What is a Crypto Wallet?

what is a crypto wallet

A crypto wallet is a place to store crypto currency. It is called a wallet because its function is similar to a wallet where you keep cash. The difference is that crypto wallets store the private keys that you use to sign cryptocurrency transactions, instead of holding physical cash. Crypto wallets also allow you to access the crypto assets you own.

The latest crypto wallets make the blockchain more accessible to users. With the introduction of cryptocurrencies, transactions required entering long keys manually. But now, crypto wallets provide many conveniences for you. The first wallet belongs to Bitcoin developer Satoshi Nakamoto.

What is a Crypto Wallet?

Crypto wallets can be software applications on computers,mobile devices, or hardware devices. Crypto wallets use an internet connection to access the blockchain network of used crypto assets. Cryptocurrency is not an asset that can be “stored” anywhere. They are data bits stored in the database and are scattered throughout it. In this case, the crypto wallet works to find all the bits associated with your public address. Then, the amount is added up and displayed in the app.

Making crypto transactions is very easy using a crypto wallet. You can send or receive cryptocurrency from your wallet using various methods. Typically, you enter the recipient’s wallet address, select the amount to send, sign the transaction using your private key, add the amount to pay the transaction fee, and send it. Accepting crypto money with this app is even easier. After sending, you receive the cryptocurrency immediately and the transaction iscomplete.

How Do Crypto Wallets Work?

As explained above, crypto wallets don’t just ‘store’ digital assets. Rather, they are a necessary tool for interacting with the blockchain. This wallet generates the information needed to carry out crypto transactions on the blockchain. The data consists of one or more private key and public key pairs.

The wallet also includes an address, which is an alphanumeric identifier,generated based on the public and private keys. Such an address is, in essence, a specific ‘location’ on the blockchain where coins can be sent. This means you can share your address with others to receive funds without revealing your private key to anyone.

The private key gives access to your cryptocurrency, regardless of which wallet you use. So even if your computer or smartphone is compromised, you can still access your funds on other devices, as long as you have the appropriate private key (or initial phrase).

Types of Crypto Wallets Based on Connectivity

If you buy any amount of crypto to keep for yourself, you must choose between storing your cryptocurrency in a ‘Hot Wallet’, a ‘Cold Wallet’, or using a combination of the two. Hot wallets are connected to the internet and vulnerable to online attacks that can lead to stolen funds. But this type of wallet works faster and makes it easier for its users to trade or spend crypto anytime, anywhere. Cold wallets are hardware and usually not connected to the internet.  Even though they can be considered safer, their use is less practical. Should you use a hot wallet, cold wallet, or a combination of both?

Hot Wallet Pros and Cons

Examples of hot wallets are web wallets, mobile wallets, and desktop wallets. Of the three, web wallets are the least secure, although all crypto hot wallets are vulnerable to online attacks.

The benefit of a hot wallet is its ease of use. They are always connected to an online network, so you don’t need to transition between offline and online to make cryptocurrency transactions. For example, many people use mobile hot wallets to trade or make purchases with cryptocurrency. Doing it with a cold wallet would be a hassle. You need to find a device (usually a computer) to connect your cold wallet, transfer the required cryptocurrency to the hot wallet, and then make a purchase. Users who hold large amounts of cryptocurrency will not usually store it in hot wallets.

Most exchanges store the majority of customer funds offline in a cold wallet matrix, and keep a certain amount required for withdrawals in a hot wallet. If you hold large amounts of cryptocurrency online, be sure to research the reputation of the crypto exchange you use.

Cold Wallet Pros and Cons

In general, cold wallets have a higher level of security. Stealing from a cold wallet usually requires physical possession or access to the hardware. The person must also have an associated PIN or password to access the funds in the cold wallet. Most hardware wallets are cold wallets.

Hardware wallets are designed to be immune to hacking. Even when a hardware wallet is plugged into your computer or connected via Bluetooth, funds stored on the drive are difficult or impossible to steal. When technically connected to the internet, transaction signing occurs inside the cold wallet device. Only then is it broadcast to the blockchain network via your computer’s internet connection.

Generally, cold wallets are less practical for daily transactions than hot wallets because they must first be turned on and connected to the internet.  Also, while hot wallets are usually free , cold wallets can cost between $50 and $200. If you have more than a few hundred dollars in crypto, you may want to invest in a cold wallet before buying more. It is a small price to pay to protect yourself from the threat of losing your crypto assets.

Combining Cold and Hot Wallets

In general, a combination of hot and cold wallets is usually ideal.  You will have more peace of mind making crypto transactions with the balance between the accessibility of a hot wallet, and the security of a cold wallet.

