Hot Wallets vs Hardware Wallets
There’s much talk about the different types of wallet you can use to store your cryptocurrency. Here we look at the pros and cons of each type, and what the future might hold.
Coincover co-founder David Janczewski has road tested several different types of crypto storage. This is what he found.
A term used to describe a wallet that’s held in an online environment, hot wallets are probably the most prevalent types available today. They allow easy, always available access to your cryptocurrency, provided that you have an internet connection. This ease of use is what makes them appealing - but in some cases has resulted in them being easier to hack and steal funds. There are also many different ways to implement a hot wallet, with some providers offering far more protection than others. Here’s what to look for:
- On-chain wallets. Make sure your hot wallet is directly represented on the blockchain. Some wallet providers pool your funds along with others’, and use offline databases to work out what belongs to you.
- Key ownership. Some wallet providers retain ownership of your private keys. This essentially means they have custody of your funds. And unless they’re a regulated bank, the only protection you have against theft is the conscience of the people running the company.
- Independent. Many people use exchange accounts as a place to store their cryptocurrency. Exchanges often employ fund pooling putting all customers funds together in large combined wallets, while they hold all they keys for operational efficiency. They’re not typically designed for use as a wallet. They’re also one of the biggest targets for thieves as they tend to hold lots of client funds. Look for an independent wallet which has exchange partnerships rather than holding your funds on an exchange.
- Insured. A few hot wallet providers claim to have insurance that protects your funds. While this is generally a good thing, be sure to check the fine print to ensure your funds are personally guaranteed against theft and lost keys.
At the other end of the spectrum are hardware wallets. These wallets offer you direct access to the blockchain, and hold your private keys in on a specially made microchip called a high-security module (HSM). These can offer robust security as you have your private keys held offline on a dedicated device. But the trade off is that you have reduced usability and convenience. Here are a few things to look for:
- Portability & robustness. Given that you will still likely want to access your funds wherever you are, it’s important that the device is easy to transport, and can stand up to the day-to-day commute. Watch out for screens that could crack. Don’t use a device that’s too conspicuous so as not to make you a target for potential thief or mugger.
- Extra cables. Make sure you pick a device that doesn’t need you to carry around another cable. Some of them still do, and often use the older micro USB standard. From personal experience, you never have the right cable available just when you need it.
- User interface. Many of these devices require you to download and install apps on your PC. Not all of them are intuitive, so be sure to test them out first.
- Recovery mechanisms. We’ve saved the most important point until last! Hardware devices have a habit of breaking, no matter how well you look after them. If this happens, you risk losing access to all of your cryptocurrency. The hardware manufacturers have thought of this and often ask you to create a backup when you set up the device. Just be sure that the backup does not involve a 24-word mnemonic or saving to a hard drive. These backups can be the weakest point in the security of your digital currency, and need a whole set of security policies just on their own.
To sum up
There are many factors to consider when selecting your wallet provider, and the final choice will depend on your circumstances. For my part, I’ve tried most of them on the market, and all of them had their foibles. It’s the reason I co-founded Coincover! I wanted a wallet that I could access online at any time just like my bank account. And just like my bank account, I wanted the reassurance that if my online account was hacked and my funds were stolen, I could rely on the organisation I’ve put my trust in to pay me back. Now with disaster recovery on my BitGo wallet, I have the best of all worlds.