Hotlink protection prevents other websites from directly linking to files and pictures on your website. Other sites will only be able to link to file types that you don't specify. Here is an example of hot linking. Let's say a website visitor likes an image on your website and wants that image on his site. If this visitor uses the full URL of your image on his site, then the image is downloading from your site every time someone looks at the website visitor's site. This means he is using your bandwidth for the image. When you enable Hot Link Protection, then the website visitor cannot steal your bandwidth anymore.
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