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What is a Cryptocurrency Wallet?

Tali Kon

What are cryptocurrency wallets?

A cryptocurrency wallet is like a digital bank account, where you can send, receive and manage cryptocurrencies. Notably, digital wallets do not actually store cryptocurrencies. Instead, storage of cryptocurrency is all takes place on the blockchain. The wallet, though, stores your personal crypto-related information. When transactions happen on the blockchain, they use this information to verify your information.

In a nutshell, if you want to trade in cryptocurrency on an exchange platform, you need to set up a wallet. 

Cryptocurrency wallets fall into two categories; hot wallets and cold wallets. 

Hot wallets:

A hot wallet refers to a digital wallet connected to the internet and, therefore, the data is only accessible online. Take for example the exchange platform Binance. If you want to trade on Binance, you can connect to Binance’s hot wallet. In other words, the access to your funds is directly through Binance’s site. Hot wallets are most convenient as you can set them up easily and they are much simpler to use when you want to trade with direction from the site you are on. 

Cold wallets:

In comparison to hot wallets, cold wallets do not require a connection to the internet. A cold wallet is a physical device which stores information on the private and public keys. Since physical device itself stores your information, to access your account on any computer, simply plug the device in. In other words, cold wallets are available offline. The belief is that these types of wallets are safer and more suitable for people with intentions to invest in cryptocurrency for the long run.

Types of hot and cold wallets

There are different wallets that fall under the hot and cold wallet categories. There are three types of cryptocurrency wallets that we will explore in detail; hardware ( cold wallet), paper wallet (cold  wallet) and software ( hot wallet).

Hardware wallets:

A hardware wallet is essentially a physical tool that can retrieve all information once plugged into any computer. A Ledger Nano S, which resembles a USB stick,  is an example of a device that can is useable as a hardware wallet. When this device makes a conntection to any network chosen, you can obtain your crypto assets from any blockchain network on any site. This is because your private key stores your security information, which the physical device itself stores. The private key consists of a pin and an optional recovery phrase and to access your cryptocurrencies. You need to only have access to your private key. As such, if someone steals your wallet, they cannot access your coins as they cannot access your private key.

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A private key presents one’s address which is the ‘location’ on the blockchain where someone can send coins.  The private key allows transactions to happen without leaking other confidential information. Considered the most secure is the hardware wallet. This is because encoded in the actual device are the private and public key, rather than obtained directly through the Internet.

Hardware wallets are a good option if you plan to invest in cryptocurrencies for the long run. As you are the only one that can access your private key, the belief is that these wallets are the most secure. Also considered, the most convenient as well, as you can access all your crypto-assets easily in any device. 

How to use a hardware wallet:

  1. Insert the device ( the hardware wallet) into your computer. 
  2. Unlock with your pin.
  3. Create a transaction on a platform and then confirm.

Software Wallets:

Unlike hardware wallets, most software wallets have a connection to the internet. In other words, storage of the security information necessary to access one’s crypto assets is not in any separate physical device, but rather online. The most popular software wallets are web, desktop, and mobile wallets. 

Web Wallets:

Offen accessed through a browser, Web wallets no not require the user having to install anything on your computer. Usually, to access the wallet one needs a password. However, many web wallets have service providers who manage them and, therefore, they can manage your private key with your password. Some service providers allow private keys to be managed solely by the user and some offer shared control.

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Desktop Wallets:

A desktop wallet is one that needs to be downloaded onto a computer. With a desktop wallet, one has total control over their private key. When you create a desktop wallet, a file named ‘wallet.dat’ is automatically installed, which asks you to create a password. That password will need to be provided for any device so it is a good idea to back up the ‘wallet.dat’ file. Computers can hold viruses and, therefore, it is vital to make sure your computer is clean before setting up a cryptocurrency wallet. 

Mobile Wallets:

Mobile wallets are essentially mobile applications which enable one to send and receive cryptocurrencies through the scanning of QR codes. Since these wallets are mobile, they are most suitable and convenient for carrying out our daily transactions. Mobile wallets should be backed up in case mobile gets lost or stolen.

Paper Wallets: 

A paper wallet is one where one’s crypto address and private key are physically present on paper by means of QR codes. These codes are scanned to carry out transactions. With paper wallets, you can’t send a portion of the cryptocurrencies in your wallet, you can only send the entire amount in your wallet at once. If you want to transfer only some of your coins, you need to first send all your coins to another type of wallet, transfer the desired number of coins and then return the rest of your coins to a new paper wallet. Although this feature of paper wallets seems complicated and inconvenient, it makes these wallets more secure. 

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