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An advisor’s guide to: Hot vs. cold wallets

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Any financial advisor can understand and appreciate the importance of securing client assets; this is why they use custodians such as Fidelity or Charles Schwab to safeguard funds. When it comes to crypto, the topic of security is complex. Being well-informed allows advisors venturing into the space to do so with confidence, and understanding crypto storage methods is an essential part of understanding the asset class as a whole. 

Particularly in the wake of the FTX fallout, clients are looking for insight surrounding the custody of assets. Two forms of crypto storage are available: hot wallets and cold wallets. Advisors must know the pros and cons of each wallet type to serve clients best and determine the most suitable option.

What is a hot wallet?

Simply put, a hot wallet is any crypto wallet (think: crypto bank account) that can be accessed online, such as those a client might have at Coinbase or Gemini. Hot wallets are the most common type of wallet and allow investors to easily send, receive, and store cryptocurrencies. They are web-based, making user access easy and attainable through a computer or mobile device. These wallets are mainly accessible at crypto exchanges and used by the majority of retail crypto owners. The downside of hot wallets is that, since they are ‘online,’ meaning still connected to the internet, they are more vulnerable to hackers. Hot wallets are slightly less secure than their ‘offline’ counterparts, so advisors should ensure they have the right wallet and reasonable security measures in place when recommending or using one on behalf of their clients.

What is a cold wallet?

Cold wallets usually take the form of a USB drive with additional security measures and provide investors with a physical medium for offline storage. Cryptocurrencies are only brought back online to make transactions. Clients sometimes prefere this option when they want to buy and hold onto their assets (known as HODLing in the crypto community); in other words, looking to own cryptocurrencies for an extended period of time or for legacy holding.

You may also hear the term hardware wallet used by clients or industry pundits. This refers to the USB stick storing the wallet’s private keys (read more about public vs. private keys here). For your clients who want self-custody of their crypto, this is a viable option. 

What’s best for my clients?

Like all things, this comes down to profiling a client and knowing their goals. A client that likes to trade may value an easily accessible, but often less secure, hot wallet option, such as what they can get at Coinbase. Another client may be a long-term holder, valuing the security and peace of mind of cold wallet/hardware wallet options. No matter which wallet your client chooses or whether they directly invest in cryptoassets at all, the Onramp Academy staff is available to educate you on how best to advise your clients on their options. 

Have more crypto questions? 

When it comes to answering your clients’ questions about crypto, we’ve got your back.