- Cryptocurrencies are stored on exchanges or in crypto wallets
- Crypto wallets allow total control of your digital funds
- Coins can be stored online or offline
- Choosing a cryptocurrency wallet depends on personal needs
You may keep your cryptos with the exchanges. But then you are not in control of your funds. Besides, exchanges can be hacked, and the consequences become very sad.
The more secure way to store cryptos is the cryptocurrency wallet. It lowers the risk of losing funds, thus contributes well to your general health. Maybe it’s time to get one right now?
What Is A Cryptocurrency Wallet?
A crypto wallet is a place where you can store your digital currencies; a kind of tool that allows you to send and receive coins or monitor the cryptocurrency balance. It is something like a bank account but also much more. In terms of sovereignty, a cryptocurrency wallet is like your own personal safe where no one else is in control of your cryptos.
How Does A Cryptocurrency Wallet Work?
Cryptocurrency wallets do not store coins themselves, they only hold transaction records and the information that proves the ownership of the coins.
Such proof of ownership has a public key and a private key. Both keys serve different purposes, but are linked with each other and play an essential role in cryptocurrency wallets.
The public key is your crypto wallet address. You share it with others who want to send you coins. Like your bank account number, the key comes in the form of a QR code or a long string of letters and numbers:
Public keys alone are not enough for transactions to happen. Whenever you send or receive coins you must prove the ownership of your crypto wallet. The only way to do that is with a private key that is linked to your wallet address.
By entering a private key, you confirm the transaction, sign it and thus prove that you are the owner of the digital currency. The private key is the final access to your funds. It is critically important to always (always!) keep it secret and not share it with others.
Private keys are never held on the blockchain. They are only “stored” on your cryptocurrency wallet, be it an application or hardware device. The cryptocurrency wallet owner is the only one in control of private keys.
The recovery (seed) phrase is like a unique master key generated whenever you set up a wallet. Furthermore, it comes in a readable form!
Usually, the recovery phrase is a 12 to a 24-word phrase, which is as critical as the private key. It is the only backup to your digital funds and allows you to restore access to your cryptocurrency wallet.
It’s secret information that should never be shared with others. Store private keys and recovery phrases offline and make sure they are physically secure.
Main Ways to Store Cryptocurrency
There are two options for storing digital currencies: custodial and non-custodial. They are defined by who is in control of the private keys.
Custodial cryptocurrency wallet
A custodial wallet is one where a third party is in charge of your private keys. Usually, it is a cryptocurrency exchange that allows you to store digital coins. However, the same exchange has full control of your digital funds.
Since the wallet is managed by a third party, it can be seized or halted at any time. Custodial wallets on crypto exchanges often get hacked, they are not the safest option to store large amounts of coins unless you are an active trader.
Non-custodial cryptocurrency wallet
Non-custodial wallet owners have full control of their private keys. This means, you are the one responsible for the wallet, and you do not have to ask for permission to use your coins. No third parties are involved.
On the other hand, if you lose the private key, you’ll never have a chance to access digital funds in the wallet again. A custodial wallet, meanwhile, may help to regain access to the funds.
Types of Cryptocurrency Wallets
Based on their working method and connection to the internet, non-custodial wallets (or simply cryptocurrency wallets) are divided into two categories: hot and cold storage wallets.
Hot Storage Wallets
Hot storage crypto wallets are those connected to the internet. They may operate as online wallets or as downloadable applications for desktops or smartphones.
- Immediate access to your digital funds
- Easy to set up
- Most of them are free
- Support multiple coins
- Support multiple platforms
- Less secure than cold wallets
- Vulnerable to hacks, viruses, physical damage of the device
- Run on third-party servers
- Possible transaction delays
- Need constant updates
- Hot wallets of crypto exchanges keep private keys under their control
Cold Storage Wallets
Cold wallets are not connected to the internet. They usually come in the form of physical devices (hardware wallets) or a piece of paper (paper wallets).
Cold storage wallets operate offline and are considered better protection from malware, viruses and various remote cyber-attacks. But they also come with pros and cons.
- Operate offline
- Private keys never leave hardware wallet
- Cannot be hacked
- Size of a USB stick (hardware wallets)
- Encrypted with PIN and biometric authentication
- Possible to recover funds after a device is stolen or lost
- Slower access to your funds
- Limited coin support
- High price (hardware wallets)
- More difficult to set up (paper wallet)
- The risk of physical damage or loss
Paper wallets are one of the most secure ways to store digital funds. They are printable pieces of paper that look a bit old school. A paper wallet is the only totally non-technological way to store coins and thus the most protected from cyber threats. However, physical protection from sun, water, thieves and loss is a must.
What Should You Look For When Choosing A Cryptocurrency Wallet?
Evaluate how long you plan to hold cryptocurrencies. For long-term investments, it’s better to choose a safer offline crypto wallet that usually comes with a price.
Consider what type of investor you’ll be. Will you buy the Top-10 coins or search for emerging stars? In the latter case, look for a wallet that supports a wide variety of cryptos.
If you travel a lot or plan to trade coins, easy and quick access to crypto holding might be useful criteria.
Crypto beginners deal with a lot of new info. User-friendly and easy to set up wallets are easier and more encouraging to start with.
On The Flipside
- Online wallets are most vulnerable to cyber attacks: keep only small amounts of digital coins there.
- People who know your wallet’s private key or recovery phrase can access your digital funds. Never share them with anyone. In any form.
- Regularly monitor your crypto portfolio balance.
- Keep your cold wallet devices safe from physical damage.