Software or hardware that stores the private keys granting control over cryptocurrency - hot wallets are internet-connected; cold wallets are kept offline for maximum security.
Owning cryptocurrency means controlling the private key that authorises spending from a blockchain address. A wallet doesn't store coins - it stores the cryptographic keys that prove ownership. This distinction matters because coins never leave the blockchain; only the authorisation moves.
Hot wallets - browser extensions (MetaMask), mobile apps, or exchange custodial accounts - are connected to the internet. They offer convenience for active traders and DeFi interactions but expose private keys to remote attacks, phishing, and exchange insolvency risk. The collapse of FTX in 2022 wiped out billions in user funds held in exchange hot wallets, demonstrating custodial risk.
Cold wallets - hardware devices (Ledger, Trezor) and paper wallets - store keys air-gapped from the internet. Transactions are signed offline and broadcast separately, meaning a hacker who compromises your internet connection cannot access the keys. Cold storage is the standard for long-term holdings or amounts that exceed comfortable exchange exposure.
For active traders, the practical balance is to keep only trading capital on exchanges and hold long-term positions in hardware wallets. The phrase 'not your keys, not your coins' captures the risk of delegating custody to a third party.
Worked Example
An investor holds 2 ETH long-term and 0.3 ETH for active DeFi trading. They store the 2 ETH on a Ledger hardware wallet (cold storage) and the 0.3 ETH in a MetaMask hot wallet for gas payments and protocol interactions. If the exchange they use is hacked, only the actively traded portion is at risk.
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