Hot Wallet vs Custodial Wallets: What's the Difference

Hot wallets are a popular way to store cryptocurrencies, but they're not the only option. Hot wallets are connected to the internet, making them vulnerable to hacking and other security risks.

This is where custodial wallets come in - they're a type of wallet that stores your assets on behalf of a third-party service. Custodial wallets are essentially a hybrid of hot and cold storage, offering a balance between convenience and security.

Hot wallets, on the other hand, are connected to the internet, making them accessible from anywhere with an internet connection. This convenience comes at a cost, however, as hot wallets are more susceptible to hacking and other security threats.

Custodial wallets, by contrast, are often used by exchanges and other third-party services to store customer assets. They're designed to provide an extra layer of security and protection for users.

A hot wallet is a digital storage solution for private keys, which is always connected to the internet, making it easily accessible for users.

Hot wallets can be mobile, desktop, or web-based, and are user-friendly, facilitating easy transfer of currencies between crypto users. They offer convenience, allowing users to quickly access, manage, and transfer their assets.

Private keys are kept and encrypted on the app itself in hot wallets and stored online. This makes them vulnerable to hackers who can target the system to break in.

Hot wallets are the most preferred wallet for buying and trading cryptocurrencies or cashing out assets after a while, due to their ease of use.

Hot wallets come in different types and have various purposes, depending on a user's needs. Some are mobile applications, while others are web-only wallets or ecosystem-specific wallets.

Mobile wallets, like Coinbase Wallet, are specific to a particular exchange, and some, like MetaMask, support only Ethereum-based tokens. Others, like Trust Wallet, are noncustodial and support over 300 cryptocurrencies and tokens.

Here are some common types of hot wallets:

Design, fees, and integration with certain crypto exchanges are also important factors to consider when choosing a hot wallet. It's essential to research wallets to find the best one for your needs.

Hot wallets come in different types and have various purposes. Some are mobile applications, web-only wallets, or even ecosystem-specific wallets.

Mobile wallets, like the one offered by Coinbase, are apps installed on a smartphone that store cryptocurrency keys and allow you to manage your assets on the go. They combine convenience with relatively good security features, such as biometric authentication.

Web-based wallets, or online wallets, are a service provided by a website that stores your cryptocurrency keys on its servers. This offers the highest level of convenience, enabling access from any internet-connected device.

Desktop wallets are a software application that stores your cryptocurrency's private keys on your personal computer. They offer a balance between convenience and security, allowing you to manage your crypto assets directly from your desktop.

Some popular hot wallets include:

When choosing a hot wallet, consider factors like design, fees, and integration with certain crypto exchanges. It's essential to research wallets to find the best one for your needs.

Metamask is a popular hot wallet that offers full access to an unprecedented collection of tokens and decentralized apps on the Ethereum blockchain. It's also compatible with other blockchains like Polygon, Binance Smart Chain, and Avalanche.

MetaMask is built on open-source code, which means it's constantly being tested for vulnerabilities and issued with security patches to keep it secure. This is a big plus for users who want to ensure their wallet is safe.

You can access your MetaMask wallet through any Android or iOS device, or as an extension on browsers like Google Chrome and Mozilla Firefox. This flexibility makes it easy to manage your cryptocurrencies on the go.

To get started with MetaMask, you'll need to decide whether to import an existing wallet or create a new one. If you create a new wallet, you'll be asked to set a password to secure the app. This password can be a string of characters, face recognition, or even a fingerprint.

A secret backup phrase will be generated for each account in your MetaMask wallet, which you should copy and store in a safe place. This phrase will allow you to recover your account if you lose access to your wallet.

Cold storage wallets, often referred to as cold wallets, are a type of crypto wallet hardware that offers an additional layer of security to protect a user's assets.

These wallets are completely disconnected from the internet and don't involve any interaction with Web3, which means they don't execute smart contracts on blockchains. This makes them the most secure type of crypto wallet.

Unlike hardware wallets, cold storage wallets work in tandem with active wallets to execute transactions, and in many cases, it's possible to create a cold wallet on existing crypto wallet hardware.

Hot wallets are a type of digital wallet that allows you to buy, send, and receive cryptocurrencies without actually holding any crypto. Instead, it holds the private keys that enable transactions.

Metamask is a popular hot wallet that works as a web browser extension, acting as a bridge between the blockchain and your browser. To use Metamask, you can either import an existing wallet or create a new one by setting a password and copying a secret backup phrase.

A hot wallet's primary function is to manage transactions, with services like fund management, whitelisted IPs, token management, and service monitoring ensuring a smooth transaction process.

Hot wallets are designed to be convenient for buying, sending, and receiving crypto assets. They hold private keys, not the actual cryptocurrencies, which are stored on the blockchain.

You can think of a hot wallet like a bridge between your browser and the blockchain, especially Ethereum. Metamask is a popular example of a hot wallet that works as a web browser extension.

To set up a new Metamask wallet, you'll be asked to either import an existing wallet or create a new one. If you choose to create a new wallet, you'll need to set a password to secure the app.

A secret backup phrase is a crucial part of setting up a hot wallet, and you should copy it and store it in a safe place. This phrase can be used to recover your wallet if you lose access to it.

Hot wallets are not suitable for storing large amounts of cryptocurrencies due to security threats. It's essential to store your large amounts of cryptocurrencies in cold wallets, which are less vulnerable to malware attacks and phishing.

Combining both hot and cold wallets is a good way to reduce your funds' online exposure. You can set up your hot wallets as receiving and sending wallets, while storing the rest of your cryptocurrencies in a cold wallet.

Hot and cold wallet setups are designed based on the developer's requirements and thought process.

In big systems, a wallet server handles multiple microservices, including managing nodes, databases, APIs, or transaction services. This setup ensures a smooth and secure transaction process.

The wallet microservices can vary from platform to platform, but they typically include fund management, whitelisted IPs, token management, service monitoring, thresholds, 2-step authentication, notifications, and Key Management System (KMS).

Here's a breakdown of the wallet microservices:

The transaction service sends the request to the wallet microservices, which then carry out all the necessary services before sending the tokens to the receiver.

Security is a top concern when it comes to hot wallets. This is because they are vulnerable to hacks and phishing scams.

To mitigate this risk, consider using a VPN to encrypt all transactions. This can add an extra layer of protection to your online activities.

It's also essential to create and manage strong passwords with a password manager. This can help prevent unauthorized access to your account.

Regular updates and strong security practices are needed to avoid online threats. Installing anti-virus software on all devices and keeping them up to date can help protect against malware.

Remaining alert to potential phishing scams is crucial. Be cautious of emails or messages that ask for sensitive information or try to lure you into downloading suspicious attachments.

Using multi-factor authentication can provide an additional layer of security. This can help prevent unauthorized access to your account even if your password is compromised.

Here are some essential security measures to consider: