What is a Hot Wallet?
A Bitcoin wallet that's connected to the internet. Hot wallets are convenient for daily transactions but less secure than cold storage because they're vulnerable to online attacks.
Why It Matters
Hot wallets are the practical choice for spending bitcoin regularly. They make transactions quick and easy, without needing to retrieve offline keys. If you're a merchant accepting bitcoin or a trader executing frequent transactions, a hot wallet is necessary. However, hot wallets inherently accept more security risk. Your private keys exist on an internet-connected device, making them vulnerable to malware, phishing, and hacking. For this reason, best practice is to keep only the amount of bitcoin in a hot wallet that you're comfortable losing, and store larger amounts in cold storage. The security tradeoff is explicit: convenience versus security. For most people, having both a hot wallet for spending and cold storage for savings provides good balance.
How It Works
A hot wallet is simply software that stores your private keys on an internet-connected device—a phone, computer, or web server. Examples include mobile wallets (BlueWallet, Lnd), desktop wallets (Electrum), or web wallets (from an exchange). The wallet software can quickly sign transactions and broadcast them to the network. The vulnerability comes from the device being connected to the internet, where malware could potentially access your private keys. Even with good security practices, you're exposed to device compromise. To reduce this risk, many people use a hot wallet with only a modest amount of bitcoin and keep most funds in hardware wallets or cold storage.