What Are Cryptocurrency Wallets? and What Are the Different Types of Cryptocurrency Wallets?
A cryptocurrency is a digital or virtual currency, and, like traditional currencies or fiat money, they need to be stored in a location. Cryptocurrency wallets are like bank accounts where fiat currencies are most commonly stored.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a program/application that functions basically to store keys (public and private keys) needed for a successful cryptocurrency transaction. A cryptocurrency wallet is a place where digital currencies are stored.
Cryptocurrency transactions are facilitated by two basic things: a public and a private key.
- Public Keys: are details about your cryptocurrency wallet that can be shared with the public. It’s like your account number and account name. You can give it to friends so they can send money to you or take money from your account when you authorize it. The public (people) will see your public keys as a wallet address on your cryptocurrency wallet.
- Private Keys: are details about your cryptocurrency wallet which must not be shared with the public. Like your credit card pin or the password to your bank account, sharing them would grant people access to your account. Thus, they are not meant to be forgotten or shared with others.
Functions of a Cryptocurrency Wallet
Cryptocurrency wallets offer the following essential functions.
- Cryptocurrency wallets help keep your private keys, i.e., the passwords you access to your cryptocurrencies. Many of these cryptocurrency wallets help you to safely secure your private and public keys and provide them whenever you need them.
- Crypto wallets allow you to send, receive, and spend cryptocurrencies like Bitcoin and Ethereum.
- Crypto wallets offer the functionality of encrypting your information.
Understanding the difference between a custodial and non-custodial cryptocurrency wallet is important to know what you should expect from a cryptocurrency wallet.
A custodial wallet is one where the private key is held by a third party, often a centralized exchange. They offer less user responsibility regarding private key management.
A non-custodial wallet gives its users full control over their private keys to your cryptocurrency. Thus, users are in control and take responsibility for their cryptocurrencies.
Types of Cryptocurrency Wallets
If you have ever tried purchasing a digital asset, you would know that there are various types of cryptocurrency wallets that you can use to store both your public and private keys for easy access to your digital assets.
However, there are two major categories of cryptocurrency wallets; others are only forms of these two. The two major types of cryptocurrency wallets are hardware and software wallets.
1. Hardware Cryptocurrency Wallets or Cold Wallets
As the name implies, hardware wallets are physical devices that help users help store their keys, typically offline, on a wallet device that is not connected to the internet. They are often referred to as cold wallets because they are not connected to the internet.
The lack of internet connectivity means that cold wallets are not easy to hack. Many cold storage devices are usually USB disks, hard drives, mobile devices, and sometimes paper wallets.
The risk is that it can easily get lost, misplaced, or even stolen because of its tiny nature, which can be a huge setback to your finances. Some examples of cold cryptocurrency wallets are Ledger Wallet and Trezor.
2. Software Cryptocurrency Wallets or Hot Wallets
These types of wallets exist as software files on a computer system fully connected to the internet. Hence the name, hot wallets. They are used for storing keys, they’re usually connected with an exchange like Binance, and they are quick and easy to access.
There are different ways to access your hot wallet; you can download a software program to your computer or through the crypto exchange that was used to buy your digital currency or use a mobile phone application.
However, there is a higher risk for hacks, breaches, and tampering because each of the above options leaves your keys linked to the internet, and with that, your crypto wallet can easily be hacked. Some examples of hot cryptocurrency wallets are Coinmetro Wallet, Trust Wallet, and Coinbase.
In choosing a cryptocurrency wallet, you may want to consider some of the below.
- Binance: is the world’s largest cryptocurrency exchange ranked by trading volume. The security of Binance has been one of the contributing factors to its success. In addition to allowing users to store their cryptocurrencies, Binance allows users to trade and invest in crypto.
- Coinmetro Wallet: is a software (hot) exchange that is aimed at building a worldwide blockchain for trading through a secure and fast platform. In addition to margin trading, Coinmetro has recently launched crypto Staking as a new service on the platform.
- Ledger wallets are multicurrency wallets designed to store private keys for cryptocurrencies offline. They are of 2 types; ledger Nano S which is useful for storing crypto for a fair price, and ledger Nano X which is used in high-end security solutions like debit or credit card cards.
In a Nutshell
The security of your digital asset largely depends on the crypto wallet where it is stored. Thus, the efficacy of choosing the right cryptocurrency wallet to guarantee security as well as quick access to your digital assets cannot be overemphasized.