Hot Vs. Cold Crypto Wallets

I read about the dangers of custodial accounts.  At that point, I realized all of my cryptocurrency was actually locked up in custodial accounts. By implication, it wasn’t mine because I didn’t have the private keys.

How do you use in practice bitcoin both as a long-term store of value, and as something you transact with, between all the available options: paper wallets, custodial accounts, and other kinds of online wallets? And how would you recommend someone go about using it?

Since 2013, the maximum amount of time I have left currency, crypto or fiat, on an exchange, is fifteen minutes. I transact weekly, sometimes more often. I don’t day trade, that’s not my purpose.

I use it as a working currency. I get paid in bitcoin and in ether; I use them to pay my bills, to live. I live in the Bitcoin community, so I have to transact. I often have to exchange because I can’t always buy the things I want with cryptocurrencies.

How do I use exchanges? In and out. In, three confirmations, sell, ACH or bank transfer out. I don’t even leave fiat on exchanges. I don’t trust them to hold money. I don’t trust banks to hold money, so how am I going to trust a two-year-old startup that has six employees? Are you kidding me?

I don’t leave money on exchanges. That’s difficult to do if you’re day trading. If you day trade in this environment with these assets of great volatility, you’re a brave person.

How do I use it? My holdings are in tiers. Think of it as: hot, warm, cold, and deep freeze. On the cold side, I hold a small amount honestly, because this hasn’t been a most profitable idea: jumping into an untested technology and not getting paid for a couple of years. But anyway, I have a small amount of bitcoin in deep freeze storage, meaning they’re held on keys that are not instantiated on any electronic device. They exist in such a way that they’re encrypted with a memorized passphrase, which I have also communicated to people who might become my heirs, so the bitcoin won’t get lost with me. That’s cold storage.

Then I have an intermediate tier, which is on several hardware wallets; pin-protected, passphrase-protected, backed up with mnemonic phrases.

Then I have a warm tier with a small amount of operating cash that I use for my businesses, to pay contractors and subcontractors, etc. Those are in multi-signature addresses, where either there are other people who are required to consent, or multi-factor wallets in which I’m the only party, but I have several devices that need to sign independently in order to exercise a transaction.

Finally, I have my hot wallet, which is in my back pocket. At the moment, a Mycelium mobile wallet.

I keep a couple hundred dollars in there, mostly for the purpose of giving everybody a fraction of a bitcoin, as if I’m the Oprah of cryptocurrencies.

So to answer your question, I have tiers. I never keep on my hot wallet more than I’m comfortable keeping in cash, in my physical wallet, as fiat. I often have to move things around in order to manage it.

So far, I have only lost bitcoin through my own stupidity. For example, misplacing a backup and then trashing my phone. I’ve lost small amounts, less than $100. I’ve never been hacked. Fingers crossed.

I don’t assume I won’t be hacked, I assume I might. But as long as it’s on the warm side of my wallets, I can take that risk.

About the author

Sunny King

I invented the proof of work. I created PeerCoin, PrimeCoin, and I am co-creator of Virtual Economy Era (VEE) coin.

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