The popular trend for  this merger is to use a second cellphone that only functions as a mobile-type cold wallet. When using your phone as a cold wallet, you will only turn it on when you want to make a transaction. The secondary phone that acts as a cold wallet connects to your primary phone via Bluetooth or WiFi, and you transfer funds to your hot wallet for transactions. After the transaction is made, the WiFi or Bluetooth connection and the secondary cell phone are turned off.

Many find it more convenient than a hardware wallet, while also offering the peace of mind of knowing your cryptocurrency is safe and secure. Using a secondary phone as a cold wallet is more secure than a normal mobile hot wallet, but less secure than a hardware cold wallet.

Types of Crypto Wallets by Device

  1. Software Wallet

    Software wallets come in many types, each with its unique characteristics. Most of them are connected to the Internet. The following are descriptions of some of the most common types of software wallets:

    1. Web Wallet

      You can use a web wallet to access the blockchain via a browser interface without downloading or installing anything. In most cases, you can create a new wallet and set a personal password to access it. However, some service providers store and manage private keys on your behalf. While this may make it easier for inexperienced users, it is a dangerous procedure.
      If you don’t hold your private key, you trust your money to someone else. To solve this problem, many web wallets now allow you to manage your keys, either entirely or via shared control (using multi-signature). So it is important to check the technical approach of each wallet before choosing the one that suits you best.

    2. Desktop Walle

      As the name suggests, a desktop wallet is a software you download and run locally on your computer. Unlike some web-based versions, desktop wallets give you complete control over your keys and funds. When you create a new desktop wallet, a file named “wallet.dat” will be stored locally on your computer. This file contains the private key information used to access your cryptocurrency address; you must encrypt it with a secure password.
      If you encrypt your desktop wallet, you must provide your password every time you run the software so it can read the wallet.dat file. If you lose this file or forget your password, you will most likely lose access to your funds.
      Therefore, it is critical to back up the wallet.dat file and store it in a safe place. Alternatively, you can export the corresponding private key or seed phrase. Doing so allows you to access funds on other devices, should your computer freeze or somehow become inaccessible.
      In general, desktop wallets are probably more secure than most web versions, but be sure your computer is clean of viruses and malware before setting up and using a cryptocurrency wallet.

    3. Mobile Wallet

      Mobile wallets work just like their desktop counterparts but are specifically designed as smartphone apps. This is quite convenient as it allows you to send and receive cryptocurrencies using QR codes. As such, mobile wallets are perfect for daily transactions and payments, making them great for spending Bitcoin and other cryptocurrencies in the real world.
      However, mobile devices are vulnerable to malicious apps and malware infections like computers. So it is recommended that you encrypt your mobile wallet with a password.

  2. Hardware Wallet

    Hardware wallets are physical and electronic devices that use a random number generator (RNG) to generate public and private keys. The key is stored on the device,  which is not connected to the Internet. As such, hardware storage is a type of cold wallet and is considered one of the safest alternatives.
    While these wallets offer a higher level of security against online attacks, they can pose a risk if the firmware implementation is improperly done. In addition, hardware wallets tend to be less user-friendly, and funds are more difficult to access than hot wallets.
    You should consider using a hardware wallet if you plan to store crypto assets for a long time or hold large amounts of cryptocurrency. Today, most hardware wallets allow you to set a PIN code to protect your device and a seed phrase you can use if your wallet is lost.

  3. Paper Wallet (Paper)

    A paper wallet is a page on a website where the crypto address and private key are printed in coded form. These codes can be scanned to make cryptocurrency transactions. Some paper wallet websites allow you to download their code to generate new addresses and keys while offline. Thus, this wallet is highly resistant to online hacking attacks and can be considered an alternative to cold wallets.
    However, the main drawback of paper wallets is that you can only send your entire available crypto asset balance.
    For example, imagine you have 10 BTC in a paper wallet. If you decide to spend 2 BTC, you must first send all ten coins to another type of wallet (for example, a desktop wallet) and only spend part of the funds (2 BTC). You can then return the 8 BTC to a new paper wallet, although a hardware or software wallet would be a better choice.
    Technically, you import your paper wallet’s private key into a desktop wallet and spend only a portion of the total balance. The remaining coins will be sent to the ‘change address’ automatically generated by the Bitcoin protocol. If you do not manually set the change address to one you control, you will most likely lose your funds.
    Most software wallets today will handle the change for you, sending the remaining coins to an address that is part of your wallet. But the crucial thing to remember is that your paper wallet will be empty after sending the first transaction – regardless of the amount. So don’t expect to reuse it later.

Crypto Wallet Security

Crypto wallet security is critical, because cryptocurrency is a high-value target for a hacker. Some of the protection it can provide is encrypting the wallet with a strong password, using two-factor authentication for exchanges, and storing large amounts of money that you have offline.

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