Tools & Resources

Hot Wallet vs. Cold Wallet: Maximizing Safety & Convenience in Web3

By The Fire Team
Orange wallet vs. blue wallet with coins
Wallets are a hot topic right now: They’re the key to storing assets in the Ethereum ecosystem and at the core of how we access web3.If you’re (relatively) new to web3, you’ve probably heard about hot wallets and cold wallets—and might be wondering how they differ and when you should use which. In this article, we’ll do a deep dive on hot wallets, cold wallets and how to stay as safe as possible.

Finally, we’ll explore how the future of wallets might look completely different. Ready? Let’s dive in!

Cold Wallet vs. Hot Wallet: The Differences in a Nutshell

If you only have a few minutes, here are the core differences between hot wallets and cold wallets: 


  • A hot wallet is always connected to the internet, a cold wallet isn’t.
  • A hot wallet only requires a click to approve transactions, a cold wallet also requires approval on a physical device. 

What to Store

  • A hot wallet is for your “spending money” and any assets you’re willing to lose. 
  • A cold wallet is for the things you want to safeguard and don’t need to use regularly.

What it Looks Like

  • A hot wallet is usually a browser extension or mobile app.
  • A cold wallet (also known as hardware wallet) is usually a physical device that often looks like a USB stick.

Where it works

  • Most hot wallets are blockchain-specific: An Ethereum wallet doesn’t work on bitcoin and vice versa.
  • Most cold wallets store various types of cryptocurrencies. The same Ledger that stores your Ether can also store your bitcoin.

What is a Hot Wallet?

In the Ethereum ecosystem, a hot wallet describes a digital wallet that is connected to the internet, making it easy for you to approve transactions quickly. 

Examples include Metamask and Coinbase Wallet (for a comparison of the best web3 wallets, click here). 

These wallets allow you to interact with Ethereum and other EVM-compatible blockchains, providing you with the flexibility to transact anytime and anywhere. 

How Safe are Hot Wallets?

On a software level, hot wallets work similar to cold wallets. They restore their private key with a seed phrase and have the same functionality. 

But hot wallets are the less secure option between hot wallets and cold wallets. That’s because they’re always connected to the internet. This creates a few potential security risks: 

  • You can lose everything at once: If you keep all of your assets in one wallet, you can lose them all in one transaction. It’s the equivalent of haing your entire net worth in cash and going on a walk in a dodgy neighborhood. 
  • Private key/seed phrase storage: Your private key (which gives anyone who has it full access to your crypto assets) is stored online. If the server is stored on gets hacked, your wallet is compromised (even if you made no mistake)

Are Hot Wallets Safer than Exchanges?

Exchanges store your coins for you. While this makes them easy to access with an email & password login, exchanges also create risks: 

  • If the exchange’s security mechanisms fail, your crypto is at risk. 
  • You don’t control your crypto: To earn returns, trade NFTs or do other web3 things, you need a non-custodial wallet. 
  • Regulatory pressure could lead to losing access to some functionalities or your assets.

Hot wallets give you more control over your private keys and your crypto. Exchanges can be high-value targets for hackers, and there have been instances of large-scale security breaches. 

Exchanges are convenient, but have downsides. If you simulate transactions, having a non-custodial wallet keeps you safer.

How Do Hot Wallets Work?

Hot wallets work by storing your private keys on a device that's connected to the internet. When you make a transaction, these wallets use your keys to sign it, which then gets broadcasted to the network to be added to the blockchain.

On Ethereum, every hot wallet is compatible with all EVM blockchains. This includes layer 2 solutions like Optimism and Polygon as well as separate blockchains like the Polkadot network and Avalanche. 

How to Use a Hot Wallet

To use a hot wallet, you first install it on your device. Once installed, you create a new wallet, which generates your private keys via a seed phrase. Remember to back up these keys offline and never share them with anyone.   

You can then receive or send Ether, ERC-20 tokens or NFTs by connecting to web3 dApps like Uniswap.

What should you keep in a hot wallet?

A hot wallet is for assets you need to have available quickly and are willing to lose. This includes funds for gas fees, to buy NFTs or to use for DeFi apps like liquid staking

If you acquire an NFT or a large amount of cryptocurrencies you can’t afford to lose, we recommend “vaulting” it in a cold wallet.

