A digital wallet is a place to store cryptocurrency, much like a bank account is a place to store fiat currency. However, unlike a bank account, cryptocurrency wallets are not centralized and are not controlled by a central bank or a nation-state.
How Wallets Work
Wallets work by storing the public and private keys that are used to generate addresses and sign transactions. The public key is used to generate the public address and the private key is used to sign transactions to verify that the wallet is the owner of the currency.
To spend cryptocurrency, a user must have the private key that corresponds to the public address that the currency is stored at. This is done through a cryptographic signature by the private key.
Types of Wallets
There are many types of wallets. Some of these include web wallets, mobile wallets, desktop wallets, and hardware wallets. Each type of wallet has its own pros and cons. Web wallets for example are easy to use but are not secure. Hardware wallets on the other hand are very secure, but are less convenient to use.
Regardless of the type of wallet, it is important to note that digital wallets are not insured in the same way that bank accounts are. So, if you do not properly protect your digital wallet, you may lose all of the currency it contains.
Hot vs Cold Wallets
A hot wallet is a wallet that is connected to the internet. Because it is connected to the internet, it is more prone to hacking. However, a hot wallet is more convenient because it can be accessed from anywhere.
A cold wallet is a wallet that is not connected to the internet. Because it is not connected to the internet, it is less prone to hacking. However, a cold wallet is less convenient because the user must use another wallet or device to access the currency.
A web-based or online wallet is a digital wallet that is hosted by a third party rather than on the user’s computer. These wallets are very convenient because they can be accessed anywhere there is an internet connection and can be used without the need to install additional software. However, online wallets are often considered less secure than other types of wallets because they are vulnerable to hacking, phishing, and other online threats.
- Easy to use
- Easy to setup
- Accessible from anywhere with an internet connection
- There are security risks associated with using online wallets
A mobile wallet is a digital wallet app that is downloaded and installed on a smartphone or other mobile device. Mobile wallets provide users with a large amount of flexibility because they allow users to make payments, send and receive money, and store cryptocurrency on the go. However, it is important to note that mobile wallets are usually not as secure as desktop or hardware wallets.
- Easy to setup
- Allows users to make payments on the go
- Allows users to store cryptocurrency on the go
- Not as secure as desktop or hardware wallets
A desktop wallet is a digital wallet that is downloaded and installed on a desktop computer. Desktop wallets are convenient because they can be accessed from any desktop computer with an internet connection. However, it is important to note that desktop wallets are less secure than hardware wallets because they are vulnerable to viruses and hacking.
- Easy to setup
- Can be accessed from anywhere with a desktop computer
- Not as secure as hardware wallets
A hardware wallet is a physical device that stores a user’s private keys and cryptocurrency. Hardware wallets are considered to be the most secure type of wallet because they are not connected to the internet, so they are not vulnerable to hacking. However, users should still take precautions to protect their hardware wallet from physical threats such as theft.
- Most secure type of wallet
- Easy to setup
- Resistant to hacking, viruses, etc
- Hardware wallets must be purchased
- Physical threats may still be a threat
If you choose a software wallet, you can also choose to print the public and private keys so that you can store them on a piece of paper. This method is referred to as a paper wallet. These can be printed out and stored in a safe place.
- Does not require an internet connection
- Does not require special software to be installed
- Paper can be destroyed
- Private keys can be stolen
- Not very convenient
Exchanges & Custodial Storage
Custodial storage is the last option for storing cryptocurrency. This is where you give your cryptocurrency to a third party exchange or custodian who will store it for you. The third party will do all of the work for you, and you won’t have to do anything.
There are some downsides to this method of storage. You will have to give a lot of personal information to the people who you are storing your currency with. They will have complete control over your crypto, which means that you might not be able to get at it if you need to.
It is not recommended to store your crypto on an exchange or custodial platform because it is not a safe way to store cryptocurrency. There have been many high-profile hacks and thefts in recent years. You must always have exclusive control over your own private keys otherwise your coins are not safe.
- Easy to set up
- Convenient because the exchange or custodian provides it
- Least secure method of storage
- Exchange or custodian may close and users will be unable to access their funds
- Not your keys, not your coins