What is a hot wallet? Definition & explanation

Manage cryptocurrencies like Ethereum or Bitcoin flexibly and access them at any time – that's exactly what hot wallets make possible. Whether on your smartphone, laptop or directly in the browser: digital wallets make dealing with coins and tokens particularly easy. But with convenience also come security risks.

In our guide, you’ll learn everything you need to know about hot wallets: you’ll get to know the most important functions, gain insight into security measures and receive a comprehensive comparison to help you choose the best hot wallet app for your needs.

• A hot wallet is a digital wallet that is connected to the internet and enables quick access to cryptocurrencies as well as easy transactions via the blockchain.

• There are different types of hot wallets, including mobile wallets, desktop wallets and web wallets, which differ in accessibility, security and key storage.

• A hot wallet app offers easy access, is quick to use and is often directly integrated with exchanges and DeFi applications, allowing for convenient management of coins and tokens.

• As a hot wallet is constantly connected to the internet, increased security risks such as hacks, phishing attacks and malware can occur.

What is a hot wallet?

A hot wallet is a digital wallet connected to the internet and installed as software on devices such as smartphones or laptops. It enables you to actively manage cryptocurrencies, carry out transactions and keep your coins available at all times.

The defining feature of a hot wallet is that it generates the seed phrase – a series of words used to restore wallet access – online. The private keys, which are used to authenticate transactions, are also stored online. This means a hot wallet offers a high level of convenience, but is more vulnerable to security risks than a cold wallet, where data is stored offline.

A hot wallet is one possible type of Bitcoin wallet that offers a great deal of everyday convenience. However, there are other Bitcoin wallets that provide greater security. 

Types of hot wallets

There are different types of hot wallets that vary in usage, security and access options. In general, there are two categories:

• Custodial wallets: the provider (e.g. an exchange) holds the private keys and the user only accesses their cryptocurrencies via the platform.

• Non-custodial wallets: the user manages their private keys themselves.

Hot wallets can be used as mobile, desktop or web wallets – depending on the device and intended use. The differences are outlined below:

• Mobile wallets: apps for smartphones that are especially convenient on the go and support QR code scanning for fast transactions.

• Desktop wallets: software solutions for PC or laptop, enabling management of cryptocurrencies directly on the device.

• Web wallets: wallets accessible via a browser, offering quick access without additional software installation.

Another important factor when choosing a hot wallet is compatibility with your device and operating system. While mobile wallets are usually available for iOS and Android, desktop wallets often offer versions for Windows, macOS and Linux. Some web wallets are platform-independent in the browser, while others are optimised for specific operating systems. A comparison will help you find out which hot wallet is the best choice for you. Each type has its own pros and cons. Choosing the best hot wallet depends on how you want to manage your funds and assets, and what your security requirements are.

How does a hot wallet work?

For a hot wallet to function securely and efficiently, several factors are crucial. When setting up your hot wallet, a seed phrase is generated. This consists of 12 to 24 words and serves as a master key that lets you restore your digital wallet on another device. Depending on the type of hot wallet, security mechanisms vary: while a custodial hot wallet manages the private keys for you, with a non-custodial wallet you retain full control over your assets.

To protect access to your hot wallet app, various encryption methods are used. Your private keys are stored within the wallet software and are often further protected by a password, biometric authentication or two-factor authentication (2FA). Without such protective measures, there is an increased risk of security breaches, as hacks, phishing attacks or malware could endanger your funds.

Once you initiate a transaction, your hot wallet signs it with your private key to verify its authenticity. The transaction is then sent to the blockchain network, where it is verified and confirmed by validators or miners. Your hot wallet is also directly connected to the blockchain and synchronises the current balance of cryptocurrencies in real time. Some hot wallets support multiple blockchains, allowing you to manage various tokens within a single digital wallet.

You can also link your hot wallet to exchanges and DeFi apps. This lets you trade crypto directly, use staking, or employ your assets in various financial protocols.

Advantages and disadvantages of hot wallets

A hot wallet offers many advantages, but also some security risks. Here’s a comparison showing when a hot wallet is the right choice and what to watch out for:

Advantages

• Quick access: a hot wallet is always available and allows immediate transactions.

• User-friendliness: most hot wallet apps are easy to use and ideal for beginners.

• Compatibility with exchanges: many web wallets are directly connected to exchanges or DeFi apps, simplifying crypto trading.

