A Beginners Guide to Cryptocurrency Wallets
In technical terms, a crypto wallet is a hardware or software device that interacts with blockchains and allows you to store or trade various types of cryptocurrencies, such as Bitcoin and Ethereum. While not in use, the funds remain safe on the storage device. Additionally, many crypto wallets provide dashboards with tools for monitoring and reporting your investments and market performance.
There are two basic types of cryptocurrency wallets: hot wallets and cold wallets (also known as hardware crypto wallets).
- Hot wallets. The software you use to buy, sell and store your investments.
- Cold or hardware wallets. They store your cryptocurrency on physical devices which are not connected to the internet all the time.
The benefits of each wallet type are discussed later in this article. Additionally, crypto wallets can be classified according to the type of digital currency they can send and receive.
The same applies to Ethereum wallets and other cryptocurrencies.
How do crypto wallets work?
Cryptocurrency wallets connect you to the world of digital currency, namely blockchains. They allow you to interact with this ledger, in which crypto transactions are recorded and digital currency is stored. All crypto wallets work by using tools called keys, regardless of whether they are Bitcoin wallets, Ethereum wallets, or general wallets.
Every digital storage method comes with a public address, a public key, and a private key. These are quite literally the keys to securing and transacting with any cryptocurrency online.
Why is a public address needed?
The public address of your cryptocurrency wallet is an external identifier. In other words, it identifies the destination of the digital currency you bought. Upon purchasing cryptocurrency, the seller sends you a record of ownership to your public address.
What is a public key?
Like your public address, a public key is similar, but not quite the same. Basically, it verifies that you are the owner of a public address for sending and receiving cryptocurrency.
Random letters and numbers make up a public key. A public key might look like this: KS22LSk73a9T596zrU79xbM744.
The crypto wallet’s public key matches the wallet’s private key. However, unlike traditional banking details, these keys do not identify the wallet’s owner.
What is a private key?
In cryptocurrency wallets, a private key acts as a password. The application offers users access to their crypto wallet, where they can buy, sell, and monitor their digital currency. You can think of it as your online bank account password. This is the key to protecting your cryptocurrency wallet.
Different types of crypto wallets
There are plenty of different crypto wallets available, each varying in accessibility, security and other features. Deciding which wallet type to use is a personal choice and will also depend on your circumstances.
Both have their pros and cons, and there is not necessarily a right or wrong answer when it comes to figuring out which crypto wallet is best for you.
Due to their nature, hot wallets don’t come as physical wallets you can hold in your hands. The most obvious advantage of hot wallets is greater convenience for frequent traders. Since they are digital tools, however, there is always the risk of being scammed and/or hacked.
Some types of hot wallets include:
- Desktop wallets. You can only use these on your computer. In addition to limiting where you can access your wallet, it also limits where hackers can access it. However, they remain vulnerable to cyber attacks.
- Mobile wallets. Mobile wallets are similar to desktop wallets but are designed to be used on cell phones. Although mobile wallets face the same threats, fingerprint and face ID technology in today’s devices might make them a little safer than desktop wallets.
- Paper wallet – a paper wallet includes your public and private keys, or a QR code (which can then be scanned and added to your software wallet to perform transactions). It’s a very safe method of storing cryptos since your keys are not linked to any servers. Only if this paper is stolen can someone steal your cryptos.
What are hardware wallets/cold wallets?
As hardware wallets store private keys on a physical device that cannot access the Internet, they are the most secure type of Bitcoin wallet. These devices resemble a USB drive.
Hackers are rarely able to gain access to hardware wallets thanks to their immunity from virus attacks. Hardware wallets can cost between $100 and $200. Both Ledger and Trezor are well-known manufacturers of hardware wallets.
Which crypto wallet is best for you?
It is recommended that cryptocurrency traders with a lot of cryptocurrency assets use both hot and cold wallets, so they can transact quickly and keep their assets safe.