Emerald Blockchain Course: 17. What Are Hot and Cold Wallets?

And what are and are not wallets in the first place.

Image of Donald McIntyre

By Donald McIntyre

October 11th, 2022

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Emerald Blockchain Course class 17 about hot and cold wallets.

You can watch this class here:

In the following sections we explain what are and are not wallets, and then we explain hot and cold wallets, and how Emerald may be used as a hot or cold wallet, or both.

1. What Are Not Wallets?

Not wallets.

Exchanges and custodial services are not wallets because they are centralized, they have the private keys, and they give you permissioned access through their web and apps.

What you have with these services are accounts as they own the crypto assets and just keep track of what they owe you in the liabilities of their balance sheets.

2. What Are Wallets?

True wallets.

True blockchain wallets are decentralized, users have their private keys, and they have permissionless access to blockchains through the web and apps.

3. What Are Hot Wallets?

Hot wallets.

What defines hot or cold wallets is whether they are used frequently and where the private keys are stored.

Hot wallets are wallets where the private keys are readily available inside users’ computers and phones, which are connected to the internet all the time, and are used frequently for day to day use.

4. What Are Cold Wallets?

Cold wallets.

Cold wallets are wallets where the private keys are held in separate devices from users’ computers and phones, that are not connected to the internet, and are seldomly used.

5. How Are Hot and Cold Wallets Used?

Cold wallets.

Because of the characteristics explained before, hot wallets are used for day to day transactions and usually to hold smaller amounts of crypto assets (normally from 10% to 20% of users’ total crypto holdings), and are practical for smaller transactions, such as paying for coffee or other more mundane things.

Cold wallets, because they are less practical, but more secure, are used to hold larger amounts of crypto assets (normally from 80% to 90% of users’ total crypto holdings) for the long term, and for larger transactions.

Cold wallet private keys are only connected to the internet to sign these larger transactions.

6. Cold and Hot Software and Hardware Wallets

Software and hardware wallets.

Hot wallets are usually software wallets inside users’ computers and phones that they use on a daily basis and are connected to the internet all the time.

Cold wallets are usually hardware wallets, paper wallets, or Private Key JSON files that are kept separate from users’ computers and phones and in safe places such as safes, pen drives, or devices not connected to the internet.

7. Cold Wallets vs Hardware Wallets

Hardware wallets.

Note that hardware wallets per se, are not cold wallets just by themselves. If hardware wallets are used on a daily basis to sign transactions with the private keys, then they are considered hot wallets.

Hardware wallets may be the best type of cold wallet, but only when they are kept separated from the internet and seldomly used.

8. Emerald as a Hot and Cold Wallet

Emerald as a hot or cold wallet.

Emerald Wallet may be used both as a hot or cold wallet. If users have Emerald installed inside their daily use computers and phones, holding their private keys, then it is a hot wallet.

However, Emerald may also be installed on devices separated from the internet so it can be used as a cold wallet, or it may be used in combination with a hardware wallet.

Thank you for following this class!

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