The crypto market expands as more people and organizations adopt the relatively new digital assets in the financial realm. The crypto use cases continue to expand, making the niche lucrative for beginner and veteran investors. If you are considering getting into crypto, you will have to consider factors such as the type of crypto to invest in and where to get them. However, more importantly, you need to know how you will keep your crypto assets. Like any other valuable asset, you can easily lose your crypto if you do not keep them securely. That is where you need crypto wallets.
What is a Crypto Wallet?
When we hear the word wallet, we immediately think of pocket or purse accessories where we hold our cash and other documents such as IDs, debit cards, and credit cards. However, like cash, cryptocurrencies are not physical assets hence cannot be stored in a physical wallet. Instead, digital currencies are related account balances and transactions on a blockchain.
A cryptocurrency wallet is like an online bank account for your crypto assets but with few significant differences. First, cryptocurrency wallets are not regulated by government deposit schemes. Second, they only hold cryptocurrencies. Third, crypto wallets allow you to be in control of your assets all the time.
Cryptocurrency wallets are computer programs that allow users to receive, store and send digital assets. Crypto wallets do not store digital coins literally. Instead, they interact with a blockchain network of specific digital currencies. They keep track of keys used to sign cryptocurrency transactions on the respective digital ledger. The keys prove the ownership of the digital assets.
How Cryptocurrency Wallets Works?
Cryptocurrency wallets contain public wallets and private keys. The private key allows for tracking ownership, sending, and receiving cryptocurrencies.
A Public key allows you to receive digital tokens from others. Think of a PayPal address (an email address) that you share with someone who wants to transfer some dollars to your account. Public keys operate with a similar model, only that they deal with cryptocurrencies and not fiat currencies.
If the person sending digital tokens fails to enter the keys currently, the crypto tokens will not reach your wallet. Instead, they can go to another wallet with the entered keys or even pass. Sadly, you cannot reclaim the funds since cryptocurrency transactions are irreversible. In most cases, wallets allow for copy and pasting of public keys to avoid missing any digit – as the key could have many characters. For example, public keys for Bitcoin blockchain wallets may look something like this: 1FZbgi29cpjq2RheqL8eyHuJJnkLtktZc5. The keys for Ethereum blockchain wallets have even longer public keys and may look like this: 0x71T7656EC7ab09b065defB751Bh401B5f6d8976F. Some wallets also generate quick response (QR) codes that someone can scan to send the funds instead of public keys.
While each wallet may have nuances, you can use the following general guidelines to receive funds in your cryptocurrency wallet. Retrieve your public key by locating the “generate address” feature in your wallet and clicking it. Copy the alphanumeric address or the corresponding QR code and share it with the person who wants to send you cryptocurrency.
On the other hand, a private key grants you ownership of funds on a given address. In our email example, you can think of a private key as a password to your email account, which allows you to access the messages and any other document stored in the account. You cannot access cryptocurrencies in a given wallet if you do not have private keys.
When you send cryptocurrency from your cryptocurrency wallet, the software uses your private key to sign the transaction. The private key is not disclosed during the signing process. By signing the transaction, the wallet indicated to the entire network that you are authorized to transfer funds from the address you are sending from.
Receiving and Sending Cryptocurrency Using a Wallet
You need to retrieve the public keys or the QR code for your wallet and send it to the person sending you digital coins. Similarly, you need the address of the recipient wallet if you are sending crypto to another person. Locate the “send” feature in your wallet and enter the recipient’s address. Input the amount of cryptocurrency you want to send, and click “confirm.” Considers sending a small number of tokens as a test transaction before sending a large amount of cryptocurrencies.
Sending coins require fees. Miners – those who confirm transactions and aid in adding new blocks to the blockchain – earn from these fees.
Types of Cryptocurrency Wallets
Cryptocurrency wallets are under two main categories: hot wallets and cold wallets. Hot wallets operate like normal wallets that we use for day-to-day transactions. Cold wallets, on the other hand, work like a safe–storing cryptocurrency with a high level of security.
Hot wallets, also called software wallets, are digital storage connected to the internet and accessible through a computer or phone. They are the most common digital currency wallets since they are simple to set up and use. You can get a hot wallet by downloading a wallet on your mobile or desktop or creating an account on an exchange. Hot wallets are suitable for everyday cryptocurrency users – those using crypto for everyday purchases or trading on exchanges. You can easily make crypto payments with the clicks of a few buttons on your mobile or computer device.
The private keys for hot wallets are stored in the cloud to enable faster transactions. Most exchange wallets are typically hot wallets. However, many leading exchanges store a large share of their funds offline (cold storage) to boost fund security. Most web-based or mobile-based wallets do not offer such a feature.
Despite standing out for their ease of use, hot wallets have one major drawback: security.
Software wallets may be vulnerable to cyberattacks since they are connected to the internet. However, some hot wallets such as hi Wallet have strong security features to protect users’ funds.
