A Bitcoin wallet is a medium of information storage that stores private keys. Contrary to a common misconception, a wallet does not store any Bitcoin. It just grants user access to a certain amount of BTC associated with the wallet.
There are many different ways to store user’s private keys. After all, it is just a string of numbers and letters. All the wallets can be categorized according to several parameters:
* Connectivity to the internet (hot vs cold)
* Number of different cryptocurrencies it is designed to store (single currency, multicurrency)
* Exact type of the wallet (paper, web, etc.)
Hot vs cold wallets
The first way to categorize the wallets is by their connectivity to the Internet. If the wallet is connected to the Web, it is a hot wallet. On the other hand, if the wallet is not connected to the Internet, it is a cold wallet. Each of these types has its own advantages and drawbacks.
Hot wallet is connected to the Internet.
Pros of a hot wallet:
* The funds are easy to access from anywhere.
* Funds can be sent fast, which can be useful for daytrading.
* Hot wallets are normally easy to use, with an intuitive interface.
* There is a large number of Bitcoin cold wallets. It means that any user will be able to find one that is compatible with his/her operating system of choice, such as iOS, Android, Windows, Mac OS or Linux.
Cons of a hot wallet:
* No matter how many security layers a particular hot wallet has, it will always be compromised in terms of safety. No wallet is 100% secure, but this is especially true when talking about hot wallets.
* The performance can sometimes be sluggish, because the system runs on a centralized server.
Cold wallet is not connected to the Internet.
Pros of a cold wallet:
* Such a wallet is much harder to exploit, because it cannot be accessed by hackers from the Internet.
* Cold wallets are a perfect option for investors wanting to buy crypto and hold it for a long period of time. For these people, cold wallet is an ultimate "buy and forget" option that needs no attention or maintenance.
Cons of a cold wallet:
* Cold wallets are generally more expensive than hot wallets. They always are pieces of hardware or some physical mediums of information storage, such as paper
* When dealing with altcoins, it is easier to find a hot wallet compatible with a particular coin than a cold wallet. This situation is especially likely to occur if the altcoin in question is still not too popular.
In short, hot wallets can be described as more convenient but less secure. In contrast, cold wallets can boast enhanced security but are more difficult to use.
It might be useful to have both wallet types. Cold wallet can be used for storing Bitcoin and/or altcoins and hot wallet for sending small amounts of cryptocurrency and trading. Users also should remember about the vulnerable nature of hot wallets and try to store big amounts of cryptocurrencies on cold wallets only.
Single currency vs multicurrency;
Cryptocurrency wallets, both cold and hot, can be designed to store either one particular cryptocurrency, such as Bitcoin or Ether, or a number of different coins. Usually, there aren’t any particular differences between these two wallet types. However, single currency wallets are more likely to offer some extra options related to the currency they store. For example, single currency Bitcoin wallets are more likely to offer full Lightning Network support than multicurrency ones.