Over the last five years, we have witnessed an exponential rise in the adoption of digital wallets. According to Global Payment Systems (GSP), digital wallets accounted for nearly 50% of global e-commerce transactions – with this number expected to rise over the coming years. Their increase in popularity makes sense to the majority of people, but some wonder how they work and how safe they are.

Each type of digital wallet has its benefits & limitations. It is important to know that there are two types of digital wallets: hot wallets & cold wallets. This article will help you develop an understanding of how they work and which one is most suitable for you. 

First we will present the advantages and disadvantages for each wallet type and then, we offer you the best practices on wallet safety so that you may maximize protection over your assets. 

Types of Wallets

Hot Wallet (Software Wallet) – A hot wallet is connected to the Internet and allows you to store, send and receive specific tokens or assets. The wallet is linked with public and private keys that facilitate transactions and ensure a degree of security.

Advantage: 

• Simple user-interface and easiest to use to purchase online.

Disadvantage: 

• More susceptible to hacks and theft as they are connected to and stored on the Internet.

Cold Wallet (Hardware Wallet) – A digital wallet that stores crypto offline, protecting your assets from unwanted access and other threats. You can only access it if you have the physical wallet (looks like a USB) or your recovery/seed phrase.

Advantage: 

• Very secure because it is stored offline. Only you can access it with the necessary codes. 

Disadvantage: 

• Not the most suitable for day-to-day use.
• If you lose your wallet password and seed phrase you will lose all your assets stored within it.

Best Practices

There are many best practices to follow when dealing with digital wallets; however, we will go through five of the most important ones:

1. Keep your private keys & seed phrases safe.

Never give these away to anyone. No company, organization, discord group, or individual will ever need these. If possible, you should store these keys/passwords offline on a piece of paper or something similar. If you wish, you may want to keep these passwords stored in a safe or at a bank deposit.  

2. Add two-factor authentication or multi-factor authentication

The more layers of security you have for your wallet, the better. An additional authentication layer will make it more difficult for people to access your account as they would also need your phone and/or any other device you have connected to the authentication process. 

3. Avoid using public Wi-Fis 

Public Wi-Fi is very dangerous. You should never use it to access your wallet. Hackers can access your personal information by setting up a copy of the public network or positioning themselves between your connection points. Using a mobile network is more secure than public Wi-Fi.

4. Keep savings in a Cold Wallet

Having a hardware wallet is the best way to store your funds safely and minimize the risk of being hacked. They are not connected to the Internet and require a seed phrase and/or a password to access funds (store this seed phrase offline).

5. Having a password manager 

A password manager is ideal to create and store all passwords for your Hot Wallets (Cold wallet passwords must be stored on paper and offline). The password manager will allow you to generate strong, unique passwords for each digital wallet or a financial account you own. You should not use old and generic passwords, which contain personal information.