What Is a Cryptocurrency Wallet?

One of the most important aspects of dealing with cryptocurrencies is where to store them, and how to keep them safe. This is what we will discuss here. However, if you are still not sure what digital currencies are and how they work, make sure to check out our guide on cryptocurrency, as we won’t go into detail about them here.

With that out of the way — let’s talk about the best way of keeping your coins safe, which is storing them inside your private cryptocurrency wallet.

What is a cryptocurrency wallet, and why do you need to have one?

A cryptocurrency wallet is pretty much what the name suggests — it is a wallet for digital coins. Cryptocurrency wallets come in many different forms, as we will discuss later on.

For now, however, you should know that they come in the form of applications, browser extensions, or even physical devices that are capable of keeping your coins safe from theft, manipulation, and alike.

As for why you need a wallet — the answer is simple: You have to have one. It is pretty much impossible to own cryptocurrencies without holding them inside a wallet. Of course, that is not exactly true, as you can still your coins inside an exchange-owned wallet.

For example, if you were to deposit fiat money into an exchange and buy your first cryptocurrency with it — those coins would sit in an exchange’s wallet, at least until you withdraw them to your private wallet. However, this is not something that you should do. In fact, it is recommended that you don’t keep your coins within the exchange when you are not using them for trading.

Most crypto exchanges are centralized, which is true for almost all of the biggest ones. As such, they have centralized servers that could be hit by hackers. In other words, while no one can hack a cryptocurrency or a blockchain — hacking an exchange is not too difficult for a capable hacker, and while your coins are stored within the exchange’s wallet, they are vulnerable and can be stolen. This has happened many times in the past, often resulting in millions, or even hundreds of millions being stolen.

Besides, if your coins are stored on an exchange, they are not really your coins. The thing with cryptocurrencies is that the wallets in which they are stored have a private key that is used for signing and confirming transactions. If you have your own wallet, you are the one who owns this private key. If you use the exchange’s wallet, the exchange is the owner of the private key.

And, as the crypto community likes to say — not your key, not your coins. This is why it is much better for you to have your own cryptocurrency wallet and to store your coins inside, with you being the only person with a private key and the sole owner and manager of those coins and tokens. This brings high security, as well as peace of mind.

Storing your funds in your own wallet is also the best tactic if you have large amounts of money in crypto. If you store a massive amount of Bitcoin or other coins in an exchange-owned cryptocurrency wallet, and it gets hacked, goes bankrupt, or gets shut down by the regulators — you may never see your money again. A lot of people lost all they owned because of such reasons, and all of it could have been prevented if they only withdrew their funds to a personal wallet.

What types of cryptocurrency wallets can you choose from?

As you may know, there is more than one type of crypto wallet. In fact, there are quite a few different types, each with their own strengths and weaknesses. Some of them are online (hot) wallets, while others are offline (cold) wallets. These different types include:

• Extensions
• Hardware wallets
• Paper wallets
• Desktop wallets
• Mobile wallets

The first thing to note about all of these different types is that they can be designed to store only a single type of cryptocurrency, such as Bitcoin. Alternatively, they could also support several coins and tokens, a specific kind of tokens (ERC-20 wallet only supports ERC-20 tokens), or they can be universal, supporting hundreds of coins at the same time.

Some of them allow you to trade a specific coin for another one, as long as both are supported, while others only serve as storage and nothing else. There are endless combinations, and whatever it is you are looking for in a crypto wallet — you will likely find at least one that will suit your needs.

Now, let’s take a closer look at each of the five types we mentioned earlier, and see each of their strengths and weaknesses.

1) Extensions

Online wallets, also known as hot wallets or web wallets, are just as the name suggests — wallets that exist online. They often come in the form of a website or a browser extension that is always connected to the web, In a way, they are similar to PayPal, and as long as you have an internet connection — you will always be able to reach them and manage your coins.

However, this is also their greatest weakness, as the fact that they are always connected to the internet also works in favor of hackers who might try to break into them. If your hot wallet has a weak password, or your password gets exposed somehow — you can consider your funds gone. Hackers will break in, steal your private key, and send all of your funds to their own wallets.

In other words, while the fact that they are on the web means that you can easily shift your coins between the wallet and exchanges at any time — it is also their greatest weakness. This is why they are mostly only good for keeping small amounts of cryptocurrencies close at hand, while you are waiting for a good investment or trading opportunity to emerge.

Some examples of hot wallets include Coinbase, CEX.io, MetaMask and others.

