What are hot wallets and cold storage?
In order to spend bitcoins, you need access to both a public and private key. The public key is your address, where you can recieve bitcoin, and the private key is something like a password that allows you to spend the bitcoins. The practice of storing bitcoin offline, not on the web server or on any computer, is known as keeping them in cold storage. This is exactly what it sounds like—printing your private keys and storing them in a physical wallet, much as you would do with cash.It is done in the interest of safety, so that if a malicious hacker gains access to your account, they wouldn’t be able to run off with all your bitcoins. There are various ways to keep your funds in cold storage, including paper wallets. It’s a wise idea to keep the majority of your bitcoin in cold storage, which is why (most!) Bitcoin exchanges also operate this way. The website (exchange)will hold a certain number of bitcoin in hot storage, in an online wallet, so that it can be withdrawn instantly by people who hold accounts with that exchange. The majority of the reserve will be kept offline in cold storage. Bitcoin exchanges keep all funds, including the amount in cold storage, on hand and do not loan funds out at any time.