What Are Crypto Wallets and What Are Their Different Types?
Key Takeaways:
- Crypto wallets do not actually store your coins; they store your public and private keys instead.
- The two major categories of crypto wallets are: Hot Wallets and Cold Wallets.
- Hot wallets are connected to the Internet and include: Desktop Wallets, Mobile Wallets, and Web Wallets.
- Cold wallets are not connected to the Internet and include: Hardware Wallets and Paper Wallets.
What are Crypto Wallets?
First things first: Cryptocurrency wallets are not actually ‘wallets’ in the sense that they don’t hold crypto tokens in the same way physical wallets hold cash. Rather, they store users’ public and private keys, and your coins are stored on public blockchain networks instead.
Your public keys are similar to your email address or bank account number. They are open to anyone, and you can share them freely when you wish to receive crypto transactions. On the other hand, your private keys need to be kept and stored secretly. They are what proves your ownership over your public keys, and you should treat it just as you would your email or bank account passwords. A public key is always paired with a corresponding private key, and their combination is used for both data encryption and decryption.
When making cryptocurrency transactions, you are not actually ‘sending’ your crypto transactions from your mobile phone or web browser extension to someone else’s. What you are doing in reality is using your private key to sign transactions and transmit them to blockchain networks, which will then use them to update the balances in both yours and the receiver’s addresses.
Aside from storing users’ keys, crypto wallets also
- Support crypto transfers through the blockchain
- Provide a user-friendly interface for crypto balance management
- Allow users to buy and sell their crypto assets
- Enable users to interact with decentralized applications (dApps)
It is often said that your crypto assets are only as safe as the manner in which you choose to store them. While you can decide to store them on exchanges, it is generally not recommended to do so unless you are a frequent trader or only have a modest amount. For overall security and full control over your keys and crypto, crypto wallets are advised more frequently by crypto pundits.
Hot Wallets vs Cold Wallets
The different types of crypto wallets can be divided into two major categories:
- Online-based Hot Wallets
- Offline-based Cold Wall
Hot wallets are crypto wallets connected to the Internet. They are mainly easy to use and highly convenient. Due to these reasons, most popular crypto wallets are ‘hot’. However, they are also prone to hacking and cyberattacks. Hot wallets are usually recommended for beginners and traders due to their quicker learning curves and transactions, but using them to store large amounts of cryptocurrencies is not recommendedcryptocurrencies.
Cold wallets are crypto wallets that are not connected to the Internet. They are considered extremely secure and dramatically reduce the risks to hacking and cyberattacks. At the same time, they also fall on the pricier side, are less convenient, and require more technical knowledge to use them. As such, cold wallets are generally suggested for experienced users looking to hold large amounts of crypto over a long period of time.
Different Types of Crypto Wallets: Hot
The different types of hot wallets include: Desktop Wallets, Mobile Wallets, and Web Wallets.
Desktop Wallets
Desktop wallets are applications that run on your PC or laptop and use encryption to keep your private keys secure. They offer you ownership of your keys, but are also potentially vulnerable to malware.
Mobile Wallets
Similarly, mobile wallets are software programs on your phones that store your private keys and allow you to quickly make crypto transactions with just a phone and an internet connection. However, your holdings are only as secure as your phone.
Web Wallets
Web wallets are probably the most popular for crypto newbies. You can access them through a web browser without needing to install any apps. They are very easy to use, but also prone to hacking.
Different Types of Crypto Wallets: Cold
The different types of hot wallets include: Hardware Wallets and Paper Wallets.
Hardware Wallets
Hardware wallets are high-tech and extremely secure. They look and work similar to USB devices and save private keys offline. They can be pricey and challenging to use for beginners, though.
Paper Wallets
On the flip side, paper wallets are as ancient tech as it gets. They are physical pieces of paper where private keys are either written down or printed. While they are safe from malware or hacks, they can also easily be lost, stolen, or damaged.
One Last Thing…
While traditional finance (TradFi) has safeguards in place for the protection of users and their funds, things are different in decentralized finance (DeFi). Since the philosophy falls under users having full power over their finances, it should also be noted that – as Uncle Ben famously said – ‘With great power comes great responsibility’.
The importance of taking your finances seriously cannot be stressed enough. Always remember to back up and save all your private keys, seed phrases, and data files in multiple secure locations to prevent losing access to your hard-earned funds.
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