CRYPTOCURRENCY WALLETS EXPLAINED
For all the brilliance that cryptocurrency has, the safety of your cryptocurrencies are a major issue that people deal with. It doesn’t matter how experienced you are in the cryptocurrency space; you need to know how to keep your cryptocurrency in a crypto wallet, and keep it safe in the best crypto wallets.
Knowing which crypto wallet to keep your cryptocurrencies in, which wallet type to choose and how to protect your cryptocurrencies from hackers are important knowledge you must have if you’re interested in cryptocurrency. So, before you buy your first bitcoin, or if you already have bought cryptocurrencies, this article is written for you.
In this article, we will teach you the different types of cryptocurrency wallets, how crypto wallets work, the pros and cons of the different wallet types and how to protect your wallet from hackers.
So, if you’re ready for the deep dive into the best cryptocurrency wallets, let’s get it started.
Why Do you Need a Cryptocurrency Wallet?
Currencies need a place to be stored. Whether it is a bank account, for your money in the bank, or your wallet for your physical cash. I’m sure you have either seen or own a wallet. And what does a wallet do for you?
It helps you keep your cash.
Now, that is what your regular wallet does, but that isn’t exactly how Cryptocurrency wallets work.
However, the main idea of a wallet is to help you save whatever cryptocurrencies you have.
What is a Cryptocurrency Wallet?
Although cryptocurrency wallets help you store the cryptocurrency that you have, in layman’s terms, they aren’t similar, in terms of how they work, to everyday cash wallets.
Before explaining how a cryptocurrency works — this is what makes it different from regular wallet — it is imperative to define what a cryptocurrency wallet is.
Cryptocurrency wallet is a tool that helps you interact with a blockchain.
Now, that might sound a bit strange. You’re asking, what does ‘interacting’ and blockchain have to do with wallets?
Well, that is why crypto wallets aren’t as simple as your everyday wallet.
Let’s take the blockchain as a big classroom. For a student to enter into the classroom, the student must be assigned a seat else he/she won’t be allowed into the classroom.
A cryptocurrency wallet, whether it’s an Ethereum wallet or a bitcoin wallet, is the seat number assigned to everyone who wants to enter into the class. The wallet isn’t the seat itself, remember, it’s only a way of assigning numbers.
Without the seat number, no student, no matter how smart or buff, can gain access into the class.
Therefore, the teacher in the classroom, which will be transactions on the blockchain, only interacts with the seat number, and not the student exactly.
So, a cryptocurrency wallet isn’t a wallet in the regular sense of the word, but a tool through which the student (you) can interact with the room with a teacher (the blockchain).
If all these still feels and sounds gibberish, let’s explain just how a cryptocurrency wallet works.
Imagine that you’re in a bank. You go to the cashier and tell them that you want to open a bank account.
The cashier tells you that they have a big room that’s filled with money. A lot of money. Opening a bank account means that you’re going to gain access to sending money into the room and collecting money sent from that same big room.
However, because you have an account doesn’t mean you’ll have your own special safe box in the room.
With an account, you are able to receive money into a special number that’ll be given to you, and also sent to other special numbers that are also in that room.
A cryptocurrency wallet works just like that: it doesn’t hold any cryptocurrency, no matter the wallet, whether it’s a bitcoin wallet or an Ethereum wallet or a Solana wallet. A cryptocurrency wallet doesn’t hold cryptocurrency!
I’ve emphasized several times that a crypto wallet doesn’t hold currency so that you don’t feel like you can just open your wallet and take off your crypto just the same as you do with a regular wallet.
The crypto wallet is that account number that you can use to interact with the blockchain, which is like that big room with loads of money.
Now, if you don’t know what a blockchain is, here is the best time to break it down for you.
And don’t feel any way, blockchain technology — and blockchain in particular — is quite simple to understand.
How Blockchain Works
Blockchain technology is a technological structure that stores records of transactions, called blocks, on several ‘chains’, in a network that is connected through peer-to-peer nodes. I know that was a mouthful. I’ll break it down.