• Ideal for everyday use: perfect for frequent transactions or paying with crypto.

Disadvantages

• Increased security risks: permanent internet connection makes hacks and phishing attacks more likely.

• Loss of device: if your smartphone or computer is stolen and no security measures are in place, your assets could be at risk.

• Private keys stored online: your keys are generated and stored online, which poses a potential risk.

• Not suitable for large amounts: long-term storage of significant assets should be done in a cold wallet.

A hot wallet app may be particularly suitable for you if you're an active user who regularly trades tokens and coins or wants to make quick payments. However, if maximum security and long-term storage are your priorities, you may also want to consider a cold wallet.

How secure are hot wallets?

The security of a hot wallet depends on the protection measures used. The permanent internet connection can increase the attack surface for cyber threats – including malware, phishing and targeted hacks. Especially dangerous are malware, keyloggers and trojans that can read private keys. Phishing attacks are also a risk, where scammers attempt to obtain your seed phrase or login credentials via fake websites or wallet apps. If you're using a custodial hot wallet, the security of your assets depends on the platform. If it's hacked or becomes insolvent, your access to cryptocurrencies may be lost. To enhance the security of your hot wallet, follow these best practices:

• Enable two-factor authentication: an extra security code makes unauthorised access much more difficult.

• Use a strong, unique password: avoid simple or reused passwords and use a password manager to store credentials securely.

• Store your seed phrase offline: write it down and keep it somewhere safe – never digitally or in the cloud.

• Keep software updated: always update your wallet software and operating system to close security gaps.

• Only use official wallet providers: download your digital wallet only from trusted sources and check digital signatures.

• Be cautious with links and emails: don’t open suspicious links or ever share your private keys or seed phrase.

• Keep only small amounts in the hot wallet: for larger amounts, a cold wallet is more secure.

Which hot wallet is the best?

The best hot wallet app for you depends on your individual needs. Whether you want to use crypto for everyday purposes, trade tokens and coins, or simply have quick access to your funds, there are different criteria a hot wallet should meet. When choosing your hot wallet, consider the following aspects:

• Security: does the wallet offer strong encryption, two-factor authentication and secure private key storage?

• User-friendliness: is the hot wallet app or software easy to use and optimised for your device?

• Cryptocurrency compatibility: does the wallet support multiple tokens and coins across different blockchains (multi-currency support)?

• Transaction fees: are there extra fees for sending and receiving crypto, or can you adjust them flexibly?

• Security features: are there special security features like multi-signature, backup options or automatic transaction verification?

• Integration with exchanges and DeFi apps: can the hot wallet be linked with exchanges, DeFi apps or other platforms?

• Custodial or non-custodial: do you want full control over your private keys, or prefer a custodial wallet for ease of use?

Hot wallets compared

Not all hot wallets are the same. The best hot wallet app for you depends on how you want to manage your cryptocurrencies. Think about which features and security measures are most important before choosing a hot wallet. Depending on device, security level and application, there are different pros and cons:

Advantages of different hot wallets

• Mobile wallets: convenient on the go, easy to use, often integrated with DeFi and dApps

• Desktop wallets: more features than mobile wallets, greater security through locally stored keys

• Web wallets: easy access via browser, direct connection to crypto exchanges

Disadvantages of different hot wallets

• Mobile wallets: risk of device loss, vulnerable to smartphone malware

• Desktop wallets: risk from viruses or hacks, limited mobility

• Web wallets: higher phishing risk, keys often stored server-side (custodial)

Who is a hot wallet suitable for?

Hot wallets are ideal for anyone actively using cryptocurrencies and needing quick access to their digital assets. They’re especially suitable for:

• Beginners: thanks to their ease of use and intuitive interface, many hot wallet apps are perfect for newcomers who want to send, receive or swap coins and tokens without technical knowledge.

• Everyday users: those who regularly pay with crypto, trade or switch between wallets and exchanges benefit from quick access, direct blockchain connection and features like QR code scanning and mobile availability.

• DeFi and NFT enthusiasts: hot wallets can often be directly connected to DeFi protocols, DEXs or NFT marketplaces like OpenSea, enabling staking, lending tokens or trading NFTs straight from the wallet.

Differences between hot and cold wallets

The choice between a hot wallet and a cold wallet has a major impact on crypto security. Hot wallets are ready for use at any time and enable uncomplicated transactions. Cold wallets, on the other hand, remain deliberately offline and protect your holdings from digital attacks.

