Personal Finance Essentials
Types of Crypto Wallets
Hot Wallets Are Convenient — Cold Wallets Are Safe
Connected and Vulnerable vs. Offline and Secure
You know what a wallet is. You keep your money and ID card in your wallet.
Likewise, you keep your digital assets in your digital wallet.
Where do you get a digital wallet? It’s provided to you by the apps you use. When you establish a PayPal account, for example, it creates a digital wallet for you, and that wallet holds the money you have on that app. Google, Walmart, Apple, Android, Samsung and many others provide digital wallets for their users, too.
Brokerage firms (such as Charles Schwab, Goldman Sachs, Coinbase, and Robinhood) also create digital wallets for their clients, called online brokerage accounts. You send money to these accounts from your bank, and you use that money to buy stocks and bonds and other securities – all of which are then held for you in that brokerage account (or wallet).
In the past, you had to have an account with a securities brokerage or exchange to trade stocks and bonds, and an account with a crypto brokerage or exchange to trade digital assets. But increasingly, you can do it all at any firm.
At all these firms, the digital wallet you get is known as a hot wallet because it’s connected to the internet. Hot wallets are risky because a hacker could gain access and steal the contents. To solve that problem, you can move the assets in your hot wallet to a cold wallet. These are not connected to the internet and are therefore safe from online hackers.
Cold wallets are easy to use, and lots of vendors sell them for about $100. You transfer your digital assets to them from your desktop or laptop computer. They come with encryption (passwords that only you know) so if someone steals it, they won’t be able to access the contents.
Alternatively, you could use an ordinary flash drive as a cold wallet, but there won’t be any encryption.
Money stored on a cold wallet isn’t spendable. To sell your digital assets or use them to buy goods or services, you must first upload the digital assets to your app’s hot wallet. Such transfers between hot and cold wallets can be tedious.