Let’s see a blockchain like a big rock.
Now, people are carrying out different transactions on this big rock.
Every time anyone carries out any transaction on the rock, there is a small block that is apportioned to that transaction.
The transaction can be anything, but for the sake of this article, the transaction is buying and selling.
However, before a transaction can go through, and the ‘block’, a record of the transaction that is connected in chains to other past transactions, people must confirm. These people are why it’s called peer-to-peer. There’s no big brother somewhere that signs all the transactions as good.
The different peers on the technology must confirm the transaction before it is approved.
The approval happens fast as many people, miners, are working on who can solve some mathematical problems to approve the transaction. So, it is a battle for the fastest miner.
Now, with cryptocurrency wallets, you are able to have a space on this big block where you can send cryptocurrency and receive cryptocurrency.
So, should you want to have a cryptocurrency, you must have a wallet.
What Constitutes a Cryptocurrency Wallet?
Every crypto wallet contains a public and a private key.
Your private key is a set of numbers or words that you have access to while the public key is a set of alphanumeric numbers that you send to others so they can send you cryptocurrencies.
There is no crypto wallet without a private and public key, therefore, it is pertinent that you know and store your private key in a safe space.
If you lose your private key, you ordinarily won’t have access to your cryptocurrency wallet…except you have a hot wallet on a crypto exchange platform.
That brings us to the different types of cryptocurrency wallets, their pros and their cons.
Because cryptocurrency is a decentralized technology that requires some pretty complex coding knowledge to walk around, we have different types of wallets to help you ‘interact’ with the blockchain so that you can send and receive cryptocurrencies.
Two main types of crypto wallets exist:
1. Cold Wallets
2. Hot Wallets
These are the main types of wallets in the blockchain. Every other type of wallet falls under these two main categories. Whether it’s a wallet on an exchange platform, or one on a wallet app like Trust Wallet, or a chrome extension like Metamask, all wallets in the cryptocurrency space fall under either Hot wallet or Cold Wallet.
- Hot Wallets: Any wallet that’s connected to the internet is a Hot wallet. If you need an internet connection to access a crypto wallet, then the wallet is hot.
- Cold Wallet: But wallets that you don’t need to log on to the internet to access are cold wallets.
Does that sound pretty simple enough?
If it doesn’t, I’ll break it down further.
Most of the popular wallets we hear about, especially for crypto traders, are hot wallets. From the different wallet addresses on exchange platforms, to chrome or browser extension wallets, to wallet applications on Android and IOS, every wallet that requires you to use the internet to connect is a hot wallet. Hot wallets are software.
While a cold wallet are wallets such as paper wallets and cold storages. You don’t need internet access to send and receive crypto on your cold wallets.
Each of these wallet types have their pros and cons.
However, we need to understand where each of the wallets we know falls under; cold or hot wallet
Types of Hot Wallets
There are three main types of Hot wallets. They are:
- Web wallets
- Mobile Wallets
- Desktop Wallets
- Web Wallets: These are wallets that you can access on the world wide web, through a browser. With web wallets, there is no need to download an app or an extension. Most web wallets are gotten from cryptocurrency exchange platforms such as Redot, Binance, Coinbase etc.
With web wallets, especially those on exchange platforms, you are not given the private key. Instead, the exchange platform saves the private key for you on their server. All you need to do to access your wallet is log onto the exchange and your wallet’s balance shows. You, however, get to have a public key that you can give to people who want to send your cryptocurrencies.
P.S: Every cryptocurrency has its own wallet address. You can’t send Ethereum to a Bitcoin wallet, nor can you receive Solana on an Algorand wallet. Therefore, it is important that you have the wallet address for whatever currency you want to send crypto to. Some of the best crypto wallets for the web include Coinbase and Binance
PROS OF WEB WALLETS
- It is easy to create and access.
