What Is Hot Wallet?
Also known as: Online Wallet, Hot Crypto Wallet, Connected Wallet
In short
A hot wallet is a cryptocurrency wallet whose private keys are kept on an internet-connected device or server; it allows fast and easy transactions but is more exposed to online attacks than cold wallets.
Wallets that run as phone and computer apps, browser extension wallets and the wallets exchanges hold for user withdrawals are examples of hot wallets. Because the private key is in an internet-connected environment, signing a transaction takes a few seconds; this is practical for everyday payments, interacting with DeFi applications and frequent trading.
Hot wallets can be divided into two groups. In self-custody wallets, the private key and recovery phrase are held by the user; control rests entirely with the user, but so does the responsibility. Balances in exchange accounts, on the other hand, are custodial and the keys are managed by the exchange. Exchanges generally keep only a small portion of assets needed for transactions in hot wallets and the majority in cold storage.
The main risks are malware, fake wallet apps, phishing sites and unlimited spending approvals granted to malicious smart contracts. To reduce risks, it is recommended never to store or share the recovery phrase digitally, to download apps from official sources and to keep only an amount sufficient for everyday use in a hot wallet.
Last updated: · This content is for information purposes only and is not investment advice.