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