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Hot Wallet

A hot wallet is a type of cryptocurrency wallet that is continuously connected to the internet. It can be in the form of web-based services, mobile, or desktop applications. Hot wallets are primarily designed for frequent use, facilitating the ability to quickly access and manage digital assets for transactions or trading purposes. They store both public and private keys necessary for conducting transactions on the blockchain.

The key feature of a hot wallet is its convenience, enabling users to readily interact with their digital assets. However, this constant internet connectivity also makes hot wallets more susceptible to cyber-attacks, hacking, and other security risks compared to their offline counterparts, known as cold wallets. As such, it’s generally advised to store only a limited amount of cryptocurrency in a hot wallet, using it for daily transactions, while keeping the bulk of digital assets in more secure cold storage.

Hot wallets can be categorized as custodial or non-custodial. Custodial wallets, often provided by cryptocurrency exchanges, manage the private keys on behalf of the user, offering ease of use but less control over the assets. Non-custodial wallets give users complete control over their private keys and, subsequently, their funds. Users of non-custodial hot wallets are typically provided with a seed phrase during setup for recovery purposes. This seed phrase is critical and should be kept secure and private, as it can restore access to the wallet if the device is lost or compromised.

To enhance security, users of hot wallets are encouraged to employ practices like activating two-factor authentication, avoiding the storage of large amounts of cryptocurrencies, and being cautious of phishing attempts and suspicious links. Despite inherent risks, hot wallets remain popular due to their ease of use and accessibility, especially for those regularly transacting with cryptocurrencies.

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