Cold wallets vs. hot wallets for Small and Medium Enterprises (SMEs)
Regardless of your organization's size, it’s important to understand the crypto storage options available to you. In today’s post, we explore the pros and cons of cold wallets vs. hot wallets for SMEs.
Why is crypto asset management important for businesses?
Cryptocurrency has now been around for more than a decade and, with each passing day, more businesses are investing and trading in crypto assets—NFTs, metaverse applications, Defi and tokens to name a few.
Due to rapid growth in the crypto asset space, the crypto asset management market size is projected to grow 24.6% annually (CAGR) over the next six years and go from .52 Billion to $2.4 Billion by 2028.
While individuals can be fairly flexible in how they manage crypto assets, SMEs, larger companies and asset managers must be more accountable. Business holdings must be accounted for and secured appropriately to manage risk and ensure compliance with government regulations and organizations’ own policies and controls.
What is a Cold Wallet?
Retail investors often use cold wallets (otherwise known as hardware wallets) to store their crypto assets.
A cold wallet is a hardware device that stores private keys (your password that gives your ownership over your crypto) and protects them from being exposed to hackers. A thief would have to have the device, know pins and passwords to drain your funds.
Cold wallets are considered cold because they are like lockboxes for your crypto. They are extremely difficult, if not impossible, to hack because of their design and construction.
Keeping your keys from being exposed on a device lessens the chance of malicious actors being able to exploit your hardware device. And because of this, many in the crypto industry consider cold wallets the safest and most secure way to store Bitcoin and other digital assets.
Why use a cold wallet?
One of the most significant benefits of cold wallets is that they are built to store your key phrases safely even when you connect to the Internet.
The password/key phrase is stored on the device and when you make a transaction you 'sign' the transaction with your key phrase in order to approve it without the keys ever being exposed to the Internet.
This a quite convenient for people who want to keep their keys safe and reasonably inexpensive for individuals. However, cold wallets are much more complicated and expensive for SMEs, large companies or asset managers who manage other people’s and companies’ investments.
How do enterprises and asset managers use cold wallets?
Enterprises (from SMEs to large corporations) and asset managers often use third-party custody providers who charge fees to safeguard their crypto assets using secure facilities and premium hardware wallets to store crypto and key phrases. These facilities and wallets are covered by insurance whereas a typical cold wallet you buy off the internet is not.
The downside of cold wallets for enterprises and asset managers
If you use a third-party custodian service to store your crypto assets, transacting can be slow because you have to gain access from a third-party provider. So, if your business needs ready access to crypto assets, the third-party cold wallet option is largely unsustainable.
Not every business needs US Bank or Swiss Crypto Vault to secure their assets though, so using a device provided by the likes of Ledger or Trezor may be enough if you are an owner operator with no need to transact crypto assets regularly.
What is a hot wallet?
Hot wallets are crypto wallets that are always connected to the Internet. They are the least secure when it comes to malicious actors, software or hacks. However, businesses can pay for SaaS products that offer higher security levels and optional insurance coverage.
New hot wallet options that use MPC and Multisig technology (such as our own product, Unido EP) provide both liquidity and the security of a cold wallet option. While larger players in the MPC and Multisig space are still fairly expensive for SMEs, newer players are joining the market all the time.
Why do enterprises use hot wallets?
Hot wallets enable businesses to easily make regular transactions such as deploying funds to invest in Defi projects and NFTs, paying employees and contractors and paying for business expenses. They are also vastly cheaper and less complicated than third-party cold wallets.
How MPC is changing the game for crypto asset custody
Given one of the biggest issues for hot wallets is that they are always connected to the Internet, free and basic hot wallets expose your keys 24/7 and are not appropriate for SMEs. However, the rise of Multi-party Computation (MPC) cryptography is changing the game for enterprises that want regular access to digital assets as well as enhanced security.
MPC essentially works by breaking up your key phrase into shards or fragments that are cryptographically secured and spread among various wallet 'signers.'
What this means is, you can keep your keys online in a hot wallet, but enjoy the level of security you’d have with a cold wallet using MPC technology.
Unido EP uses a proprietary, patent-pending MPC algorithm at the blockchain level that breaks up keys and stores them with different key signers. This is powerful because it allows your funds to be deployable 24/7 and protected from hackers.
Unido EP wallet security is simple and inexpensive compared to other options on the market. The key to Unido EP wallet security is in having multiple wallet signatories.
The signatories do not necessarily need to be other people. You could have more than one person as a signatory or you could have more than one device as a signatory if you are a sole proprietor. Wallet transactions only need a majority to vote for a transaction to go ahead, so, ideally, you need at least 3 wallet signatories to properly secure your crypto assets on Unido EP.
Choosing the best crypto custody option for your SME
When weighing which crypto custody solution works for your SME, it’s important to determine whether or not you plan to simply put crypto assets away for a long time or whether you want to use them for regular business transactions and Defi investment.
If you are a fund or asset manager looking to keep your clients' crypto safe, then cold storage using a third-party service may be your best bet. However, if you want to use crypto funds regularly (or your clients do), a hot wallet SaaS platform like Unido EP makes the most sense.
About Unido EP
Unido EP takes the complexity and expense out of digital asset management for organizations with sophisticated corporate governance needs. Our patented, end-to-end platform seamlessly automates corporate governance and self-custody of crypto assets so you can securely store, manage and invest in crypto without massive overheads.
Unido EP comes with a web-based dashboard and a decentralized application (dApp) featuring a robust set of DeFi tools, easy-to-set-up authority regimes and iron-clad security. All of this is inside a complete digital asset management platform, built with financial institutions in mind but tailor-made for any organization or individual’s needs.