Cryptocurrencies have grown leaps and bounds since their inception in 2009. The underlying technology behind cryptocurrencies, blockchain, has increased security today all thanks to the technological safeguards enabled by the collective efforts of its proponents.
Today, blockchain has gone way beyond being a digital innovation that enables the creation of digital coins. It has also found real-life applications in many fields such as financial technology, supply chain management, healthcare, and many more.
Based on estimates, 4,000 cryptocurrencies are in circulation as of February 2021, and more are being created to cater to rising demands and increasing faith in the high return potential that cryptocurrency trading brings. Digital currencies like bitcoin are stored in cryptocurrency wallets, which functions like a conventional wallet, showing proof of the digital coins you own. In a nutshell, it is a tool that makes it possible for you to store, send, receive, and manage your cryptocurrencies.
You can access your wallet through your very own private key or through a crypto wallet app that stores public and private keys. These keys enable transactions like buying digital currency. Crypto wallets also supply digital signatures needed to authorize crypto coin transfers to someone else’s wallet.
The Advantages of Having a Crypto Wallet
Crypto wallets make it easier for investors and coin owners to manage their digital currencies. It is the first thing to secure for anyone who wants to buy or trade Bitcoin or any other cryptocurrency.
Most crypto wallets have security features such as two-factor authentication, encryption, and various other safeguards to keep one’s digital money safe. Another important consideration is to ensure that the currencies you have are fully compatible with the digital wallet you pick.
There are several kinds of digital wallets, each with its capabilities, pros, and cons in terms of security, convenience, and overall accessibility. Whatever format you choose, it is a crypto wallet owner’s responsibility to keep their private keys safe from prying eyes so they can protect their digital wallets.
Kinds of Crypto wallets
Crypto wallets have two main categories, namely hot wallets and cold wallets. Hot wallets have a direct connection to the internet. On the other hand, cold wallets do not rely on an internet connection to store digital currencies.
Examples of hot wallets include:
- Desktop wallets – These are apps that run on your PC or desktop. You will have complete control of your digital money with no third-party involvement. This makes you responsible for backing up your wallet and keeping it malware-free. e.g.: Exodus, BitPay, and Electrum
- Mobile wallets – Mobile wallets run on smartphones to manage cryptocurrency funds. There are many crypto wallet options for iOS and Android operating systems. Wallet owners are responsible for making back-ups and securing their devices. e.g: Mycelium, Trust Wallet
- Hybrid wallets – Hybrid wallets are browser-based apps that have desktop and mobile capabilities but don’t offer users full control that typical desktop or mobile wallets do. e.g.: Blockchain
You are essentially creating a hot wallet when you set up accounts on a crypto exchange network or download a mobile wallet or a desktop wallet on your PC.
A hot wallet offers ease of set-up, use, and overall accessibility. It’s most suited for everyday digital currency users who regularly spend or trade cryptocurrencies. On the other hand, because it needs to be connected to the internet, many consider hot wallets to be a less secure option for cryptocurrencies.
Examples of cold wallets include:
- Hardware wallets – These wallets are more popular because they are easier to use than paper wallets and come with customer support from their manufacturer. A hardware wallet uses an encrypted portable device to store your private keys and carry your digital money.
Sending cryptocurrencies to a hardware wallet involves sending them from a hot wallet to the hardware wallet’s private address. To transfer digital currency from a hardware wallet, you need to connect to the internet through the wallet’s software and then authorize the transaction by using your private key. e.g. SafePal, Trezor, and Ledger
- Paper Wallets – They function like hardware wallets but don’t require the use of an encrypted USB device. All you need are pieces of paper containing your private key and public wallet address (printed as QR-codes that can be scanned to facilitate transactions), which you should secure in a safe storage place.
Cold wallets provide superior security compared to hot wallets, which makes them great for storing bigger amounts of cryptocurrencies intended for long-term investments.
However, they are impractical for everyday use. Encrypted key-sized devices or paper wallets can easily get lost if not secured properly. Paper wallets must be sealed in plastic or laminated and stored in a cool, dry place to avoid damage.
Choose a Crypto Wallet Based on Your Needs
Now that you know the main types of crypto wallets, it’s up to you to choose which one suits your purpose. Just remember that not all crypto wallets are created equal.
Every platform and software will have its own set of functions and capabilities, so you must research them carefully to ensure that they are compatible with your chosen cryptocurrencies and level of tech know-how.
Most importantly, be responsible for securing your private keys and beware of phishing scams and unknown websites at all times when trying to transact using your wallet and cryptocurrencies.