There are different kinds of crypto wallets? There are indeed, and we’re going to run you through them all and explain how each one offers a different set of advantages and disadvantages.
We’ll also look at how wallets work, and why it’s important to keep your wallet keys safe. Let’s start exploring the different types of crypto wallets available on the market.
What Is A Crypto Wallet?
Starting with the basics, let’s cover what is a crypto wallet exactly. As you would hold your fiat money in a wallet, a crypto wallet is a digital wallet that stores cryptocurrencies. In order to use cryptocurrencies, you’ll need a wallet to store the digital assets.
The crypto wallet acts as a gateway to the blockchain that facilitates the sending, receiving, and “storage” of digital assets. Wallets can be in the form of a USB, a desktop program, or even on paper, and hold your public and private keys. These keys give you access to your funds, and allow you to both send and receive the supported cryptocurrencies.
Wallets differ in which cryptocurrencies they support, so it’s always important to do your research and find out whether the wallet you are interested in supports the cryptocurrencies you are hoping to use. You’ll also do well to establish which type of wallet best suits your needs.
How Do Crypto Wallets Work?
Before we dive into how do crypto wallets work, let’s cover a few points. Anyone can create a cryptocurrency wallet free of charge and without any identity verifications. Each wallet has a unique string of letters and numbers which acts as the wallet address and is also known as the wallet’s public key. This allows anyone with a unique code to send you cryptocurrencies.
When creating a wallet, you will also receive a private key, which allows you to access and send your digital assets. Think of the public key as your bank account number, and the private key as your PIN code. It is extremely important to understand that should someone get access to your private key, they will immediately have access to your cryptocurrencies. Never share your private key with anyone.
The blockchain tracks cryptocurrencies as transactions between wallet addresses, so until you make a transaction with your wallet address it will not be added to the blockchain. The blockchain also does not keep a record of valid addresses, so if you send coins to an invalid address, the system will not recognize this and the coins will be gone forever (also known as coin burning).
Right, so how do crypto wallets work? Crypto wallets don’t actually “store” the cryptocurrencies, as these are digital entities, instead, the wallets store records of transactions stored on the blockchain.
Each record indicates a change of ownership of the cryptocurrency, and the transaction is signified by the transaction record on the blockchain and the change of balance in both wallets. Crypto wallets are generally simple to navigate and easy to use.
Exploring The Different Types of Crypto Wallets
Several different types of crypto wallets offer different levels of security, functionality, and accessibility. Below we’re going to explore the various options and divide these into two categories: hot wallets and cold wallets. Hot wallets indicate that the wallets exist online, while cold wallets are stored offline. Each category has several options available, with varying degrees of the above-mentioned factors.
Web wallets are apps that can be accessed through web browsers. These might be through an online exchange or website and can be accessed from anywhere. Great for quick and easy accessibility, but as they are stored online they are more susceptible to hacking.
Mobile wallets are stored on your smartphone through an app and are only accessible through the device that they are downloaded on. These wallets are ideal for traders on the go as they are easily portable and highly convenient. The downside however is that they are vulnerable to hackers of both the app and the phone.
Desktop wallets are software wallets that live on your computer. These wallets offer a full overview and control of your funds and can be accessed whenever on your computer. As these wallets have instant access to the internet when online, they too are vulnerable to hacking.
All these options offer fast access to your cryptocurrencies and are ideal for day traders or users who frequent their account often.
Hardware wallets are kept on external devices like USBs and do not require an internet connection to be accessed. When the user wants to send funds they simply connect the wallet to a device connected to the internet. These wallets are great for long-term hodling or more secure storage, however as they are physical devices they still need to be kept safe from damage and theft.
Considered to be the most secure of all the options, paper wallets hold your public and private keys on literally a piece of paper. In order to move funds, you will need to have a software wallet to send or receive the funds to and from. Paper wallets are ideal for long term holding and should be kept in a safe location.
Cold wallets offer more security than hot wallets, but still require a certain level of safekeeping. These wallets are best for users looking to securely store their cryptocurrencies for a long term period.
Finding The Right Crypto Wallet For You
Finding the right option that best suits your needs is important. A day trader for instance will have a hard time working with a paper wallet, while a long-term investor would incur unnecessary vulnerabilities using a mobile wallet. Each user is different, so make sure you find what works best for you when exploring the different types of crypto wallets.