Understanding Crypto Wallets
Crypto wallets store the private keys to your cryptocurrency and keep them safe. They allow users to send, receive and spend multiple cryptocurrencies such as Bitcoin and Ethereum, Ripple, among others. They come in several varieties, and they can be physical devices, software or online services such as exodus, ledger, nano and among others.
But like cryptocurrency, the concept of a crypto wallet is quite abstract. Let’s take a closer look at these essential crypto tools and how they work.
What is a crypto wallet?
The first lesson of crypto wallets is that they are nothing like the wallet in your purse or back pocket, containing cash and credit cards. Rather, a crypto wallet is a form of digital storage for securing access to your crypto.
Cryptocurrency is a highly abstract store of value, with no physical tokens similar to coins and cash notes. There is nothing more than a string of code on a larger blockchain.
When you buy Bitcoin (BTC), what do you actually own? A public key and a private key on the BTC blockchain.
Think of the public key as something like your bank account number – you can share it with anyone, but it doesn’t give access to your money.
The private key is like a password for your bank account. Please don’t share it with anyone, or they might steal all your money.
If you lose your private key, you could lose access to your crypto. Likewise, the person who holds a private key has full access to the cryptography. Keeping your private keys safe in a crypto wallet is essential.
“Coins and tokens are part of a blockchain system in the form of data, and wallets serve as a means of accessing them,” says Martin Leinweber, digital asset product strategist at MarketVector Indexes.
How Crypto Wallets Work
A crypto wallet stores the public and private keys needed to send, receive, and store cryptocurrency.
When you buy a cryptocurrency, the company you bought it from probably gave you a wallet to hold the digital coins. It is called a hot wallet because it is online and connected to the Internet.
“To avoid the risk of hackers stealing your online wallet, you can get a cold wallet that is not connected to the internet,” says Ric Edelman, founder of the Digital Assets Council of Financial Professionals.
Cold wallets are basically USB drives or some other type of hardware device. “Once you have one, you simply transfer your coins from your hot wallet to your cold wallet,” Edelman explains.
Types of Crypto Wallets
As stated above, there are two main categories of crypto wallets: hot wallets which are connected to the internet and cold wallets which are not. Let’s take a look at these in more depth.
A paper wallet is the easiest cold wallet to understand and use. This is what it looks like: a piece of paper with your keys written on it.
“Because it’s just a piece of paper, it’s a cold wallet and therefore safe from hackers, but the paper can be lost, stolen, torn or made unreadable by getting wet,” says Edelman . Given this, “as far as cold wallets go, paper isn’t ideal.”
A more secure type of cold wallet is a hardware wallet. Like a USB drive, hardware wallets help protect your private keys from hackers who would need to steal the physical wallet to access them, says Leinweber.
Hardware wallets also have an added layer of security over paper wallets by requiring users to enter a PIN to access device content. Although these PINs provide an additional layer of protection, if you forget your PIN, you lose access to your coins. “So you have to be up to date to use such a wallet,” says Leinweber.
“The idea behind hardware wallets is to isolate private keys from online storage like on a computer or smartphone, which are more vulnerable to hacking,” says Leinweber. “Storing the private keys offline prevents this, as hackers would have to physically steal the cryptocurrency hardware wallet to access a user’s private keys.”
You can usually get a hardware wallet between INR 3,000 and INR 17,000, although there are much higher priced options. For example, you can buy the Trezor Model One for around INR 10,000. You can also find cheaper ones like a SafePal wallet for INR 5,500.
Online wallets, also known as software wallets, are your hot wallets. Desktop, mobile or web applications, these wallets require an internet connection and are both more accessible but also more prone to hacking than cold wallets.
“Your password is stored on online servers and therefore represents a potentially increased risk,” says Leinweber.
If you only trust your infrastructure, he says it makes sense to create desktop wallets like Electrum and Wasabi Wallet. This avoids involving a third party and allows you to be solely responsible for the security of your wallet.
Leinweber says mobile wallets are often preferred by people who use cryptocurrency daily. These wallets are “positioned as an app on your smartphone, similar to Apple Wallet, and simply allow transactions using QR codes.”
Meanwhile, web wallets are mostly accessed through browsers and allow you to transact anywhere you have an internet connection, he says.
Custodian vs non-custodial portfolios
Now for some more crypto jargon. Non-custodial wallets are the types of wallets that allow you to control your own data. These are often the type of wallet preferred by crypto enthusiasts, as they do not involve third parties to secure your private keys.
Offline wallets from Exodus or MetaMask, two offline storage options, are examples of non-custodial options. These wallets are touted for their security, which means they are less prone to hacks.
Custody wallets, on the other hand, are wallets offered by crypto companies such as crypto exchanges like BlockFi Wallet.
If you choose this type of wallet, you are essentially outsourcing your private keys to them. But these wallets have some advantages when it comes to accessibility. If you want to access and send coins from this type of wallet, you log into your account and enter the location where you want to send your crypto. These hot wallets usually come with other features as well, such as free availability and allowing the ability to stake your crypto.
How to get a crypto wallet
It is not difficult to get a crypto wallet. Some crypto exchanges, such as WazirX, Zebpay, Unocoin, and CoinDCX, offer an online crypto wallet. If you want a cold wallet, you can buy one directly from a manufacturer online or even on Amazon.com. If you browse Amazon.com, you might notice that you buy the Ledger Nano S cold storage stick for almost INR 7,000 or the Trezor Model T hardware wallet for around INR 21,500.
But there are a few factors to consider when choosing a crypto wallet:
- Customer service: It is a good idea to choose a wallet medium that is always available and useful, especially if you are new to cryptocurrency ownership.
- Costs: Third-party hot wallets may charge transaction fees, which ultimately reduces your profits.
- Security: Make sure your wallet provider is reputable and has reasonable security measures in place to protect your cryptocurrency keys.
- Supported crypto types: Some wallets can only support a handful of crypto projects, while others can support around 100 crypto projects. For example, if you want to buy Cardano (ADA), you will need to ensure that the wallet supports this crypto.
With these factors in mind, a categorical “best” crypto wallet does not exist, says Leinweber, because every wallet has its strengths and weaknesses.
“Many users even opt for multiple wallets in parallel, which can ultimately lead to a more secure distribution of assets,” he says. “However, which wallet is the best and most suitable for someone should be decided by everyone based on their preferences.”
How to use the crypto wallet
The process of using a crypto wallet for cryptocurrency transactions will depend on the type of wallet you have. Still, it’s generally a simple process, much like you would send any other currency digitally.
“All you have to do is enter the recipient’s public address and the amount of cryptocurrency you want to transfer and confirm the transaction,” says Leinweber.
The difference between cryptocurrency and fiat currency transactions is that there is less recourse if things go wrong.
“Be careful when entering the address, as cryptocurrency transactions are irrevocable,” says Leinweber. “If you enter an incorrect address, you will not be able to collect your coins.”
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