A hot wallet is suitable for everyday use, as it enables simple transactions and integration with exchanges and DeFi apps. However, it is more vulnerable to hacks, phishing attacks and malware because the private keys are stored digitally.

A cold wallet, by contrast, is not connected to the internet and is therefore significantly more secure against cyberattacks. It is particularly suitable for the long-term storage of large assets. As the user always retains control over the private keys here, this method is referred to as non-custodial. The downside is that cold wallets are less convenient, as a connection must first be established for transactions.

Many users combine both wallet types: a hot wallet for daily use and a cold wallet for larger assets. This way, flexibility and security can be combined optimally.

Frequently asked questions about hot wallets

There are many uncertainties when it comes to hot wallets. How secure is a hot wallet really? What risks are there and what steps can you take to protect your funds? In the following sections, you’ll find answers to the most common questions about using a digital wallet for cryptocurrencies.

How are private keys stored in hot wallets?

For a hot wallet to function, the private keys must be stored on an internet-connected device. They enable access to cryptocurrencies and are used to sign transactions before they are sent to the blockchain. Depending on the type of hot wallet, the private keys are either managed by the user (non-custodial) or stored on the servers of a provider (custodial).

What do hot wallets cost?

Most hot wallets are free. Users can download a hot wallet app or desktop wallet without any fees and use it directly to manage cryptocurrencies.

However, there may be indirect costs when using a hot wallet. Some custodial wallets, especially those integrated into exchanges, charge fees for transactions, withdrawals or currency exchanges. In non-custodial hot wallets, such costs do not apply, but network fees (transaction fees) are still incurred when a transaction is executed on the blockchain. These fees vary depending on network load and the blockchain protocol.

Are hot wallets anonymous?

Hot wallets are not automatically anonymous, as many providers must comply with legal requirements for customer identification (KYC – Know Your Customer). In particular, custodial hot wallets integrated into crypto exchanges require user verification to meet legal obligations. This involves providing personal details such as name, address or ID documents.

However, there are non-custodial hot wallets that do not require identity verification. They allow anonymous management of cryptocurrencies, as long as there is no connection to a regulated platform. Nevertheless, the transparency of the blockchain remains a factor: although transactions do not contain real names, they can be traced using the wallet address.

How do you create a hot wallet?

Setting up a hot wallet is straightforward and takes only a few minutes. Depending on the type of hot wallet – whether a mobile wallet, desktop wallet or web wallet – the steps are similar:

1. Choose a wallet provider: decide on a trusted hot wallet that supports your desired cryptocurrencies and check for security features such as encryption, two-factor authentication and seed phrase backup.

2. Install or set up the hot wallet: download the wallet app on your smartphone, install the software on your computer or set up a web wallet directly via your browser.

3. Write down and securely store the seed phrase: during setup, a seed phrase is generated, which is used to restore the wallet and should be stored offline.

4. Enable security measures: set a strong password and enable 2FA, if available, to further protect access to the digital wallet.

5. Make your first deposit: after setup, you can receive cryptocurrencies by using your wallet address, which acts as the recipient for transactions on the blockchain.

What risks are associated with hot wallets?

Using a hot wallet brings several risks, primarily due to the constant internet connection. These include:

• Security risks: as hot wallets are online, they are susceptible to hacks, phishing attacks and malware.

• Loss due to technical errors: technical issues with the wallet software, operating system or device can lead to loss of access to your cryptocurrencies, with recovery often impossible without a secure seed phrase backup.

• Risk with custodial wallets: if you're using a custodial hot wallet, your private keys are not under your control, so a hack or the provider’s insolvency could restrict access to your assets and funds.

• Device loss or theft: if your smartphone or laptop is stolen and your digital wallet isn’t adequately protected, unauthorised individuals could access your tokens and coins.

• Human error: many losses occur due to carelessness – for example, saving the seed phrase on insecure devices or clicking suspicious links that lead to phishing attacks.

These risks can be minimised through appropriate security measures, such as two-factor authentication, strong passwords and secure storage of the seed phrase.

More topics related to cryptocurrencies

Want to deepen your knowledge about cryptocurrencies? Then take a look at our detailed articles in the Bitpanda Academy to gain deeper insights into the world of digital currencies.

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• Storing cryptocurrencies securely

• How do I get started with cryptocurrency trading?