Every crypto user has probably wondered about how crypto wallets work. Understanding these wallets and their utility properly is as important as the buying of coins itself. The concept is simple and the term ‘crypto wallets’ is self-explanatory to some extent. But what if we told you that strictly speaking, crypto wallets don’t actually store crypto? (It’s, true, they don’t)
Investors should also take time to compare different types of crypto wallets available in the market. Crypto platforms like CoinSwitch allow users to store their funds within their app—a feature similar to an online crypto wallet. But what makes them different, and when should you use them?
Fact Check: What is a crypto wallet?
In ordinary life, most of us store our cash and cards in a wallet to keep them safe. Likewise, many crypto investors discover that in order to keep their assets safe, they need to store them in a safe place. But here is where the difference between our real and virtual lives comes into play:
Technically, crypto wallets don’t store your crypto. Your holdings live on the blockchain and can only be accessed using a key. And that’s where they stay. Crypto wallets simply keep your keys safe and secure, so only you can access them in order to make a transaction. The keys are something like the PIN codes of your debit and credit cards; they prove the ownership of digital money and allow only confirmed users to make transactions.
So essentially, a crypto wallet is a software program that allows users to interact with blockchains, enabling them to make purchases and sales. It also allows users to view their account information and monitor their portfolios.
Features of a Crypto Wallet
If knowing what wallets are used for hasn’t already convinced you to look for one, here are some features of a crypto wallet that might make you think again.
- Offline storage option: Some crypto wallets work offline. The advantage is these wallets, especially hardware ones, are usually impenetrable to cyber attacks. Some of them remain safe and secure even if they are exposed to a computer infected with a virus.
- Self-ownership: With a private key that only you can access, you are the indisputable owner of everything in your wallet. It’s a great way to secure your ownership rights without getting third parties involved.
- Accessibility: All you need is to be anywhere with an internet connection and you can keep your crypto growing.
- Easy to use: Easy access is an especially crucial factor for daily cryptocurrency users, and wallets will definitely simplify your life on that front.
Types of Crypto Wallets
There are different types of wallets that can be used for blockchain transactions, each having its own unique purpose. They are usually classified into hot or online wallets and cold or offline wallets. Since there are no one-size-fits-all crypto wallets, it’s a good idea to look at the various types available before you make a pick.
Hot wallets are connected to the internet and are meant primarily for everyday users. They are easy to set up, and you can access them from anywhere with an internet connection. But this comes with security risks because if your hot wallet gets hacked, there’s a chance you might lose all your assets.
Types of hot wallets:
- Desktop wallets: These wallets come as downloadable applications for use on desktops or laptops. The app helps generate a data file that will hold the private keys.
Examples: Exodus, Bitcoin core, and Electrum.
- Web wallets: As the name suggests, you can use this kind of wallet through a web browser without having to download any software or apps.
Example: GreenAddress, a Bitcoin wallet.
- Mobile wallets: These wallets are essentially apps for your smartphone that can be used to exchange funds.
Cold Wallets are considered more secure because they are connected to the internet only during transactions. They come in the form of hard drives and USB devices. Although relatively more secure, cold wallets have some drawbacks, too. If you damage your cold wallet device or forget your key, you won’t be able to access the hard drive and might end up losing your assets forever! And the hardware ones can be expensive.
Types of cold wallets
Paper Wallets: A paper wallet is simply a printed piece of paper containing both your private and public keys, which can be accessed via a QR code.
Example: MyEtherWallet, PQD Wallet.
Hardware wallets: A type of cold storage device that stores the user’s private key in a secure hardware device.
Example: Ledger and Trezor.
Storage options on exchanges: Are they safe?
While it is convenient to store coins in the exchange where you bought them, crypto wallets are safer and more secure, especially if you plan to hold on to your crypto assets for a while (HODLing). It is best to take a call on which one to use after you decide whether you are planning to do short-term trading or HODLing. In any case, your decision will also depend on the exchange you use, because some don’t offer you the storage option at all.
Crypto wallets are a great investment. But if you are just starting out as an investor and are feeling overwhelmed by all these options, you can always begin with a crypto platform like CoinSwitch; the app will allow you to store your assets there while you take your time to explore the various crypto wallet options available in the market.
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Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.