What are the Types of Cryptocurrency Wallets?
The two main types of cryptocurrency wallets are hot wallets and cold wallets.
- Hot wallets are wallets that are either stored online or on your computer. Hot wallets are not always as secure, as they normally are operated by a third party (for example, a crypto exchange) and can be potentially accessed from any device with an internet connection. Hot wallets can also be applications on mobile devices such as tablets and smartphones. Some desktop computer hot wallets can only be accessed on the computer which it was downloaded to.
- Cold wallets are offline and can be either hardware devices or printed paper. For hardware device wallets, they are usually in the form of a USB stick and contain the cryptocurrency account’s keys. Paper wallets have the crypto account QR code, wallet address, and keys printed on paper and can be used to access your cryptocurrency on its blockchain.
Cold wallets are normally used by those who want to hold cryptocurrencies for an extended period of time and who are concerned about any third-party involvement with their wallet.
What is a Public and Private Key?
Cryptocurrency wallets involve both public and private keys.
A public key is a unique string of numbers and letters which is compressed and shortened (by what is called a hash algorithm) to form a wallet’s address, something that can be shared with anyone from whom you want to receive a particular cryptocurrency payment. The sharing of a wallet address does not give anyone any special access to your crypto, nor would anyone be able to derive your name and/or information simply by having the wallet address.
A private key is paired to your public key and is used to unlock an account to prove ownership and perform transactions. In a blockchain, private keys are actually generated first, then an associated public key, then a hashed (shortened version) of the public key which is the wallet’s public address.
You can think of a private key as a password on a PIN. Private keys can come in different forms (i.e., a 64-digit code, QR code, or mnemonic phrase) but are always very large numbers that are impossible to guess.
Private keys should never be shared, as possession of the private keys are essentially equivalent to ownership. Anyone who has your private and public keys can access and transact from your blockchain account.
Do I Have to Have a Cryptocurrency Wallet?
Yes, you do. Without private keys that give you access to a blockchain address, there is no way for you to access your cryptocurrency holdings.
Can I Just Hold my Crypto on an Exchange?
You can certainly hold your crypto on an exchange but must understand that the exchange would then be the custodians of your crypto.
Exchanges are businesses which allow customers access to buying, selling, and trading of cryptocurrencies, generally with some type of fiat on-ramp or off-ramp. They are privately run and though you may have access to your funds through a username and password on the site, the security of the large amounts of cryptocurrency that the site custodies is not in your control.
If the exchange is not reputable and not insured, internal security failures or external hacks can result in your funds being lost. For this reason, many people choose to store access to their cryptocurrency on ‘offline’ wallets.
Does Each Cryptocurrency Need a Different Wallet?
No. There are some cryptocurrency wallets that are able to access multiple different cryptocurrencies and blockchains. For instance, the hardware wallet Ledger Nano X can directly support multiple different cryptocurrencies.
What is the Best Cryptocurrency Wallet?
That question must be answered by whoever is holding the crypto!
If security is your number one concern and you want to be solely responsible for your holdings, a cold, paper wallet may be best. However, this brings up concerns as well, as many people question where to safely store the paper (Safe deposit box? Under a mattress?).
Hot wallets and applications can provide much easier access, but just like a bank or equity account, one must have confidence in any third-party involvement.
There is no right or wrong answer… it depends on the needs, the preferences, and the risk tolerance of the holder.
KEEP READING
