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 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. however, crypto wallets can also be categorised as hot or cold wallets, depending on their mechanism.
Software wallets are more common as they are considered more convenient for users to interacts 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. 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. Your private key, on the other hand, works similar to your bank PIN number. 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 your 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 threat these 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.
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 (hot wallets). the most common type of software wallets include:
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 example of web wallets includes MetaMask and Trust Wallet.
This is a software you can download to the computer that gives you full control over your keys and funds.
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.
A hardware wallet is a device where you can store your keys offline. It 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.
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 key 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.
Bitcoin and Ethereum, unlike fiat money, have no physical manifestation (same as 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; the paper content of these wallets applies to the cryptocurrency owner’s method of entry. A paper wallet is a piece of paper that holds keys and 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 HODL, put them on your cold storage/hardware wallet and keep that in a secure place. Some people keep them in a safe or in a safety deposit box at the bank. Use your hot wallet for all your trading activity when you want to buy, sell, send, or trade small amounts of bitcoin or other digital assets you may have.