Cryptocurrency wallets store and keep the private keys of your cryptocurrency securely. It allows users to send, receive and spend various cryptocurrencies such as Bitcoin, Ethereum, Ripple, and many more. They come in several types and can be either physical hardware, software or online services like checkout, ledger, nano etc..
But like cryptocurrency, the concept of a cryptocurrency wallet is a very abstract one. Let’s take a closer look at these basic encryption tools and how they work.
What is a cryptocurrency wallet?
The first lesson of cryptocurrency wallets is that they are not like a wallet for cash in your wallet or your back pocket, carrying cash and credit cards. Instead, a crypto wallet is a form of digital storage to secure access to your crypto.
Cryptocurrency is a very abstract store of value, without a physical token similar to coins and bills. It exists as nothing more than a series of code on a larger blockchain.
When you buy Bitcoin (BTC), what do you actually own? A public key and a private key on the BTC blockchain.
Think of a public key as something like your bank account number – you can share it with anyone, but it doesn’t provide access to your money.
The private key is like the password for your bank account. Please don’t share it with anyone, or they can steal all your money.
If you lose your private key, you may lose access to your encryption. Likewise, a person who owns a private key has full access to the encryption. Keeping your private keys safe in a crypto wallet is essential.
“Coins and tokens are part of the blockchain system in the form of data, and wallets serve as a means of accessing them,” says Martin Leinweber, digital asset product strategist at MarketVector Indexes.
How do cryptocurrency wallets work?
A crypto wallet stores the public and private keys needed to send, receive and store cryptocurrencies.
When you buy cryptocurrency, chances are that the company you bought it from gave you a wallet to hold the cryptocurrency. This wallet is called hot because it is online and connected to the internet.
“To avoid the risk of hackers stealing your online wallet, you can get a cold offline wallet,” says Rick Edelman, founder of the Digital Asset Council for Financial Professionals.
Cold wallets are basically thumb drives or some other type of device. “Once you have one, you can simply transfer your coins from your hot wallet to your cold wallet,” says Edelman.
Types of cryptocurrency wallets
As mentioned above, there are two broad categories of cryptocurrency wallets: hot wallets that are connected to the internet and cold wallets that are offline. Let’s take a look at these in more depth.
Paper wallet is the simplest cold wallet to understand and operate. It looks like this: a piece of paper on which your keys are written.
“Because this is just a piece of paper, it’s a cool wallet and therefore safe from hackers, but the paper can be lost, stolen, torn, or rendered illegible through getting wet,” Edelman says. Given this, “As in cold wallets, paper is not perfect.”
A more secure type of cold wallet is the hardware wallet. Like a USB drive, hardware wallets help keep your private keys safe from hackers who might need to steal the physical wallet to access them, Lennweber says.
Hardware wallets also have an extra layer of security over paper wallets by requiring users to enter a PIN code to access device content. While these PINs provide an extra layer of protection, if you forget your PIN, you will lose access to your coins. “So you have to be tech-savvy to use such a wallet,” Lennweber says.
“The idea behind hardware wallets is to isolate private keys from online storage such as a computer or smartphone, which are more vulnerable to hacking,” Lennweber says. “Storing private keys offline prevents this, as hackers will have to physically steal a hardware wallet of cryptocurrency to gain access to a user’s private keys.”
You can usually get a hardware wallet for between INR 3,000 and 17,000, although there are some much higher price options. For example, you can buy a Trezor Model One for around INR 10,000. You can also find more economic funds, such as SafePal wallet for INR 5,500.
Online wallets, also called software wallets, are your hot wallets. Desktop, mobile or web applications, these wallets require an internet connection and are easily accessible but also more vulnerable to hacking than cold wallets.
“Your password is stored on servers across the Internet, and therefore represents a potential increased risk,” Lennweber says.
If you only trust your infrastructure, he says it makes sense to have desktop wallets like Electrum and Wasabi Wallet. This avoids the involvement of a third party and allows you to be solely responsible for the security of your wallet.
Linweber says that mobile wallets are often preferred by people who use crypto on a daily basis. These wallets are placed as an app on your smartphone, similar to Apple Wallet, and allow transactions simply with the help of QR codes.
Meanwhile, web-based wallets are mostly accessible through browsers and allow you to transact anywhere you have an internet connection, he says.
Custodian of the Covenant vs. Non-Custodian Governor
Now for more coding language. Non-custodial wallets are the types of wallets that put you in control of your private data. This is often the preferred type of wallet among crypto enthusiasts because it does not include a third party to secure your private keys.
Offline wallets from Exodus or MetaMask, both of which are offline storage options, are examples of non-wallet options. These wallets are promoted for security, which means that they are less vulnerable to hacking.
Custodial wallets, on the other hand, are wallets offered by crypto companies such as cryptocurrency exchanges such as BlockFi Wallet.
If you choose this type of wallet, you are basically outsourcing your keys. But these wallets have some perks when it comes to accessibility. If you want to access and send coins from this type of wallet, you can log into your account and enter the site you want to send cryptocurrency to, and these hot wallets usually also come with other features, such as being freely available and allowing the ability to share Your cryptocurrency.
How to get a crypto wallet
It is not difficult to get a crypto wallet. Some cryptocurrency exchange platforms, such as WazirX, Zebpay, Unocoin, and CoinDCX, offer an online crypto wallet. If you want a cool wallet, you can buy one directly from the manufacturer online or even from Amazon.com. If you are browsing Amazon.com, you may notice that you are buying a Ledger Nano S cold storage stick for around INR 7,000 or a Trezor Model T hardware wallet for around INR 21,500.
But there are some factors to consider when choosing a crypto wallet:
- Customer service: It is a good idea to opt for wallet support which is always available and helpful, especially if you are new to cryptocurrency ownership.
- expenses: Hot third-party wallets may charge transaction fees, which ultimately reduces your earnings.
- protection: Ensure that your wallet provider is trustworthy and has reasonable security measures in place to protect your cryptocurrency keys.
- Supported encryption types: Some wallets may support only a few crypto projects, while others may support hundreds of crypto projects. For example, if you want to buy Cardano (ADA), you will need to make sure that the wallet supports this crypto.
With these factors in mind, there is no categorically “best” crypto wallet, Lennweber says, because each wallet has its strengths and weaknesses.
“Many users choose multiple wallets in parallel, which may eventually lead to a more secure distribution of properties,” he says. “However, which wallet is the best and most suitable for a person, everyone must decide according to their own preferences.”
How to use a crypto wallet
The process of using a crypto wallet for cryptocurrency transactions will depend on the type of wallet you have. However, it is generally a straightforward process, not unlike how you send any other currency digitally.
“All you have to do is enter the recipient’s public address and the amount of cryptocurrency you want to transfer, and confirm the transaction,” Lennweber says.
The difference between dealing with cryptocurrency versus fiat currency is that there is less recourse if things go wrong.
“Be careful when entering the address, as cryptocurrency transactions are irreversible,” Lennweber says. “If you enter an incorrect address, you will not be able to get your coins back.”