Hot wallets are wallets that are on devices connected to the Internet, such as desktop clients, mobile apps and third-party managed wallets on exchanges. Due to being connected to the Internet, these wallets are far more susceptible to theft, potentially exposed to hackers or ransomware. Hot wallets can be thought of and used in the same way as traditional day-to-day wallets, or debit cards. While you wouldn’t store a large amount of money in them, as they aren’t that secure, they are a quick way to access funds or buy and sell different cryptocurrencies.
Online Cloud Wallets, desktop/mobile wallets and multi-signature wallets are the most popular hot wallets available. Cloud based wallets are easily the most user-friendly, and is simply a matter of creating your own account on an exchange service. The downside, however, is that your private key will be stored on a third party server, making it very exposed to hackers. Many online exchanges are now asking potential users to undergo thorough identity checks when registering for an account, which might deter those wishing to preserve anonymity. Online wallets are great for storing smaller amounts of crypto, especially for the purposes of exchange. Do not, under any circumstances, store a significant proportion of your crypto wealth in this form of hot wallet.
Another very popular form of wallet is a desktop or mobile wallet. Although these wallets are still connected to the internet, they are significantly safer than using online cloud based wallets. These wallets are downloaded and installed on a single device, such as your smartphone. These wallets are safer because they are only accessible from the single device where they were downloaded, however, this also means they can be quite inconvenient and risk being damaged or lost. On top of this, hackers can quite easily plant Trojans or other malicious content in your system, to phish for personal details.
Muti-signature wallets have also become more popular since the first one was released by BitGo in 2013. Multi-sig is a technology used to bolster bitcoin security. Multi-signature technology addresses require one or more other users to sign off a transaction before it can be entered on the blockchain. This is intended to make the process inherently safer and more democratic. When creating new addresses, users agree upon the required number of signatures required to authorize a transaction. Even though mulit- sig wallets are much safer, they are still hot wallets and prone to attacks over the internet. In fact, some large exchanges have already been attacked that have utilised mulit-signature technology.