What is a cryptocurrency wallet? Cold wallet v.s. Hot wallet

What is a cryptocurrency wallet?

Wallets don't store "money," they only store "keys."

A cryptocurrency wallet is a tool used to manage private and public keys. In the traditional financial system, people are used to storing their assets in bank accounts, where the numbers displayed represent how much money they own. However, in the world of cryptocurrency, this logic needs to be rethought. A cryptocurrency wallet doesn't actually "store" coins directly; instead, it's used to manage and control access to assets via their private keys.

If it only stores "keys," where did the money go?

If a cryptocurrency wallet doesn't store "coins," then the question arises: where exactly do cryptocurrencies go?

The answer is: cryptocurrencies actually exist on the blockchain, not in the wallet.

The blockchain is like a public and unchangeable ledger that records how much asset each cryptocurrency wallet's "address" owns. These addresses are calculated based on public keys, so the assets are "tied to the address" rather than being placed in any physical device. In other words, a cryptocurrency wallet is merely a place to keep your private keys, not a container for storing assets.

Understanding Public and Private Keys

Public and private keys are generated using an asymmetric cryptography mathematical method.

Public Key: This is your cryptocurrency wallet's receiving address, similar to your bank account number for receiving funds. You can safely share it with others to receive cryptocurrency.
Private Key: This grants control over your cryptocurrency wallet, much like your online banking login password and transaction password combined. It's the sole proof of ownership for moving your assets and must never be disclosed. Therefore, securely backing up your cryptocurrency wallet's private key is absolutely crucial.

The main differences between cold wallets and hot wallets

What is a cold wallet?

A cold wallet is a wallet that stores private keys completely offline. Its design philosophy is to "never let the private key touch the internet" to reduce the risk of theft.

Common forms include:
1. Paper Wallet: Printing out your private key or seed phrase and storing it securely.
2. Hardware Wallet: Devices like Ledger and Trezor, which resemble USB drives.
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Advantages:
• Extremely high security, virtually immune to remote hacking attacks.
• Suitable for storing large amounts of assets for long-term safekeeping.
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Disadvantages:
• Relatively inconvenient to operate, requiring an additional device.
• If the device is lost, damaged, or the seed phrase is lost, assets cannot be recovered.
• Not suitable for frequent trading.

What is hot wallet?

A hot wallet refers to a wallet connected to the internet. Although hot wallets share the common characteristics of being connected to the internet and enabling instant transactions, they can be divided into the following categories based on their usage scenarios and private key control:

Exchange Wallets: You'll get a wallet address after opening an account on an exchange, such as ZONE Wallet, Binance, or Coinbase.
Decentralized Application (DApp) Wallets: Their key feature is that users hold their own private keys. The wallet is merely an operating tool and doesn't involve asset custody, for example, MetaMask, which is a cryptocurrency wallet for the Ethereum blockchain.
Mobile Application Wallets: These include TokenPocket, Bitget, and others, emphasizing ease of use for daily payments or cross-chain transfers.
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Advantages:
• Convenient to use and highly instantaneous.
• Suitable for daily transfers and transactions.
• Easy to integrate with decentralized applications (DApps).
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Disadvantages:
• Exposed to the internet, making them easy targets for hacker attacks.
• If an exchange, phone, or computer is hacked, private keys may be stolen.
How to Choose a Secure Hot Wallet?
When choosing a secure hot wallet, you need to strike a balance between convenience and security. Hot wallets are cryptocurrency wallets connected to the internet, so even though they're easy to operate, they're more susceptible to attacks than cold wallets.

Here are important considerations when selecting a secure hot wallet:

Developer/Exchange Reputation: These teams usually possess professional development capabilities and risk control mechanisms, along with a good market reputation.
1.  Legality and Compliance: Legal platforms are more likely to cooperate with regulatory
2. bodies, increasing transparency and user rights protection.
3. Security Protection Features: Ensure features are in place to reduce the risk of hacking when users transfer assets or connect to DApps.
4. Regular Updates and Maintenance: Using a wallet with an active community and a history of version updates can effectively prevent known attack methods from compromising your assets.

Is a cryptocurrency wallet secure?

In summary, different types of cryptocurrency wallets reflect users' varying priorities in asset management.

The core design of cold wallets emphasizes the safeguarding of personal private keys and the absolute security of assets. They minimize online risks like hacking attacks through a completely offline mechanism, ensuring users have sole control over their private keys.

Hot wallets prioritize the fluidity of instant transactions and operational convenience. They remain constantly online, allowing for quick transfers, payments, or interactions with decentralized applications, meeting the needs of daily or frequent transactions.

Consequently, the security of hot wallets can vary depending on the service provider. Especially when wallets are hosted on various exchanges, their security level and whether private keys are self-held by the user will depend on that platform's security architecture and policies. While enjoying the convenience, users also need to consider potential platform risks.

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About ZONE Wallet

ZONE Wallet is a blockchain investment gateway designed for Taiwanese users.
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Investing in virtual assets carries risks related to price volatility and liquidity. The above content is for reference only and does not constitute any financial advice. Please carefully assess your financial situation before investing and be cautious of potential fraud.