Ethereum Hot Wallet Examples

There are many hot wallets, but a few popular ones include: 

  • Metamask
  • Coinbase Wallet
  • Trust Wallet
  • Rainbow
  • Phantom
  • Zerion
  • Uniswap Wallet

What is a Cold Wallet?

A cold wallet, also called a hardware wallet, stores your private keys offline on a physical device. This means they’re never in an iCloud backup or any other centralized server. 

That way, no hacker can get access to them (as long as you don’t compromise your seed phrase or give the wrong token approvals). Popular examples include Ledger and Trezor, which are often called the best cold wallets. 

That doesn’t mean you can’t use your cold wallet on web3 apps like lending protocols: Metamask and other software wallet providers support Ledger.

While this is possible, it’s not always recommended: As soon as you use your cold wallet online, it stops being untouchable. If you insist on using your cold wallet online, make sure you revoke token approvals afterwards.

If you do, cold wallets are the equivalent of a high-security vault for your crypto assets—they're disconnected from the online world, providing robust protection against online threats. 

How Do Cold Wallets Work?

Cold wallets store your private keys offline on a physical device. When you want to make a transaction, you need to connect this device to an online interface, sign the transaction with the private keys, approve the transaction on your physical device and then disconnect the device once the transaction is complete.

Are Cold Wallets Safe?

Cold wallets are generally safer. You'll make fewer transactions, thus limiting exposure to potential threats. However, security is still paramount—you remain vulnerable if you compromise your seed phrase or give incorrect token approvals.

How to Use a Cold Wallet

To get a cold wallet, you need to purchase a hardware wallet. You can choose the best hardware wallet by reading online reviews, but make sure it can store every cryptocurrency you’d like to use.

While most of the popular providers are fine, you should never buy second-hand hardware wallets or from unofficial vendors.

There have been reports that new, but compromised hardware wallets were sold on eBay, which then allowed the vendors to drain their victim’s assets. Only buy on the brand’s official website.

After setting it up and securing your backup seed phrase, you can transfer assets to the addresses provided by the device. 

What should you store in a cold wallet?

Cold wallets are safer than hot wallets, but also make it harder to move assets. We recommend using a cold wallet for assets you want to safeguard (like expensive NFTs or large amounts of tokens) and don’t plan on moving in the near future. 

How Account Abstraction Wallets Could Transform Hot and Cold Wallets

The future of wallets in the Ethereum ecosystem might see a transformation with account abstraction

Account abstraction gives software wallets the functionality of smart contract wallets, which enhances both their features and security. On the other hand, cold wallets could use the autonomous elements of smart contracts to ease transaction processes without compromising their offline security.

There are many ways both hot and cold wallets could change with account abstraction. But when it comes to account management and staying safe in crypto, here are a few transformations we might see:

  • Vault wallets: While many software wallets already support multiple accounts, you could create a “vault wallet” which doesn’t have a hardware component, but requires additional signers to make any transaction. That way, you’d have a more secure wallet without the inconvenience of a hardware wallet.
  • Savings account: If you want to save money for a rainy day, keep it separate in a savings account. Ethereum account abstraction enables you to build this inside an Ethereum wallet.
  • Automatic transfers: Because account abstraction wallets can automate certain transactions, you could automate transfers to your cold wallet or vault wallet if you buy an asset over a certain amount, say $500.
  • Spending limits: With spending limits, even your hot wallet becomes more secure. How? Account abstraction wallets can limit the amount of tokens that can be moved in a given time period. That means that even if you mess up, a hacker couldn’t instantly take all of your assets.

If you’re exploring Ethereum, check out Fire!

We’re a trusted chrome extension that simulates transactions before you sign any potentially malicious smart contract.
Check it out
To Summarize

In conclusion, hot and cold wallets serve unique roles in the crypto landscape. Hot wallets offer convenient, immediate access to funds, but are susceptible to online security threats. Cold wallets, while less handy for frequent transactions, provide a secure offline storage option for substantial assets. Ultimately, a balance of both may be the most secure approach for many users. With the advent of account abstraction, we can expect transformations in wallet functionality, offering an even more secure and seamless crypto experience in the future.