Continuity was designed to make your iPhone, iPad, and Mac work more easily, quickly, and seamlessly together. Instant Hotspot does just that by making personal tethering even more personal. It's meant for just you, so it requires you to be logged into iCloud on all your devices, and be within Bluetooth Low Energy (BT LE) range. But once you are, sharing your iPhone or cellular iPad's LTE connection is not only simpler and faster than ever, but more secure.
When you log into an iPhone, iPad, or Mac with your Apple ID, iCloud creates and stores a destination signaling identifier (DSID) and rotates it periodically. Any time you go to Wi-Fi settings to look for a network to join, the device begins broadcasting a personal hotspot identifier based on the DSID.
Your other devices, as long as they're logged into the same Apple ID, and are within Wi-Fi range, will respond to that broadcast and, if they have cellular networking enabled, will respond that they're available.
Using BT LE means the devices have to be close by, and using your Apple ID means they have to be your devices, or at least devices you have possession of and are logged into.
So, if you go to Wi-Fi in your Mac menu bar, and your iPhone is close by, it will come back as available.
Making the spot hot
Devices available for Instant Hotspot are listed separately from both standard Wi-Fi access points and traditional Wi-Fi tethering options. They get their own Personal Hotspot sub-menu under available options.
Choose a Personal Hotspot, and your device will send a request to the cellular device to turn on Wi-Fi tethering. The communications is secured using standard Bluetooth encryption and the transmission is encrypted using a method similar to iMessage.
The cellular device then responds with connection information and the hotpot link is established. There's no SSID or password required because both devices are logged into your Apple ID and that serves as authentication and authorization.
At that point your Mac or Wi-Fi iPad will be connected to your iPhone or cellular iPad, and you'll be up and running on the internet.
The bottom line
Instant hotspot is still a Wi-Fi tether, and your internet activity will be transacted using the same level of security, and with the same expectation of privacy as any other wireless internet connection. Since you're not sharing it with everyone else on the coffee shop network, though, the risks of snooping or sniffing your activity are much lower.
That's not unique to instant hotspot, of course. What's unique is achieving that level of security and privacy so quickly and easily.
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