What is a hot wallet?
A hot wallet is a cryptocurrency wallet which is connected to the internet. With hot wallets it is possible to quickly send or receive crypto. Think of an exchange. It should be possible for a user to quickly withdraw or deposit crypto. Hot wallets are often referred to exchanges, because most exchanges keep a small percentage of all cryptocurrency in hot wallets. This allows users to trade, withdraw and deposit crypto. Normally, without having to wait too long. By large hacks, on the other hand, criminals can steal the entire wallet, because it is accessible via the internet.
Chances are, you are using hot wallets too. For example, do you have your cryptocurrency at a broker or an exchange? If so, this is also considered hot storage, because you can access your wallet via the internet. It does not matter whether the broker or exchange has the coins on a cold wallet. The opposite of a hot wallet is a cold wallet.
What are the pros and cons of hot wallets?
The advantage of hot storage is that you can quickly access your cryptocurrency. After all, it is connected to the internet and people want their crypto fast. That is therefore also the biggest drawback. Everything connected to the internet is theoretically vulnerable to hackers and criminals. In addition, the wallet is most likely on a computer that can also have vulnerabilities. For hackers it is a sport to find these vulnerabilities and empty the wallet. Therefore it regularly happens that an exchange is hit by a hack, where the hot wallet is (partially) emptied. The following hacks took place in 2019:
- Binance hot wallet emptied
- DragonEx hack
- BitHumb hack
We recommend to only store cryptocurrency with which you trade, in hot wallets. In this case, we mean brokers and exchanges where you store your cryptocurrency.