Why it matters
Hot wallets trade security for convenience. They enable instant transactions without the ceremony of air-gapped signing. But internet connectivity means vulnerability to hacking, malware, and phishing. Responsible custody treats hot wallets as operational floats, not primary storage.
How it works
A hot wallet stores private keys on a device connected to the internet, such as a phone app, desktop software, or exchange account. Transactions can be initiated immediately. Security depends on the device's security, which is inherently limited. Institutions typically auto-replenish hot wallets from cold storage, maintaining minimum operational balances.
Example
A custody provider maintains 2% of client holdings in hot wallets to process withdrawals within minutes. The remaining 98% stays in cold storage. When hot wallet balances drop below threshold, a scheduled process moves funds from cold storage through defined approval workflows.