- You don’t need to store your private keys; all you need is a password you can remember.
Con of Web Wallets
It is relatively unsafe as a bridge into the exchange’s system might see all your cryptocurrency wiped out. Should any hacker gain access to your private keys, which are stored with the exchange, you can lose all your crypto assets.
- Desktop Wallet: These are software, most times browser extensions, that you download on your system. A desktop wallet gives you complete access to your private keys.
Because the software installed and saves on your system a ‘wallet.dat’ file, you can easily access your wallet by using your personally created password for your wallet.
However, should you need to access your desktop wallet from another system, which isn’t yours obviously, you’ll need to have the private keys and your password ready. You also need your private key should you lose your laptop or delete the wallet.dat file on your system.
Some of the best digital wallets for Desktops are Metamask and
1. They are relatively safer than web wallets as you have full control over your private keys.
- If your computer has any virus or malware, there’s a high possibility of you losing your cryptocurrencies.
- Mobile Wallets: Unlike desktop wallets, mobile wallets are mobile software applications that you download on your mobile phone.
Mobile wallets are easy to use, most have easy-to-understand user interfaces, and use QR codes to send and receive crypto on them.
Also, mobile wallets give you ‘seed phrases’ that act as your private keys.
With mobile apps, you get the relative ease of web wallet and the safety of a desktop wallet. Some of the best crypto wallets for mobile include Trust Wallet and Argent.
- They are easy to use and doesn’t require you to know your private key to have access to your wallets
- Should you misplace your phone and can’t remember your seed phrase; all your cryptocurrencies are gone.
- If your phone has a malicious app, you are vulnerable to attacks from hackers.
P.S: It is often advised that you store your seed phrase in different places, online and offline, so you can easily access your mobile wallets should your phone get broken or stolen.
Types of Cold Wallets
No internet? You have no need to worry with these two types of cold wallets.
Although cold wallets are safer, and are often advised as the best crypto wallet option when you plan to HODL large amounts of crypto, you can easily lose your cryptocurrency assets if you misplace the cold storage.
The two main types of cold wallets are:
1. Hardware wallets: These are devices that store your wallets private and public keys. Hardware wallets use Random Number Generators (RNG) to generate the keys for your wallet. They are like USB hard drives, but aren’t USB hard drives.
Hardware wallets can be kept in a place, usually a cold place, and left there forever. The only time any human can gain access to the cryptocurrencies in a hardware wallet is when they have the hardware itself and the password used on the hardware.
You don’t have to fear online attacks when you have a hardware wallet. Your crypto assets can’t be assessed!
While there is no fixed amount, hardware wallets can cost up to $100 for one.
Some of the best crypto hardware wallets include Ledger Nano X, Trezor One, SafePal S1 etc.
PRO OF HARDWARE WALLETS
1. They are the safest type of wallets
1. They are quite pricey.
2. When you lose the hardware, you lose all your crypto. There’s no way you can gain access to your hardware should you lose it.
PAPER WALLET: This is an old form of cold wallet. With paper wallets, your wallet’s private keys are printed on paper or as QR codes.
To access paper wallets, you’ll have to scan the QR code on the paper. There are some wallets that you can download the QR codes offline, and then scan whenever you want to access the wallet.
PRO OF PAPER WALLET
- It is safe as your cryptocurrencies can’t be hacked by hackers
- You have to keep the printed QR code or private key safe cause should you lose it; you have lost all your crypto assets.
- With paper wallets, you can’t send parts of the cryptocurrencies in your wallet to another address. You must send all the cryptocurrency in the wallet at once.
Protecting your Cryptocurrency Wallets
Cold wallets still remain the safest option for you. But if you use hot wallets, you can protect your cryptocurrency wallets from hackers by:
- Use 2-Factor Authentication on your wallets
- Use Password managers and Google Authenticator
These steps don’t protect you fully from hackers because should the exchange’s cold storage or system gets compromised, you lose your assets.