of wallet types to get the optimal effect. Your institution could keep the crypto that they don’t plan to transact (at least not in the near future) in a cold wallet to enjoy its security and the coins and tokens that would be involved in transactions relatively soon in a hot wallet. By using this approach, you can benefit from the functionality, accessibility, and security that your organization desires.

Besides looking at cold storage vs. hot storage, what are some types of cold storage that are used?

The most basic type of cold wallet is a paper wallet — meaning a document with the investor’s public and private keys listed on it. Embedded in the paper is a quick response code (QR code) that facilitates the transactions. If the document becomes damaged, though, the paper wallet is now worthless. So, this type doesn’t come with much true security.

A less commonly used type of cold wallet is the sound wallet, which can be expensive. Your private keys would be encrypted and recorded in sound files on something that resembles vinyl disks or CDs. The audio files have a code hidden within them that can be obtained through technology.

The type of cold wallet described in this blog post is a physical wallet: a type of hardware that’s held offline. They can be a USB drive, for example, or a smart card, which is a plastic card that has a built-in microprocessor, and these devices are what your institution would use to access your digital assets held within the wallet.

When a custodian manages your cold wallet and its keys, this can be comparable to putting it in cold storage like you would in a bank vault. This option is available for institutions through BitGo’s services. Contrast this to self-managed cold wallets, which BitGo also offers, and those are like managing asset security in your home while using the custodian’s vault technology.

Can BitGo help our institution to decide between cold storage vs. hot storage?

Absolutely! We’re here to help. You can find information about our hot wallets here, and here’s info about our self-managed cold wallets. BitGo also offers custodial wallets as well as NFT wallets to secure your assets. BitGo Trust Company is regulated and audited — a qualified custodian — with up to $250MM in insurance.

We also offer plenty of other professional services for investors like family offices, hedge funds, market markets, and banks as well as for builders like exchanges, retail aggregators, platforms, and crypto startups. These professional services include asset deployment through lending, borrowing, trading, staking, and DeFi access and the ability to build platforms.

To get the conversation started about your needs, including whether cold storage vs. hot storage is right for you, and how BitGo can help you to achieve your goals, just reach out. We look forward to speaking with you!