Hot Wallet: Definition, Types, Examples, and Safety Tips

What Is a Hot Wallet?

A hot wallet is a cryptocurrency wallet that is always connected to the internet or another connected device. Hot wallets are used as temporary key storage and to send and receive cryptocurrency. Usually, their interfaces also allow you to view how many tokens you have available.

How a Hot Wallet Works

When you buy or mine a cryptocurrency, you must set up a wallet to facilitate transactions if you decide to use it to purchase goods or services. Your cryptocurrencies, or rather the private keys you use to access the currency, are stored in these wallets when you receive a coin.

When you own a cryptocurrency, you're given private keys to access it. Public keys are similar to account usernames; they identify the wallet so that the user can receive tokens without revealing their identity. Private keys are similar to personal identification numbers that must be entered when creating a transaction. The wallets that store these keys are usually accessed with usernames and passwords but can also use different login techniques.

Hot wallets are applications connected to the internet and the cryptocurrency infrastructure, which allows you to use them. For a user, the hot wallet is the interface for using and storing your cryptocurrency keys.

They are different from cold wallets, which are devices or applications that store your private keys offline—these can be an application on a device that doesn't connect to the internet or a device that looks like a USB thumb drive that stores your keys. You can even write your keys on a piece of paper, which is considered a cold wallet. To use the cryptocurrency you have in cold storage, you need to transfer the keys to your hot wallet.

Types of Hot Wallets

There are various hot wallets available, and many of them are free to download. Some wallets are specifically designed to be used in partnership with particular mobile web applications; you might find one that only works with a particular cryptocurrency or ecosystem. In addition, some cryptocurrency exchanges will only accept transfers to and from specific wallets.

Examples of hot wallets are MetaMask, Coinbase Wallet, and Edge Wallet. MetaMask is designed for transactions using the Ethereum ecosystem. Coinbase Wallet is the wallet for the cryptocurrency exchange Coinbase, and Edge Wallet is designed to accept transactions using all of your digital assets.

Because there are so many wallets with different designs and intents, it's important for you to research hot wallets before downloading and using their services. Wallet developers have varying degrees of expertise, various commitments to security and privacy, and different priorities in mind when creating their wallets. Some might have fees; others might not. You might need to use one wallet that integrates with your internet browser for one currency and another wallet that is a dedicated application.

Special Considerations

There are several aspects you should consider before deciding on your hot wallet. Most important are its security features and how you use them. Your cryptocurrency is only as safe as the way you store your keys. Any items stored in a hot wallet are vulnerable to hacks, malware, ransomware, or any other method thieves can think of.

To keep your cryptocurrency safe, consider some of these tips.

Use Your Hot Wallet Only for Transactions

It's a good idea to keep only a small portion of your crypto-assets in your hot wallet; you might consider only putting the amount of cryptocurrency you need in it when you need it. This strategy would mean storing most of your assets in a cold wallet and transferring what you need to the hot wallet for immediate or near-future use.

Store Your Assets in an Exchange

You could also choose to keep your cryptocurrency tokens in accounts linked to the exchange you use. Some exchanges will store your cryptocurrency for you in cold storage. These exchanges either subcontract custodial services and transfer your keys to them or have built data storage methods designed for key storage.

However, if you keep your tokens in an exchange account and an attacker gains access to the exchange's network, you could lose your cryptocurrency in the attack. To help customers if this happens, some exchanges are insured for the loss of customers' assets if they (the exchange) lose them due to theft or failure of their systems and will reimburse you up to a certain amount.

Exchange Your Cryptocurrencies

If you maintain a substantial balance of cryptocurrency, you're accepting the risk of drawing the attention of hackers or losing a significant portion of your holdings in an attack. Because many of the top digital currency exchanges allow users to transfer between various fiat currencies and cryptocurrencies, you should only hold small amounts in your wallet. You can convert the rest to your country's currency and place it in your bank account.

Hot Wallets and Investing

Cryptocurrency investing is similar to stock market investing—you own a cryptocurrency and wait for its fair market value to increase. You could continue holding it or try to sell it to another investor at a profit. However, a hot wallet is a precarious place to store your cryptocurrency investments. Cold storage, such as a paper wallet or other non-connected methods, might serve you better as you wait for your cryptocurrency's value to increase.

You could also use a custodial cold wallet, such as a reputable, regulated, and insured exchange's cold storage or licensed digital asset custodian. Another option is to invest in a cryptocurrency ETF that holds cryptocurrency so that you gain exposure to these assets without needing to secure them yourself.

The Bottom Line

Hot wallets are any private key storage method that has a connection to another device or the internet. All hot wallets have or are software of some type, so they are vulnerable to hacking, malware, viruses, ransomware, or other methods used by criminals.

There are many hot wallets available, so it is best to research for the one you prefer and only keep the keys to the crypto you intend to spend in it. Once you use your crypto in your hot wallet, transfer the keys back to cold storage to be safe.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info.