What is a cryptocurrency wallet?
A cryptocurrency wallet (crypto wallet) is a software-based wallet built to send, receive, and store digital assets. As with fiat currency, a wallet is used to spend cash and to store currencies in one place. When a user purchases cryptocurrencies, they are stored in a crypto wallet and from there can be used to make transactions in the future.
A crypto wallet also stores public and private keys. Public keys in a crypto wallet are used to obtain public addresses used to identify a wallet and receive funds or digital assets. In comparison, a private key encrypts the wallet and authenticates the ownership. Therefore, it is advised not to share the private key with anyone.
In 2009, Satoshi Nakamoto introduced the first crypto wallet when he released the Bitcoin protocol. A crypto wallet can also be termed a blockchain wallet.
For better understanding, a crypto wallet is like a bank account, a private key is the bank account’s password or the access key, the public address is the bank account number, the blockchain is the bank’s ledger, and the custodian is the banker (in case of custodial wallets).
Some of the examples of crypto wallets are:
- Coinbase Wallet
- Trust Wallet
- BitGo Cryptocurrency Wallet
- Electrum Wallet
What is a hot wallet?
A hot wallet is a software-based wallet that is accessible online and facilitates online cryptocurrency (or digital assets) transactions among the owner and others. The cryptocurrencies are stored in a program linked to the internet. Thus, the hot wallet provides convenience and accessibility of financial transactions and holdings by securing and storing cryptocurrencies online.
Advantages of using a hot wallet are:
- Provides immediate access to all the holdings stored online.
- Allows accessing funds from anywhere, supports multiple platforms, and is available free of cost.
- The interface is user-friendly, especially for beginners.
- Difficult to hack as it is built using multiple layers of security.
- Users may also be insured if they store funds in a hot wallet provided by an exchange they are trading with.
What is a cold wallet?
A cold wallet is a medium for storing digital assets or cryptocurrencies offline. Thus, it prevents theft and cannot be compromised. These are tangible offline storage devices that are plugged into the computer system to make transactions. Therefore, it is also known as a hardware wallet or an offline wallet. Some of the examples of cold wallets are Trezor, Ledger, KeepKey, etc.
Advantages of a cold wallet are:
- It provides better security as neither are they connected to the internet nor do they rely on a third party with private keys. These hardware wallets come with better protection like PINs or biometric impressions.
- While configuring the wallet, the user will frame a recovery phrase that is unique and generated by the device.
Disadvantages of a cold wallet are:
- It is advised not to use cold wallets in public places or while travelling. Thus, it is not suitable for quick transactions and day traders.
- Most of the hot wallets are available for free or with lesser fees. On the contrary, cold wallets are quite expensive.
- They do not accept all cryptocurrencies. For instance, less popular cryptocurrencies accepted in hot wallets may not be accepted by these cold wallets.
- A cryptocurrency wallet is a software-based wallet built to send, receive, and store digital assets.
- Satoshi Nakamoto first introduced it in 2009.
- There are two types of crypto wallets based on storage: Hot Wallets and Cold Wallets.
Frequently Asked Questions (FAQs)
- What are the various types of cryptocurrency wallets?
Some of the cryptocurrency wallets based on their storage methods are described below:
- Hardware wallets: Hardware wallets are the hardware devices that hold public and private keys. It is portable and looks like a USB (a battery-less device) with buttons and an OLED screen. They can turn out to be challenging to use for beginners.
- Paper wallets: Paper wallets are the printed QR codes on paper for one-time use. They are not prone to hacks as they are not available on the internet. One of the drawbacks of these wallets is that they cannot be used to send partial funds.
- Web wallets: Web wallets are accessed by website browsers making them less secured. These can be either custodial or non-custodial. If the wallet is non-custodial, the funds and private keys are safe as the access remains with the wallet owner. Web-based wallets are suitable for quick transactions.
- Mobile wallets:Mobile wallets are installable software packages on mobile phones. These wallets are suitable for daily trading but vulnerable to malware infections as they are open to viruses.
- Desktop wallets:Desktop wallets are installable packages and are one of the best methods to store digital assets in cold storage in a clean system. These wallets are easy to use, offer privacy, and do not involve any third party. To avoid any fundamental security issues, an antivirus is required on the desktop.
- What are the safety measures to protect cryptocurrency wallets?
Besides using wallets cautiously, it is advisable to take extra precautions to safeguard the currencies or digital assets stored.
- Update the software: The wallet holder should regularly update the wallet’s software and the computer’s or mobile’s software to experience the latest security enhancements.
- Back-up the funds: It is suggested to store a small number of funds in the wallet and keep most of the funds in a safer environment. Users using hot wallets need to be extra cautious.
- Adding extra layers of security: Setting up complex and long passwords and ensuring the withdrawal of funds requires a password will enhance the security. Wallets with a good market reputation and better security standards like additional PIN requirements every time the wallet is accessed or a two-factor authentication are better to use.