What is a cryptocurrency hot wallet?

Hot wallets are safer than exchanges

Both hot and online wallets are connected to the internet.

The distinction between them is that with hot wallets, users hold their private keys, while online wallets do not allow its users to access them.

Unlike with exchanges, hot wallets owners do not delegate ownership to a custodian but have control over their private keys.

In fact, hot wallets are a piece of software run locally by its owner, on a device connected to the internet. It is not the safest wallet to store digital asset but it still holds the fundamental properties of cryptocurrencies and protects holdings to a certain extent.

It introduces further responsibility to the user, as losing access to the device will result in a loss of all the cryptocurrencies stored in the wallet.

Private keys generated locally but in an insecure environment

Unlike cold wallets, hot ones generate private and public keys on devices connected to the internet, creating an unsafe environment for digital asset storage.

Once a device is plugged online in its lifecycle, it is vulnerable to malware and attacks. In the event a device hosts malware, the private key is comprised and its underlying assets as well. In fact, there is always a probability a malicious party intrudes a device connected to the internet which effectively jeopardises the security of digital holdings stored on it.

Although hot wallets are not the most secure way of storing cryptocurrencies, it is a convenient way to secure them without a time-consuming set-up. Hot wallets are perfect for basic transactions and securing low amounts of virtual assets.