Decoding the different types of cryptocurrency wallets that provide secure storage to your digital tokens in 2021
A cryptocurrency wallet is a tool, a program, or a service that enables you to interact with a blockchain network. It is essential to have a cryptocurrency wallet to store your digital assets, but picking the right wallet can be difficult. Some cryptocurrency wallets are vulnerable to hackers, and your crypto funds remain at risk.
A crypto wallet essentially stores the private key of your digital assets. By storing, either online or offline, they provide security and accessibility to your cryptocurrencies depending upon their type. There are different categories of wallets, and they all serve different purposes. Cryptocurrency wallets can be classed into three major groups: software, hardware, mobile, and paper wallet. Based on how they are utilized, they can also be grouped as hot or cold wallets.
What is a Cryptocurrency Wallet?
As contrary to the widespread opinion, a cryptocurrency wallet does not store our digital assets. However, it provides us with a viable means to interact with blockchain networks instead. Alternatively stated, crypto wallets can induce the data required to send and receive digital assets. This critical data comprises the private and public keys of various blockchain addresses supported by the crypto wallet.
Crypto wallets also comprise an alphanumeric string address used to recognize the blockchain location. You can share your cryptocurrency address with other people to receive digital currencies. However, the private key should always remain private. No matter the type of wallet you are using, private keys grant access to your coins.
Note this; you cannot separate tokens from the Blockchain. There is no way cryptocurrencies are moving out of a blockchain network. They can only be sent from one address to another specific address.
Types of Cryptocurrency Wallets
If you are a regular cryptocurrency user or trader, you may need to use a hot wallet for convenience. A hot wallet utilizes the internet to operate, and they are relatively easy to set up. They can be accessed quickly and easily hence more appropriate for frequent users and traders. A hot wallet is connected to the internet. Hot crypto wallets can be categorized into software wallet, exchange wallet, and mobile wallet.
1. Exchange Wallets
Wallets provided by crypto exchange platforms are hot wallets. In other terms, if you are storing your Bitcoin on any exchange platform, they control the custody of your digital asset. However, some of the leading exchange platforms have chosen to keep a significant portion of users’ assets in cold storage. The reason being cold storage is deemed to be more secure compared to hot storage.
2. Software Wallets
A software wallet is a web-based wallet installed on your computer or desktop that holds the private key of your Bitcoin or any other crypto. This type of crypto wallet is also connected to the internet and offers relatively less security as compared to a hardware wallet. However, a software wallet facilitates easy accessibility to your crypto funds like Bitcoin or Ethereum.
3. Mobile Wallets
As the name suggests, a mobile crypto wallet enables accessibility to your cryptocurrency funds through your mobile phone. It stores your crypto funds i.e. private key to your tokens like Bitcoin in a smartphone. They are often secured with 2 factor authentication (2FA) to enable security of your tokens. However, you may lose accessibility to your funds in case if your phone is hacked or stolen. While this type of crypto wallet provides greater accessibility, they are relatively less secure than a hardware wallet.
It would be best to store vast amounts of money through hot storage since they are more exposed to hackers. They are potentially prone to security threats which may result in the loss of your crypto assets. It would help if you held long-term investments under cold storage, and only a limited quantity can be held in hot wallets.
Cold wallets don’t use the internet and are considered more secure for storing your tokens private keys. They are only connected to a computer and internet while performing a transaction. They are relatively less accessible in comparison to different types of hot wallet, but provide optimum security. Moreover, you should always consider storing your large amount of tokens in hardware or paper wallet and store the funds you need accessibility to in your hot wallet.
1. Hardware Wallets
Hardware wallets and paper wallets are both considered to be cold wallets. A hardware wallet is represented as a physical USB device that stores your Bitcoin or any other token in an offline manner - without connected to the internet. This further makes it difficult for hackers to gain access to your digital asset. However, you may lose immediate accessibility whenever you need to make a transaction.
2. Paper Wallets
Paper wallets enable you to print your public and private key on a piece of paper. Some paper wallets also have a QR code for you to directly send a cryptocurrency transaction. They store cryptocurrency in offline storage and all you have to do is enter your private keys from the piece of paper while performing a transaction. You will have to safely store the piece of paper as you lose access to your crypto tokens if you lose access to your private key.
A cold wallet uses a physical medium to store private keys offline. This is why they are more robust and impenetrable by hackers. However, cold storage is more expensive compared to hot wallets, which are provided at no cost. Again, cold wallets support a limited number of crypto assets compared to hot wallets, which supports several tokens. In fact, most of the cold wallets today only support major digital assets in the market, including BTC, ETH, and LTC.
Cryptocurrency wallets are an essential element of the blockchain ecosystem. They enable us to use Bitcoin and other digital assets through the blockchain network. Every wallet differs from the other, and each has its own pros and cons. If you are looking to invest in cryptocurrencies, you should set a security-focused mentality. Ensure you purchase your coins from a trusted source and protect your private keys from falling into the wrong hands.
The best way to guarantee your crypto assets are safe and secure is by purchasing a cold wallet. Even though hot wallets provide us with the convenience we require when transacting or trading cryptocurrencies, they hack-proof from a security point of view. Avoid keeping your long-term holdings in hot wallets to be on the safe side.