Cryptocurrency wallets give you access to your stored cryptocurrency, from where you can transfer your stored crypto to any desired platform or simply deposit your cryptocurrency, like Bitcoin, Ethereum, XRP, etc., inside your wallet. These wallets can come in the shape of hardware wallets like a USB stick or software-based like an online or downloadable wallet app like Coinbase Wallet.
Why exactly is it necessary for crypto holders to keep a wallet, and why should they not keep all their crypto funds on exchanges? This is a question which we will also answer in this article. We will also explore the type of wallets that individuals can use, the features that are available for different types of crypto wallets, and highlight some best practices that will ensure the safety of the digital assets of the crypto holders and traders.
All cryptocurrency wallets have private keys and public keys as essential components. A Private key is a secret, alphanumeric code that grants the owner access to their cryptocurrency holdings like a password. It must be kept secure and should never be shared with anyone.
It is used to sign transactions, which allows you to spend or transfer your cryptocurrency. A Public Address is derived from the private key using mathematical algorithms. It is an address that you can share with others to receive cryptocurrency. People can use your public address to send you funds, but they cannot access your wallet or funds with it.
Types of Cryptocurrency wallets
Essentially, as mentioned above, there are two types of wallets: Hardware Wallets and Software Wallets. Software Wallets then have further categories, and the user makes their purchase decision of a certain wallet after taking into consideration their requirement.
So, what thought process goes behind making certain decisions can be explained by what type of characteristic a certain wallet holds. We will look into different types of wallets, how they differ from each other, and which one is the best option for you.
Hot Wallet
A Hot Wallet is a type of crypto wallet that is connected to the internet. Hot Wallet is a useful commodity for you if you want easy access to all your stored crypto in one place. You can access your wallet from any device like a mobile, laptop, or tablet if you have a working internet connection with you at the time.
Since most people have access to such electronic items at any given time, it means that they can access their crypto funds whenever they want for either sending, receiving, or storing crypto. It is essential to remember that different Hot Wallets have other characteristics.
Some wallets can support a certain number of different crypto tokens, like Trust Wallet, which can support up to 65 other cryptocurrencies and tokens. Whereas some wallets like eco system specific, for example, MetaMask, will only support Ethereum-based tickets.
There is also the question of the region in which you reside. Some wallets can work in some countries, but they don’t offer their services in others. So, your purchase decision will certainly take into account the wallet companies that make their services available to your region.
Other factors that can influence your decisions are the platform fees that may vary across different wallet-providing services. Some may provide you with enhanced security features and safeguards, and as a result, they will charge accordingly. Some may provide you with a cheaper alternative, but it will be up to your peace of mind whether you would risk going with them.
Some other examples of Hot Wallets are Desktop Wallets and Mobile Wallets.
Desktop Wallet
In Desktop Wallet, you install software where you can store your crypto. You have sole access to your funds as long as you don’t share your private key with anyone. Essentially, you have exclusive access in terms of sending, transferring, and receiving funds, and you are less susceptible to losing your funds as compared to those who keep their crypto holdings in an online wallet.
However, that is not to say that you are completely invincible because, in a desktop wallet, you still need to connect to the internet at one point, and once you do, you are in the potential crosshairs of hackers or malware attacks. Also, if your desktop device gets damaged and you lose your data, there is no way you can get access back to your crypto funds. So using Desktop Wallet has its risks as well.
Mobile Wallet
Mobile wallets are digital wallets that can be installed on your smartphone. They offer the convenience of accessing your cryptocurrencies from anywhere but are also more susceptible to security risks, such as theft or loss of the device. Trust Wallet and Coinbase Wallet are popular mobile wallets with varying user friendliness levels.
Trust Wallet is more user-friendly as it has a simple interface for users to interact with. On the other hand, Coinbase Wallet is considered more business-friendly as it gives you direct access to the Coinbase exchange, hence it can be considered as a wallet suitable for experienced crypto traders and investors.
Cold Wallet
Cold Wallets differ from Hot Wallets in one essential way: it is not connected to any network. They are offline wallets, which makes them a more secure option compared to Hot Wallets because they are not susceptible to any hacking attacks.
If, in the past, you were an FTX exchange user, and instead of storing your crypto funds on the exchange, you decided to keep them in your Cold Wallet, then you are a very smart individual.
At the time of the FTX collapse, many customers reported that their funds went missing from their crypto accounts. The total amount that went missing from different accounts amounted to $600 Million. Cold Wallets have two further classifications, namely Paper Wallet and Hardware Wallet.
Paper Wallet
A paper wallet is essentially a piece of paper on which your private key and public address are printed. You can either write them on a piece of paper, print them, or write them on a text file on your computer.
The ideal approach would be to write it on a piece of paper with you, make sure the paper is of durable material, store it somewhere safe, and not share it with anyone. You can give your public address to anyone who wants to transfer funds to your account, and you can access your account using your private key.
Hardware Wallet
Hardware wallets are offline devices like USB or Smart Cards that hold your private keys and public address. Similar to the paper wallet, you can give your public address to anyone who wishes to transfer funds to your accounts or an exchange if you want to transfer funds from your exchange into your account.
Like Paper Wallets, you should safely store your Hardware wallet away from anyone’s access because once it gets into the wrong hands, you are susceptible to losing your crypto funds.
It is also essential that you do not lose this Hardware Wallet because if you do, then your funds are lost forever. Also, remembering your private key is of utmost importance because companies don’t provide you with a forgotten password-like feature when it comes to crypto wallets.
If you forget your private key, then your funds are lost forever. So if you think you cannot remember your private key at all times, then you should make a backup of it in case of forgetting it at any certain point. Ledger Nanos and Trezor are some examples of popular hardware wallets.
Features of a Good Cryptocurrency Wallet
These are some important features one should take into consideration before deciding to purchase any crypto wallets.
Support Multiple Cryptocurrencies
The most sought-after feature in any crypto wallet is whether or not it will be able to support your favourite crypto tokens. New tokens are constantly being launched in the market, and if a certain token catches your eye and you can generate a substantial profit from trading it, or you see a certain potential of that token in the long term, then you would certainly like to hold it inside your crypto wallet.
But if the wallet you have opted to use doesn’t support that particular cryptocurrency, then you would look for an alternative where your demands are met. Support of different cryptocurrencies in different wallets will also help users diversify their crypto portfolio rather than sticking to just one or two coins.
Two-Factor Authentication
Two-factor authentication or 2FA is an additional layer of security in which a user will be sent a verification code on their mobile number or on their email ID that can either be an alphanumeric or a pre-decided secret question of which only the user has knowledge. This extra layer of security will ensure that your funds are safe from any prying eyes.
Transaction Fees
Cryptocurrency transactions require fees paid to the blockchain network for processing the transaction. How much transaction fee is charged to you depends upon the size of the transaction, the rate defined for trading a certain cryptocurrency, and the current load that the network is enduring. It’s essential to choose a wallet that allows you to control the transaction fees you pay to ensure your transactions are processed efficiently.
So, all in all, choosing the right cryptocurrency wallet is vital for the safety and accessibility of your digital assets. When the time comes for you to decide on which wallet to buy for sending, receiving, and storing your cryptocurrency, take these factors into account before making any decision.
