Hot wallets are generally defined as web or browser wallets that are constantly connected to the Internet. This means that cryptocurrencies are always accessible and can be easily transferred. However, while this setup is convenient, it also makes hot wallets vulnerable to hacks where users lose control over their assets.
Typically, hot wallets are wallets that can be accessed through an internet browser or have a browser widget. The most prominent example is the wallet provider MetaMask. Centralized exchange (CEX) accounts also fall into the category of hot wallets. CEX accounts are convenient for storing cryptocurrencies and having them available for trading or staking. However, centralized exchanges are less secure than other types of hot wallets because users do not control the private keys to the cryptocurrencies. This means that if the exchange goes bankrupt or is hacked, users have no control over their assets.
Security risks of hot wallets
Hot wallets are less secure than cold wallets, which store private keys offline. In general, you should avoid storing large amounts on hot wallets because of the risk of being hacked or scammed. Hot wallets offer the ability to easily control coins online, with the most convenience offered by the services of centralized exchanges. Hot wallets were particularly popular in the early days of the crypto era, when secure solutions were still complex to use.
Meanwhile, web wallets and over reliance on centralized exchanges have become almost taboo, and the crypto community strongly cautions against their use. In addition to the hacks that have hit prominent exchanges in the past, access to personal accounts can be blocked. This can be due to new compliance regulations introduced by the exchange, or it can simply happen by accident. Although trading platforms or exchanges are usually considered relatively secure, as they are often backed by a reputable company, there are still risks. This has become especially true after the fall of the FTX exchange in 2022.
