A pouch where money and other things such as ID cards, debit & credit cards are kept should come to mind when ”WALLET” is being mentioned. Does that imply to cryptocurrency wallet too?
In this article, we’ll learn about cryptocurrency wallets, their types, and their importance.
What Is A Crypto Wallet?
The primary function of a crypto wallet is to store the cryptocurrency that you have purchased or mined. Crypto wallets are well-known for being a secure way to store large quantities of crypto assets using private keys.
Because cryptography operates on a digital platform, private keys are the only way to store data online safely and securely.
Using blockchain technology, it is possible to keep track of all monetary transactions. The safety of a user’s private keys is directly related to the safety of a crypto wallet. Just like your ATM PIN, a private key is essential. Your digital assets can be stolen if you lose your private key.
How To Stay Safe With Crypto Wallet
Your digital assets are vulnerable when they are held in a crypto wallet. Privacy breaches can still occur, even though these service providers promise to protect your assets and transactions with the utmost care. To keep your Bitcoin safe when utilizing a wallet, you can employ the following methods:
1. To ensure the safety of your transactions, it is important to always protect your network. IP addresses should be whitelisted so that the system will immediately block any other sources that try to connect during the transaction. You can also use virtual private networks (VPNs) to hide your location from hackers.
2. Ensure our phone or computer is safe at all times by purchasing a reputable antivirus program. Keeping your crypto wallet’s passwords up to date is an important part of ensuring its security.
3. A user’s hot wallet is typically used if he or she intends to make an immediate or short-term transaction. So, keeping digital assets in hot wallets for an extended period is not advisable because of the increased risk of cyberattacks that they pose.
The fact that code wallets aren’t connected to the internet means that the cryptocurrency stored in them is safe from malicious activities.
However, you can easily transfer your crypto from the cold wallet to the hot wallet when you want to make transactions.
4. Investing in multiple wallet services and using only one of them for regular transactions is an option to consider if you want to be extra cautious. A separate wallet for each cryptocurrency might help diversify your portfolio and make managing it easier.
Types of Crypto Wallet
Crypto wallets are of two major types. They are-
1. Hot Wallets
One of the foremost crypto wallet types brings hot wallets to the discussion. Hot wallets are wallets that connect to the internet and generally offer lesser security. On the other hand, hot wallets offer better accessibility due to their connection to the internet. Even if hot wallets are vulnerable to fraudsters and hacker attacks, they are highly user-friendly.
2. Cold Wallets
Cold wallets are another prominent answer to ‘What are the different types of cryptocurrency wallets?’ next to hot wallets. They are specific variations of cryptocurrency wallets that are designed for cold storage. Cold storage implies that the wallets store the crypto tokens of users in offline mode.
As a result, they serve as vaults that you can use for everyday transactions. Interestingly, some types of cold wallets connect to the internet even while retaining their basic working functionality.
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Therefore, it is quite clear that people with a larger amount of crypto assets would find better benefits with cold wallets.
However, a combination of both cold and hot wallets could present better value advantages for crypto users. For example, a large share of funds could be stored securely in a cold wallet, with the hot wallet allowing better flexibility for funds. So, a hybrid approach with the two crypto wallet categories blended could offer improved security alongside flexibility.
Types of Hot Wallets
Generally, you would find all the software wallets in the hot crypto wallet types. The most common types of hot wallets include mobile wallets, web wallets, and desktop wallets.
1. Desktop Wallets
Desktop wallets involve downloading an application to your desktop or laptop. The application will help in generating a data file for holding the keys of the users. Users should also create a password for accessing the keys. Desktop wallets offer the advantage of ownership of your key, albeit with risks of physical damage or malware/virus infection.
2. Web Wallets
Web wallets are one of the prominent types of crypto wallets in the category of hot wallets. You can access the web wallets through a web browser without the need for downloading any specialized software or application. With the help of browser access, web wallets ensure accessibility for crypto assets from any location with your password, a device, and a web browser.
In the case of web wallets, the website would have ownership of the keys to your crypto assets. However, alternatives like multi-sig wallets offer a certain level of control to users over their crypto wallets.
3. Mobile Wallets
Mobile wallets are also one of the crucial crypto wallet categories in hot wallets with functionality similar to desktop wallets. You have to install a mobile application on the phone, which would serve as the hot wallet. Mobile wallets present better flexibility for exchanging funds while presenting some security risks.
Types of Cold Wallets
The next important point of discussion regarding crypto wallet types would refer to the variants in the cold wallet category. You can find two common variants of cold wallets such as paper wallets and hardware wallets.
1. Paper Wallets
The name gives a lot away about paper wallets when it comes to understanding them as one of the types of crypto wallets. Paper wallets are nothing but physical pieces of paper. The paper must contain all the data you would need for accessing the cryptocurrency. Cold wallets generally offer additional security.
However, the same does not hold strong in the case of paper wallets. In event of losing the paper document, you have the risk of losing the crypto assets in the wallet.
Furthermore, paper wallets also present the setbacks of limitations in sending partial funds easily. In addition, the time-consuming nature of transactions with paper wallets also presents formidable setbacks for their use.
2. Hardware Wallets
Hardware wallets, on the other hand, truly define the principles of designing a cold wallet. They offer security by completely avoiding the online exposure of private keys. Hardware wallets save private keys on a physical device in an offline environment and work just like a flash drive.
Hardware wallets are one of the most easy-to-use crypto wallet types in cold wallets because you can connect them easily to computers or any other device by using a USB drive.
Even if the device is connected to the internet, the private key does not leave the device. The device would request the transaction details and provide validation for the data, thereby completing the transaction. Then, the transaction details go to the online network, where it is documented. Some of the popular hardware wallets which are in use presently include Trezor, Ledger, and many others from different manufacturers.
A cryptocurrency wallet is where your crypto assets whether purchased or mined are stored. There are two types of cryptocurrency wallets which are hot and cold.