If you own cryptocurrency, it is important that you keep it in a place that is safe and secure from hackers and cyber thieves. Cryptocurrency is kept in wallets. Unlike the wallet you keep in your pocket, a crypto wallet is a tool that is necessary for sending, receiving, and storing your digital assets. There are a number of different types of cryptocurrency wallets. This article will give an in-depth overview of the different types of crypto wallets and which is the safest option.
What is a crypto wallet?
A crypto wallet is a mechanism that can be used to interact with digital assets on a blockchain network. In simple terms, when you own cryptocurrency, it will be stored in a wallet. There are three major types of crypto wallets. These are software, hardware, and paper wallets.
Software wallets are more common as they are considered more convenient for users to interact with different cryptocurrencies. Hardware wallets, on the other hand, offer more security as they have no connection to the internet. Lastly, paper wallets refer to keys being printed on a physical piece of paper and hidden in a secure location. Later on in this article, each of these wallet options will be explained in further detail.
How does a crypto wallet work?
All units of cryptocurrency in existence are stored in crypto wallets. Each of these wallets has a key to unlock and access the funds inside. No matter what type of wallet you have, your keys are how you access your crypto. There are two types of keys you get when you sign up for a wallet, a public key and a private key. Your public key is a cryptographic code that anyone can send transactions to, sort of like a bank account number. Your private key, on the other hand, works similar to your bank PIN. This is the key required to access the assets within your wallet.
When you create a new wallet, you will receive what’s called a seed phrase. A seed phrase is a sentence consisting of a random combination of words. Your seed phrase allows you to access your crypto from anywhere, even if you lose your wallet. It is very important to write your seed phrase down and keep it in a safe place. Do not put your seed phrase on the computer or your smartphone as people could potentially access it.
Types of crypto wallets
Hot wallet vs cold wallet
Crypto wallets can be categorised as either ‘hot’ or ‘cold’, which ultimately depends on internet connectivity. A hot wallet is connected to the internet. The most common hot wallets are the ones that are connected to cryptocurrency exchanges. For instance, when you sign up for a Swyftx trading account and purchase cryptocurrency, the asset will be stored on the wallet/s integrated with your account. Hot wallets are convenient and easily accessible.
In contrast, a cold wallet is not connected to the internet. Instead, cold wallets refer to storing private keys on a physical medium. This is done to prevent the threat of online hacking. Cold wallets are considered a safer alternative to storing cryptocurrency than hot wallets and are quite suitable for long-term ‘HODLers’ of cryptocurrency assets.
Key Takeaway
Hot wallets are connected to the internet. The most common types of hot wallets are exchange wallets and software wallets. They are very convenient but can be less secure. Cold wallets are isolated from the internet. The most common types are hardware wallets and paper wallets. They are extremely secure but more inconvenient.
Software wallet
Figure 1 – Software wallet MetaMask
There are several different types of software wallets, however, one unique characteristic that software wallets all have in common is that they’re connected to the internet, which makes them hot wallets. Below is a list of the most common types of software wallets.
Web wallets
Web wallets are used to access different blockchains through a browser (i.e. Google Chrome). They can be hosted or non-hosted. Non-hosted web wallets are considered more secure as the private key and funds are always in your control. Some examples of web wallets include MetaMask and Trust Wallet.
Desktop wallets
This is software you can download to the computer that gives you full control over your keys and funds.
Mobile wallets
Mobile wallets are similar to desktop wallets but they’re designed specifically for mobile apps. Users can conveniently send and receive crypto through the use of QR codes.
Hardware wallet
Figure 2 – Three different hardware wallets
A hardware wallet is a device where you can store your keys offline. This type of cold wallet is completely separate from your computer or smartphone, and most importantly, separate from the internet. Hardware wallets typically look like a USB, however, they are actually just a very small computer with a tiny screen, a few buttons, and their only function is to store your keys and sign transactions. When there is a transaction you want to send, all you need to do is connect it to your computer and download software also known as a ‘bridge.’ This will allow you to begin preparing your transaction. Once the hardware wallet receives the transaction it signs it on the wallet and sends it back to the computer.
Paper wallets
Another popular cold storage wallet option is paper wallets. They are exactly as they sound, a piece of paper that has your public and private keys on it. This could include QR codes, written addresses, or seed phrases. The downside of a paper wallet is that it can easily be destroyed, and it is hard to send and receive from, but always a great backup.
Important To Remember
Bitcoin and Ethereum, unlike fiat money, have no physical manifestation (which is the same for most other types of cryptocurrency). Paper wallets vary from ‘hot’ wallets in that they are not connected to the internet. They do not, however, store real Bitcoins or crypto. A paper wallet is simply a piece of paper that holds the keys or QR codes for facilitating cryptocurrency transactions.
What type of wallet is right for you?
The most common way to store crypto is to have both a cold wallet and a hot wallet. You can then use both of them for their best features. If you have large sums of crypto or digital assets that you are intending to hold long-term (HODL), put them on your cold storage/hardware wallet and keep that in a secure place. Some people keep them in a secure location like a safety deposit box. Then you can use your hot wallet for all your trading activity when you want to buy, sell, or send your Bitcoin or other digital assets.
Summary
It is important to keep your crypto in a safe and secure place. Crypto wallets are used by new and experienced traders alike for storing digital assets. This article has explored the different types of crypto wallets and explained the benefits of each. To learn more about any of the specific terms used in this article, check out some of the other great pieces on the Swyftx Learn platform!
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