Hot and cold wallets: which one you need, and when

The difference between a cold wallet and a hot wallet comes down to a single question: do the keys to your crypto ever touch the internet? If the answer is yes, it is hot — convenient and exposed. If it is no, it is cold — inconvenient and safe. Everything else is a shade of that one decision, and getting it right depends on how much you hold and how often you move it.

First, what a wallet actually stores

A wallet does not store coins: it stores private keys, the cryptographic proof that the coins recorded on the blockchain are yours. Whoever holds the keys holds the funds — which is why the industry motto is “not your keys, not your coins”. Every serious wallet generates a seed phrase of 12 or 24 words: the master copy of your keys. Anyone who gets hold of that phrase can empty you out from anywhere in the world.

It is worth being clear about the three models, because “owning crypto” means very different things depending on which one you use:

• Third-party custody. Your coins sit on a platform’s balance sheet. What you have is an entry in their system, not a set of keys.
• Hot self-custody. The keys are yours and they live on a connected device: your phone, your browser.
• Cold self-custody. The keys are yours and they never leave a device that connects to nothing.

Hot wallets: for moving money

• The platform where you buy. Strictly speaking it is not even your wallet: the keys are theirs. Fine for trading, a bad place to keep your savings — as FTX customers learned the hard way in 2022. If you are going to use it for that, make it at least one of the platforms authorised to operate in Spain.
• Standalone apps (the likes of MetaMask on Ethereum or Phantom on Solana): the keys are yours and they sign in seconds. They are the front door to DeFi and NFTs, and also the favourite attack surface for phishing.

Cold wallets: for keeping money

A physical device — the usual models cost between €60 and €150 — that keeps the keys on a chip which never touches the internet. To sign a transaction you have to confirm it on the device itself: a remote attacker cannot, full stop. It is the difference between carrying your money in your pocket at a railway station and keeping it in a safe.

And now the part almost nobody tells you: what it does not protect you from

This is the important bit, because it is where most people who already own a cold wallet lose their money today.

The device stops somebody stealing your keys. It does not stop you using them yourself to sign something you never meant to sign. If you connect the cold wallet to a website that asks you to approve a contract and you approve it, the device does exactly its job: it asks for confirmation, you confirm, and the transaction goes out signed and valid for ever. There is no mechanism that undoes it.

That is how most hardware wallets are emptied today: not by breaking the chip, but by getting the owner to press “confirm”. Hence three habits worth more than the device itself:

• Read what appears on the device’s screen, not what appears on the computer’s. That is the entire reason the device has a screen.
• Distrust unlimited approvals. Permission to spend “all” of your balance of a token is still alive months later, long after you have forgotten the website that asked for it.
• Keep wallets separate. One for tinkering and signing things, another that connects to nothing. Compromising the first should not touch the second.

Which one you need: the practical rule

If the last row is you, we have written up the criteria for choosing a hardware wallet — secure element, open or closed firmware, and whether the seed can ever leave the device — and a comparison of Ledger and Trezor with the figures side by side.

The seed phrase is the asset, not the device

It takes a while to sink in: the device is replaceable and the phrase is not. If it breaks or you lose it, you buy another one, type in the twelve words and your coins are back. If you lose the phrase and the device at the same time, there is no customer service department anywhere in the world that can do a thing about it.

• On paper or on metal, never digitally. Metal exists because paper gets wet and burns, and both of those things happen.
• Two copies, in two different physical places. One copy at home protects you against forgetfulness and does nothing against a fire.
• The extra passphrase — the “25th word” that some devices offer — adds a real layer of protection, and a new way of losing everything if you forget it. Use it knowing that.
• Think about whoever comes after you. If something happens to you tomorrow, would anybody in your family even know this exists? A sealed envelope at the home of someone you trust solves more cases than any sophisticated arrangement.

The mistakes that empty wallets

• A photo or a digital note of the seed. A seed phrase in your phone’s gallery, in your email or in a synced note is a safe with the key left in the lock.
• Typing it into a website. No legitimate organisation — none — will ever ask you for your seed phrase. Whoever asks is robbing you.
• Buying the device second-hand or outside the official channel: it can arrive already tampered with, and it starts up showing you a seed that somebody else already knows.
• Not doing a small test before moving large amounts to a new address.
• Approving without reading. Said above already, and it is the one that takes the most money today.

Two tax points that should put your mind at rest

Plenty of people put off moving to self-custody for fear of complicating their lives with the Agencia Tributaria, Spain’s tax authority. The two usual doubts have good answers:

• Moving your coins to your own wallet is not selling them. Nothing is transferred, so there is no gain or loss to declare. What changes is who holds them, not whose they are. What is taxed is selling, or swapping one coin for another, and that is explained in the tax guide.
• What you hold in self-custody does not go on Form 721. That return reports crypto held abroad by a third party on your behalf; if the keys are yours, there is no third party. A device with a million euros of bitcoin on it is not declared there. You can check your own case with the Form 721 checker.

The rest of the hygiene — two-factor authentication, passwords, reviewing contract approvals — is in the security guide. And if you have not bought anything yet, the whole process is in how to buy cryptocurrency in Spain.

This content is for information only and does not constitute financial or tax advice.