All units of cryptocurrency in existence are allocated to crypto wallets or ‘digital wallets.’ Contrary to what you may believe, crypto wallets don’t actually store your crypto coins or tokens. Rather, crypto wallets are digital representations of cryptocurrency holdings. They store your private keys which are used to access your cryptocurrency so it is extremely important to not lose these keys.
There are many different types of crypto wallets and many different ways of storing cryptocurrency, each with its own pros and cons. This guide will discuss the different options you have to store your Bitcoin and crypto safely.
How do crypto wallets work?
There are two types of cryptocurrency wallets: hot and cold storage wallets. Hot storage crypto wallets, also known as online wallets or web cryptocurrency wallets, allow you to continuously access your cryptocurrency from the internet browser on a computer or mobile device. Essentially, these wallets are connected to the internet. Cold storage cryptocurrency wallets mean that you need to physically have the hardware in order for you to access your cryptocurrency.
An important point to note with cryptocurrency and Bitcoin wallets is that some wallets exclusively store one type of currency e.g. Bitcoin or Ethereum. There are, of course, multi-currency wallets out there, so ensure you do your research before settling on a wallet if you intend to hold multiple currencies.
What are keys?
Like a physical key, the encrypted data contained in wallets can only be unlocked by someone with the right decryption key.
Today’s encryption methods use complex mathematical formulas known as algorithms, rather than simply adding or subtracting random numbers. This makes it harder for hackers to crack the code. And instead of a simple string of random numbers for a key (which would be easy to hack), modern keys are randomly generated even more times before they’re used–this way, hacking is much less likely!
These keys can come in two different forms; Public Keys and Private Keys.
A public key allows you to receive digital currency transactions. It’s a cryptographic code that is paired with the private key, which only you have access to and allows for “unlocking” of your wallet where it has been sent too.
The address associated with this transaction will be a shortened form of your public key – think of this as being similar to something like an email or phone number that can be used in place on its full version while still allowing others who know how to contact you when they need to.
The private key is a string of digits and letters that provide you with ownership over your cryptocurrency. Unlike most passwords, it’s an astronomically large number because if someone had access to the code they could steal your assets by sending them to another wallet.
The private key is represented in a number of ways including:
- A String of 256 zeroes and ones
- A 64 digits in the hexadecimal system i.e. 0BD687D29C44567F3A63DC32AA213733389DE98A60FB6303D31F257F
- A QR code
Private keys can also be derived from a seed phrase. This phrase is designed to provide a more user-friendly way to store and access crypto assets. A seed phrase is typically expressed as a 12-word combination of random words. For example
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Important to know:
A majority of crypto wallets only store one type of cryptocurrency. If you want to store more it’s advised you look into multi-currency wallets
What is a cold wallet?
As mentioned above, cold wallets are physical wallets and thus not connected to the internet. This makes them less susceptible to hacking.
Cold wallets or ‘offline wallets’ come in a variety of forms.
Cryptocurrency paper wallets is exactly as it sounds: a physical wallet that is created by printing the cryptocurrency’s private and public keys onto paper.
Assuming no one else gains access to this paper this obviously makes it very secure from attacks. The downside of course being, like any physical object, it can be easily misplaced.
A hardware wallet is a cryptocurrency wallet that is a physical device, typically in the form of a USB. Hardware wallets aim to combine security and convenience as users only utilise them when they want to actually access their cryptocurrency. Some examples of hardware wallets include the Ledger and Trezor cryptocurrency wallets.
What is a hot wallet?
In contrast to a cold wallet, a crypto hot wallet is an online cryptocurrency wallet. Hot wallets are typically used for everyday transactions and provide a high level of convenience, as the cryptocurrency is always accessible on your device.
A hot wallet can be accessed from any internet-connected computer or mobile phone app at any time. The downside to this type of cryptocurrency storage configuration is that it comes with some vulnerability as it is more prone to hacking.
A web-based wallet exists solely online. It’s accessed through a web browser, with private keys encrypted behind a password chosen by the user. Web-based wallets are generally advised against because they’re more highly susceptible to attacks.
Desktop wallets or ‘software wallets’ are downloaded and installed on the users desktop with wallets available for Windows, Mac and Linux systems. This means they’re still connected to the internet, but with some added security of storing information locally.
Many cryptos will have a desktop wallet you can easily download or you can use a compatible multi-currency desktop wallet. You’ll need to copy and paste your private keys into the wallet software to access your funds.
Examples of desktop wallets include Bitcoin Core, Atomic and Exodus.
Mobile wallets are some of the most user-friendly wallets out there as they’re compatible with smartphone devices. They have the same functionalities as desktop wallets but in a mobile app form.
Mobile wallets can be downloaded and installed on Android, iOS or Windows phone operating systems.
Some popular examples include ZenGo, LoafWallet and Hive Android.
Is there an alternative to a crypto wallet?
If you choose not to keep your coins in cold storage or you don’t want to download a hot wallet there is another option.
Many crypto exchanges and broker platforms offer storage for your cryptocurrency within the platform itself. These are referred to as crypto exchange wallets and they can be very convenient as you will not need to set this wallet up yourself. Most crypto exchanges already have a wallet integrated into your account when you sign up.
If you don’t want to store your crypto in an external wallet, Swyftx offers storage for your cryptocurrencies within the platform itself. Swyftx securely stores cryptocurrency by giving users the option of implementing two-factor authentication (2FA).
Which wallet is right for you?
Which wallet is right for you will depend on your unique needs.
While hot wallets typically offer more convenience, they have less security. Many view hardware wallets as combining the best of both worlds but ultimately the choice is up to you.