Heard people talking about crypto wallets but don’t really know what they are? In this blog we will simply define and explain them.
A Simple Definition Of A Crypto Wallet
A crypto wallet is a device that allows you to keep your cryptocurrencies safe. They don’t actually store your cryptocurrencies, they live on the blockchain. Crypto wallets store the private keys (passwords) needed to access your crypto. They don’t look like traditional wallets. Some resemble USB devices while others exist online only.
Why Do We Need Crypto Wallets?
Crypto wallets prevent people from hacking or stealing your crypto funds. They do this by storing the private keys needed to access your cryptocurrencies. Your keys prove your identity and give you access to your crypto. If you lose your private keys, you lose your money and have no way of recovering it. That’s why it is important to keep them in a safe place.
How Do You Use A Crypto Wallet?
Crypto wallets need a private key to access them. This key is essentially an elaborate password that represents a wallet address and allows you to send and receive crypto funds. It is a random mixing of up to 64 characters making it extremely difficult for hackers to decode. If you forget or lose your private key, you can restore your wallet and your accounts by using your passphrase or “seed words”. These are normally 12, 18 or 24 words in length and basically act as your master key. If you lose that, there is no way of recovering your crypto assets.
Security Of Crypto Wallets
The safest crypto wallets are ones that have no connection to another device, either via the internet or bluetooth. They should also not deny you access to your crypto because the custodian, the company that stores your digital assets on your behalf, is undergoing financial stress.
Types Of Crypto Wallets
This is where it gets interesting. There are two main types of wallets, custodial and non-custodial (also known as self-custodial).
Custodial wallets – are hosted by a third party who keep your keys for you. Some cryptocurrency exchanges also do this. Binance, BitMex and Free Wallet are among the popular custodial wallets.
Non-Custodial wallets – devices where you are responsible for the safety of your private keys. This offers greater security and is the most common type. Ledger Nano X, Electrum and Exodus are among popular non-custodial wallets.
Hot And Cold Wallets
Custodial and non-custodial wallets may be broken down into a subcategory of hot or cold wallets. Hot wallets have an internet connection whereas cold wallets do not.
Hardware, Online And Paper Wallets
Wallets may be further divided into another three subsets.
Online (or software) – your keys are kept in an online app or similar platform, making it much easier to send, receive and trade your crypto, similar to a personal banking platform. Insist on one that is protected with two-step encryption.
Hardware – these resemble USBs, are stored in a safe place and only connected to your computer when in use. They are a good balance of security and convenience.
Paper – keys are written on a physical piece of paper and stored for safekeeping. This makes regular use of cryptocurrencies much more cumbersome but is extremely safe. They have however dropped in popularity because paper wallets can be easily damaged or lost.
If you are buying cryptocurrency as a long term investment and unlikely to make regular transactions, hardware or paper wallets are preferable.
But if you are ready to throw yourself into everything the blockchain has to offer, you’ll likely need an online wallet.
Advantages Of Online Wallets
Versatility – online wallets allow you to manage all of your digital assets from one platform.
Convenience – online wallets manage your private keys for you, usually secured by two-factor authentication.
Personal – you interact with user names rather than long multi-digit public key addresses.
Functionality – browse and use dApps (decentralized apps) in the DeFi (decentralized finance) marketplace.
Shopping – start making purchases at online stores that accept cryptocurrency.
Which Crypto Wallet Is Best?
As you can see, the types of crypto wallets on the market are many and varied and come with sometimes contrasting features. Security is often the price people pay for convenience and finding the right balance of the two is important. Think about what your crypto needs are and read lots of online reviews to help you decide which crypto wallet is best for you.
Want To Know More About Crypto Wallets?
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