Soft wallets fall into three categories: Desktop wallets, mobile wallets, and web wallets.
These are software you install on your desktop or laptop computer and give you complete control over your wallet. Some desktop wallets include additional functionalities such as exchange integration.
However, since a computer could be compromised, desktop wallets are relatively insecure.
Mobile wallets are quite similar to desktop wallets in functionality. However, they are compatible with smartphones or other mobile devices. Many mobile wallets facilitate quick payments through near field communication (NFC) or scanning a QR code.
Mobile wallets are compatible with operating systems such as Android and iOS. Examples of mobile wallets are hi Wallet, Bitcoin wallet, and Mycelium.
Web wallets are online services that can send, receive and store your cryptocurrency. These wallets are highly convenient since you can access them anytime, anywhere, from any device, as long as you can access the internet.
However, web wallets have the highest security risk. They are vulnerable to malware and fishing attacks. Additionally, there is a significant counterparty risk. You can log into a third-party device and lose all crypto assets.
Cold wallets are digital storage devices that sign transactions offline and disclose them online. These types of wallets are considered to be more secure since they are not connected to the internet. You will only connect them to the internet when you are making transactions.
Cold wallets are of two types: hardware wallets and paper wallets.
Hardware wallets are the most popular since they are easier to use. They also come with customer support.
A hardware wallet utilizes a physical medium, typically in the form of a USB stick, to store the private keys.
You can transfer your crypto assets from a hot wallet, such as an exchange wallet, to your wallet’s public address if you want to use cold storage. Conversely, you can send crypto from your cold wallet to a friend’s hot wallet or an exchange wallet. To connect your wallet to the internet, you need to use the respective wallet’s software and use your private keys to activate the transaction.
Paper wallets operate similar to hardware wallets, only that they do not use USB –like devices. Instead, they are just papers that contain your wallet’s private keys and public keys. Such wallets must be kept safe from theft and physical damage.
To use a paper wallet, you must import it to a hot wallet by scanning the private keys.
The main drawback of cold wallets is impracticability for everyday cryptocurrency use. It is more cumbersome to send cryptocurrency from a cold wallet. If you are a day trader, you will want to go for an efficient and secure hot wallet for convenience. However, if you’re going to store a large amount of crypto assets with no intention of frequent transactions, you can go for cold wallets.
❗️Learn more about Securing and Growing Your Crypto Assets
Custodial and Non-custodial Wallets
Custodial wallets are crypto wallets that take custody of the users’ private keys. The wallet providers have access and control over the users’ cryptocurrencies. One of the popular wallets in this category is Coinbase.
The main advantage of custodial wallets is ease-of-use, especially for beginners. When using these wallets, you do not need advanced technical skills. It is only required you create an account using your email and then login into the wallet to start operating.
Despite the ease of use that you enjoy with a custodian wallet, you should remember that the whole point of cryptocurrency is to gain control over your funds. However, with your money in the wallets, you simply hand over the security of your assets to a third party. It is less likely that a renowned custodial wallet can steal your funds. However, you may not access your funds if they decide to lock you out of the wallet without notice.
Non-custodial wallets refer to fully decentralized cryptocurrency wallets. These digital currency storages trust the users with their wallet’s private keys. Therefore, users have exclusive control of their funds. These wallets offer to improve security to users’ funds. For example, hi is launching a non-custodial wallet that will allow users to own their private keys with cryptocurrencies and stable coins.
The advantages of non-custodial wallets come with the condition that you must know how to back up and restore your wallet. Additionally, you also need to take responsibility for the security of your wallet.
Often, the private key is a 12 to 24-word recovery phrase. You need to store this phrase securely since losing it may mean losing your wallet and your funds. You can note it down on a piece of paper and keep it in a safe place. You also type it in your computer, transfer the document to your hard drive and store it safely. The recovery phrase will help you recover your account if you lose your device or private keys.
The Danger of Losing Private Keys
While cold wallets offer relatively better security, their main problem is you can easily lose your crypto assets when you lose your wallet device and the private keys. You will no longer know where your crypto assets reside on the blockchain or have the keys to access them.
There are limited ways of recovering the private keys of a lost, cold storage wallet. The procedure is also not an easy one.
On the other hand, hot storage provides easy recovery of lost keys through the service provider. You only need to go through some challenge-and-answer questions to recover your keys.
Other Uses of Cryptocurrency Wallets
Cryptocurrency wallets can also store keys to fungible and non-fungible digital tokens (NFTs). For instance, a token stored in a crypto wallet could also represent unique artwork, plane or concert tickets, or even goods in a supply chain.
Distributed ledgers with decentralized mechanisms use a capability security model. Therefore, possession of an encryption key proven by a digital signature over a transaction authorizes the respective transaction.
As the new “trustless” global economy based on the blockchain continues to grow, more uses of crypto wallets may develop. Such uses may include storing digitalized representations of traditional identity documents such as passports, driver’s licenses, birth certificates, voter’s records, and passports.
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