Crypto

Crypto Wallets: What They Are, How They Work, And Which One To Choose

Table of Contents hide 1 What Is A Cryptocurrency Wallet? 2 Types Of Cryptocurrency Wallets 2.1 Hardware (Cold) Wallets 2.2 Software (Hot)...

Written by Niel Patel · 4 min read >
web3 wallets on polygon

Cryptocurrency has become a popular trend among people worldwide, given its multiple use cases, income prospects, and other great benefits. There are numerous excellent coins and tokens to invest in, such as the most popular coin BTC Bitcoin, yet you may use alternative options like SOL Solana, ADA Cardano, and XRP Ripple exist. The peculiar thing about these coins and tokens is that people need wallets to store them safely, just like with fiat currency.

Simply put, you are required to have a digital currency wallet to store your digital tokens safely. This article covers the topic of such electronic wallets, so you will learn about the types of e-wallets, how they work, and how to choose the best to store your money. 

What Is A Cryptocurrency Wallet?

A cryptocurrency wallet is a software application or a physical device rather than an actual wallet you utilize to store fiat currency. The crypto wallet features private and public keys that are required to access digital money. 

A public key is a unique identifier for a specific digital account or address, and you can compare it to a person’s bank account ID that you can share to receive funds. A private key is a secret code that allows the fund’s owner to access and control the digital cash; you can compare a private key to the password to your bank account. 

Types Of Cryptocurrency Wallets

People can choose to purchase numerous digital wallets, some of which are more popular than others. Some of the wallets we are about to describe are cheaper, and others are less accessible; others, like paper wallets, are no longer as popular as they were. 

Hardware (Cold) Wallets

Hardware wallets are physical devices, like flesh drives, which can’t be accessed online, so private keys can’t be stolen by hackers.

Pros:

  • Security. Keys are stored offline, so they are considerably less vulnerable to malware attacks.
  • Several-currency support. More than one type of coin can be stored by users.
  • Cryptocurrency backup options. Multiple cryptocurrency recovery options may be utilized if the user forgets a password or loses access to the key.

Cons:

  • Cost. These devices are substantially more expensive compared to other solutions.
  • Lack of convenience. You have to carry the device and utilize it with a laptop if you decide to utilize the funds.
  • Incompatibility. The device may become outdated, and you won’t be able to utilize it with your new laptop because of the lack of cryptocurrency wallet compatibility.

Software (Hot) Wallets

These are computer or mobile device software programs that one can download and install. Some examples of such solutions include Jaxx, Exodus, MyEtherWallet, etc.

Pros:

  • Affordability. These solutions are less expensive than hardware wallets.
  • Support for numerous currencies. Such solutions handle numerous digital coins and tokens, allowing users to store and manage funds without using other applications.
  • Backup and restoration features. Most such solutions provide backup and recovery alternatives that hardware offers, but for a much more affordable price.

Cons:

  • Lack of cryptocurrency wallet security measures. It’s the major disadvantage since they are connected to the web so hackers can attack the software and get access to a private key. 
  • Compatibility issues. One may have a device incompatible with the application they wish to download and install. 
  • Reliance on third parties. If the software provider doesn’t manage their platform properly, such as regularly updating and seeking vulnerabilities to get rid of them, it may become susceptible to attacks. 

Web Wallets

The person accesses these web-based platforms (that can be mobile or desktop wallets) through a standard web browser, such as Chrome, Firefox, Safari, etc. These solutions have similar cryptocurrency security risks as software solutions.

Pros:

  • Easy to utilize. Simply put, it’s like an add-on function; for instance, if you utilize an ad-blocker, you know how to add it to your browser. 
  • Support of numerous cryptocurrencies. Web wallets support as many currencies as previously mentioned examples. 
  • Price. Such a solution is more affordable compared to hardware solutions. 

Cons:

  • Lack of security. The add-on is connected to the web, so it’s susceptible to attacks. 
  • No control over private keys. They are stored on third-party servers, so you don’t even know the code and whether the keys are stored safely.

Paper Wallets

In this case, private and public keys are contained on a physical document, and they are printed out or written down and kept in a secure location. Some users even choose to keep different parts of the paper key in multiple places, and they achieve this by dividing one long private key into numerous parts and printing them out. Then these parts are kept safely and separately. While paper wallets are secure, they can be lost or damaged.

Pros:

  • Security. Surprisingly, this is the safest option to store keys unless you lose the piece of paper to a flood, fire, or any other disastrous event.
  • Price. You can utilize a cheap yet safe online generator to create a public and private address, so you don’t pay cryptocurrency wallet fees for maintenance. 

Cons:

  • Loss or physical damage. You can easily lose the piece of paper and, thus, the access to funds without any recovery options. 
  • Technical skills are required to generate these wallets. It’s easier to set up a wallet when there is a cryptocurrency wallet user interface: paper wallets don’t offer them.
  • Inconvenience. You have to figure out how to print it out without risking showing the private key. 

Multi-Signature Wallets

As you may have already guessed, these are utilized by businesses and crowdsourcing organizations to secure access for numerous people.

Pros:

  • Shared ownership. It’s easy to access funds by giving access to specific people.
  • Increased security. A transaction approval requires multiple signatures, so yes, hackers have a hard time hacking them. 

Cons:

  • Higher fees. Security means more money spent.
  • Complexity. Several people must approve a transaction, so all of them must be online.

How Cryptocurrency Wallets Work

Users’ private keys (and not actual funds) are stored by crypto wallets. These keys are required to utilize digital funds, and they are extensive strings of numbers and characters that operate as a password. Simply put, the private key is used to unlock funds and utilize them accordingly. These numbers and characters are chosen randomly to ensure the highest security. 

As a user transmits or receives digital funds, a decentralized network of nodes verifies and records the transaction. This decentralized network is called a blockchain. The digital wallet communicates with the blockchain to maintain private keys and to start financial operations, either by broadcasting a transaction request to the network or by signing a transaction request with the private key.

Choosing The Right Cryptocurrency Wallet

Choosing the right and suitable digital e-wallet depends on numerous critical factors that include a person’s budget, security requirements, the planned utilization of crypto funds, and cryptocurrencies necessary to be supported. We won’t focus on types of software and brands since it’s a personal choice, yet we will discuss a few tips that should be helpful when choosing the right e-wallet type.

Tips For Using A Cryptocurrency Wallet

Here are a few critical aspects to consider:

  • The usage of crypto funds. If you plan to store a small number of funds and use them to purchase goods and services, it’s appropriate to consider a hot wallet. If you require storing more digital funds and require them to be safe, consider purchasing a cold e-wallet, as can be used safer.
  • Preferred budget. Once you’ve figured out your preferred usage of cryptos, consider all options that are affordable, given your budget. 
  • Personal technical skills. As mentioned in this article, users are required to understand how blockchain and cryptocurrency work to be able to utilize some digital currency wallets.

Simply put, the purchased digital currency wallet must be convenient and store funds safely, so that you get a seamless experience utilizing the digital wallet if you have difficulties utilizing the wallet. 

Conclusion

Just like physical wallets, its digital crypto counterpart enables you to utilize, manage, and store funds. It’s critically important to purchase a safe crypto wallet to avoid the loss of funds to hacker attacks, and always to utilize the purchased digital wallet responsibly, which includes storing private keys properly and choosing complex passwords when utilizing software applications. 

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