2) Hardware wallets

Then, we have hardware wallets, which are a type of cold wallets. These come in the form of a device, not unlike the USB stick. You can connect them to your PC, withdraw your cryptocurrencies and store them on it, and then simply plug them out. 

They have no connection to the internet on their own, meaning that they cannot be hacked, unless during those short periods when you are depositing or withdrawing your coins to and from them. However, this is a very small window of opportunity for online thieves, so you shouldn’t worry too much about them being able to exploit it.

However, this also makes cold wallets pretty impractical when it comes to quick trades and investments. You need to have them, as well as your computer, at hand at all times in order to exploit sudden opportunities, which will not always be the case.

Furthermore, you also need to keep in mind that physical form makes it easier for them to get stolen. Someone can simply take the device off of you without you even noticing. They would still need to crack its protections, such as the password that you must put, but losing a cold wallet could be a problem. Still, if you are careful enough, this shouldn’t happen, and they are considered to be the best way to store large amounts of cryptocurrencies. 

Some of the best cold wallets that you can find on the market include Trezor and Ledger Nano S.

3) Paper wallets

Then, we have paper wallets, and the first thing that we should point out is that they are definitely not for everyone. They are a bit technical, and require not only a certain amount of technical knowledge, but also a lot of caution from their user.

Basically, a typical paper wallet is nothing more than a piece of paper with your public addresses and private keys printed on it. In a way, it is a low-tech type of cold wallet. That is all that a paper wallet needs in order for you to start transferring your coins on it.

Of course, this means that it will keep your private keys offline, which is pretty secure, as we have seen in our cold wallet example. However, it is easy to lose the paper, have them stolen or damaged, which could lead to losing your money. 

One example of a paper wallet is MyEtherWallet.

4) Desktop wallets

Next, we have desktop wallets, and once again — the name pretty much says it all. These are wallets for your Bitcoins and your altcoins which you can download, and they can then sit on your desktop. A good thing about them is that they are half-way between hot and cold wallets. 

Having them on your desktop means that it is pretty easy to get your coins to an exchange, or back to the wallet itself. However, all you need to do is cut off your internet connection, and your entire desktop/laptop becomes a cold wallet.

It is a middle solution, and a rather good one for those who are traveling and want to keep their coins offline, but close at hand. There are different wallets for different systems, and there are many that would work on several of them.

Some examples of desktop wallets include Bitcoin Core, Electrum, Exodus, and more.

5) Mobile wallets

Finally, we have mobile wallets, which are online crypto wallets that you can download and use as an app on your phone. Mobile wallets became popular relatively recently, but their development picked up the pace once crypto went big in 2017/2018.

Similarly to desktop cryptocurrency wallets, these can also be used as hot or cold wallets, and all that you need to switch them from one to the other is to connect/disconnect them from the internet. They are pretty easy to use, they support a fair number of coins, and you can easily use them for trading on the go, which is usually out of the question, except if you carry around a laptop at all times, and can quickly find some Wi-Fi.

Now, your phone is typically always connected to the web, which makes many classify this wallet as a hot wallet. However, if you have a spare one — and many of us do in the modern day — you can just start using that one as a cold wallet, and easily carry it with you, and then just connect to the web when you want to trade.

Some of the most popular mobile cryptocurrency wallets include Coinomi, Mycelium, and Electrum.

Dangers of crypto wallets

From everything that we have mentioned so far, you can probably already tell what some of the dangers regarding crypto wallets can be. For example, if you own a wallet, and you are in control of its private key — losing access to it means that all of your funds might be lost to you forever.

This is a danger that can often happen to HODLers, who tend to buy coins, store them somewhere, and forget about them for years. By the time they remember to check them, they might not remember their password, or they might lose their cold wallet if they don’t secure it properly.

Making a backup is a good way to safely store your wallets, and you can do it in several ways. Some people prefer to simply write their information down on a piece of paper and hide it somewhere in their home. Others may take an extra step and hide the paper in a safe or bank. 

You can also write down the code and encrypt it in a way that only you would understand, and know how to decipher it to get the actual information. That way, even if someone steals it, they won’t be able to get the real code. Alternatively, you can also write down the true code, but delete the last few characters, which you would memorize.

That way, even if someone finds the code, it would be incomplete, and they wouldn’t be able to break into your wallet and steal your funds. However, this method has an obvious downside, which is forgetting those last few characters, which could mean that even you would be locked out of your wallet forever. Generally speaking — relying on your memory over long periods is not the best way to go about it. Storing this information on devices is also not smart, especially if they can be hacked or stolen.

In other words, you might have to get creative, split up the code and store it in different places, or use some of the methods that we have mentioned before.