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What is a Cryptocurrency Wallet?

By Arthur Crowson10/06/2022

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Simply put, it is a place where you store your digital assets or cryptocurrencies. From such a wallet, you can store, send, receive and sometimes trade cryptocurrencies.  Wallets vary significantly depending on what the user wants to achieve. There is also a varying level of risks as far as crypto wallets are concerned.

This makes it necessary to choose a wallet carefully, especially for those entering the space for the first time. There is a lot of risk associated with the crypto space and some users have lost millions of dollars in digital assets by making one wrong choice. This is not meant to scare you, but rather to inform you. In this article, you will learn everything you need to know in order to choose a cryptocurrency wallet you can use safely. If you are looking for a cryptocurrency wallet explanation, read on.

How Cryptocurrency Wallets Work

Before getting a wallet and buying cryptocurrencies, it is important to know how wallets work in order to use them safely. Wallets are generally protected using private keys. Before sending funds from a wallet, the user is required to digitally sign the transaction using their private keys. As the private keys are quite long and can be intimidating to deal with, signing a transaction is reduced to using a PIN code set for the wallet or a password. Two-Factor Authentication (2FA) is sometimes used to confer additional security.

Of course there is the risk of losing a wallet due to the loss of a device or the damage of it. The developers have made a way to recover wallets on such devices using a mnemonic seed phrase. This is a series of random words that are usually 12 or 24 in number. It is the only way to recover a wallet in the case of loss. It is important to write down the seed phrase and safely store it offline in case the need arises. Many have lost their funds for ignoring this one task when creating a wallet, don’t be one of them!

Types of Cryptocurrency Wallets

Cryptocurrency wallets can be classified based on different factors. In this article, we will classify them based on the number of digital assets they support and their, the devices they can be used on and the level of control the user has on the wallet.

Multi and single asset wallets

As the name implies, multi asset wallets support more than one cryptocurrency. Because of the several assets they support, the user can decide to trade one asset for another. They can also hold all supported digital assets in one single wallet with one private key. This makes it easier for the user to manage their portfolio without having to manage  many private keys and seed phrases. An example of a multi asset wallet is Exodus which I personally use. It supports more than 100 assets.

On the other hand are single asset wallets which support only one digital asset. One can use this wallet if they are interested in holding only one cryptocurrency. There are not many of this kind of wallet and most of them are for Bitcoin only as they were first used when the only cryptocurrency or the others were not yet widely accepted. An example is Electrum wallet which is just a Bitcoin wallet and does not support any other digital asset till today

Based on the level of control the user has on the asset, wallets are broadly classified into hot and cold wallets. This level of control also determines the level of security of the wallet to a large extent.

Hot Wallets

Hot wallets are wallets that are perpetually connected to the internet. These can be web-based or mobile based in the form of an app. As long as the mobile device is connected to the internet, the wallet is also active online. The web-based wallet is however perpetually online. A major disadvantage of this class of wallets is that they can be easily attacked by hackers or other bad players. An example is the online version of the blockchain wallet and the mobile version of the same. The desktop wallets also fall into the hot wallet category. Examples are Exodus and Atom.

Cold Wallets

Cold wallets are technically offline wallets. This is because they are 100% offline unless the user wants to carry out a transaction after which it goes offline again. There are two types of cold wallets, namely paper wallets and hardware wallets. Paper wallets are literally on paper. The wallet address is printed on the paper and funds can be sent to it. However to send money from it, the user will have to use the private key to log onto a computer to do that. Same thing goes for the hardware wallet which most times just looks like a memory stick and is completely offline.

Cold wallets are generally safer than hot wallets because they are offline and cannot be hacked. However, it does not mean that they do not have their own shortcomings. For instance, the challenge with a paper wallet is that it can easily be damaged by water or fire, so there is need for careful handling. It can however be recovered using the seed phrase.

How to Choose the Right Wallet

Choosing a wallet can be a daunting task especially if the user is entering the space for the first time. However, the task becomes easier if the user knows what they wish to use the wallet for. Some factors to consider are the amount of digital assets the user wants to acquire and their level of familiarity with crypto wallets in general.

If the investor or wallet owner wishes to buy a significant amount of assets and does not need to use the wallet often, it is advisable to buy a hardware wallet. There are several of them on the market, the most popular of which are from Trezor and Ledger. This may be a significant investment for a wallet, but it is necessary to protect a larger investment. The option of a paper wallet is very cheap but works just as well. More care must be taken to preserve it though.

Hot wallets on the other hand are ideal for those who trade cryptocurrencies daily or need to access their wallets often. It is also more suitable for those who spend their assets to buy things online. It is however advisable to put just enough of the cryptocurrency in a hot wallet for spending and trading. Leaving excess funds on a hot wallet is a high risk to the owner as hackers can very easily access it and steal everything.

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Arthur Crowson

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