Just like you need a wallet to store cash and credit cards, you should also have a secure place to store your crypto.
When purchasing digital currencies on a trading platform, or exchange, you will have the option to store the keys to your coins in the account, keeping everything on the platform. Alternatively, you are able to move these keys off the platform to a personal wallet.
What is a Crypto Wallet?
A cryptocurrency wallet stores your private keys, which give you access to send and receive the cryptocurrencies you own.
One common misconception is that crypto wallets store actual cryptocurrency. Whilst that intuitively makes sense, they actually only store the private keys which allow you to access your cryptocurrencies, which remain on the blockchain.
Using these keys, you are able to send and receive currency, while keeping your private key encrypted.
Types of Crypto Wallets
There are two main types of wallets – hot and cold wallets.
Hot wallets are connected to the internet in some form, whilst cold wallets are physically stored and not connected to the internet. Both types of wallets have their pros and cons.
Hot Wallets
Exchange Wallet
An exchange wallet is stored on a specific exchange’s servers (think Ebonex, Binance, etc.). While this offers a sort of convenience for easy trading and access to fiat conversion, this type of wallet is only as safe as the wallet provider’s security.
For example, if the exchange gets hacked, the wallets stored in those servers may be compromised. Two-factor authentication is always recommended to ensure the highest level of security.
Web/ Desktop/ Mobile Wallet
Another type of hot wallet is Web and Desktop Wallets. These wallets are separate from an exchange, and often use open-source software. Wallets such as Metamask encrypt the private keys in a browser and are useful for accessing decentralised applications that use Ethereum and ERC-20 tokens (ie SushiSwap).
Cold Wallets
Hardware Wallet
A hardware wallet is one of the more common forms of cold wallets. With this wallet type, keys are stored on a physical device, rather than software, and are similar to that of a USB drive. This type of wallet can be connected to a computer when it’s time to transact crypto and is often compatible with multiple apps and blockchains.
A hardware wallet is ideal for people who have a large sum of crypto, or who will be holding funds for extended periods of time.
Paper Wallet
The second type of cold wallet is known as a paper wallet. As the name suggests, a paper wallet is another offline method of storage, which involves printing out public and private keys and storing them on a piece of paper.
These public and private keys are printed in the form of QR codes, which can be scanned to access transactions.
Often seen as the gold standard for protecting digital assets, cold wallets are the most difficult type to hack. While cold wallets have been deemed some of the safest storage options, they don’t come without their limitations and risks.
Cold wallets can be easily lost or misplaced, and are unable to be recovered. While difficult to hack, it’s not entirely impossible. Safety is key, so it’s important to purchase a storage device from a reputable seller to avoid the risk of tampering.
Pros and Cons of a Crypto Wallet
Is a Wallet Needed?
As many exchanges provide the option of an exchange wallet, it’s not always necessary to move to a different wallet from the get-go. When going through the different types of wallets available, it also comes down to personal preference.
As many starting out with crypto know, it’s no secret that there’s an accompanying learning curve. Until sufficient knowledge is developed, the idea of moving keys to a more secure cold wallet can seem overwhelming.
Exchanges have gone above and beyond to ensure platforms are safe and secure, and often have insurance to back up their security in case of attack.
A crypto wallet is very much so like a personal crypto bank account, that only you have access to and control over.
Where software wallets are built for convenience, hardware wallets are built for safety and security.
