What is a Crypto wallet, and how to choose one for yourself?
You are like me if you don’t like carrying your wallet around. I think wallets are bulky and unnecessary. Then I have friends who can’t go anywhere without their fanny packs. Funny. Right? Pun Intended.
In this article, we are going to discuss Crypto wallets. You will find out why you need to use them. They work differently from your physical wallet. We will get to that shortly. We will also show what to consider before you choose one. But first, let us find out what a crypto wallet is.
What is a crypto wallet?
A crypto wallet is a form of storage for your private key that makes them safe and accessible. Unlike physical wallets, crypto wallets don’t hold your crypto tokens. However, they are linked to your blockchain to control your crypto transactions.
The question to ask is, ‘do I need crypto wallets?’ The answer is yes.
The only alternative you have is to keep all your tokens on a crypto exchange. However, the odds of losing your crypto are high. Since 2011, crypto exchanges have lost approximately $1.65 million worth of crypto to theft.
A crypto wallet gives you complete control of your crypto. You are sure you have full ownership of your private key. What is the catch here? The wallet needs to be secure.
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How do crypto wallets work?
Before we discuss how a crypto wallet works, let me remind you that cryptocurrency is a digital currency. Apart from that, it works as a virtual accounting system.
Let’s say Frank wants to send crypto to Nestroy. Frank creates an address which is also called a public key. We can compare it to a bank account. It is a string of numbers and letters that helps to identify a wallet.
Creating an address creates a public key along with its private key. The two form a key pair.
The private key is a sequence of random bits used to encrypt data. You can deposit crypto to a public key but can’t remove the tokens without a private key.
The question is, where do wallets come in? The crypto wallet holds the private key from any address Frank creates. The private key signs a transaction request to verify it is coming from the correct owner.
Therefore, the crypto wallet stores the private key, in the same way, your physical wallet holds Fiat money. The difference is that the crypto wallet does not contain the crypto tokens since they are part of a blockchain.
The private key confirms transactions. Once the transaction is complete, the blockchain is updated.
Types of crypto wallets
We are going to see different ways that wallets are categorized.
Custody
Custodial wallets have users hand over their private keys to the wallet service, while non-custodial wallets give complete control to the users.
Internet connection
A hot wallet has a connection to the internet. A cold one is not. Guess which one is vulnerable to online attacks. You guessed right. Hot.
Method of storage
Paper wallets
A paper wallet contains a public and private key required for a transaction. The printout can be in the form of words or a QR code.
Paper wallets are secure because they are not vulnerable to online attacks. For large volumes of crypto, generating the keys and writing them down on paper is a lot of work.
Hardware wallets
An upgrade from paper wallets. It is one of the most secure ways of storing your crypto.
These types of wallets store your private keys in secure hardware devices.
What happens when you lose your hardware wallet? This type of wallet allows you to back up your assets using a seed phrase which helps regenerate your private keys.
Software wallets
A software wallet is a program you install on your computer or mobile that helps you access your crypto. They act as an interface to crypto blockchain and require a password before you access your digital assets.
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Factors to consider when choosing your crypto wallet
Company reputation
Before settling on a wallet, some due diligence could save you from being a victim of crypto scams. Check for online forums, reviews, and social media pages before settling on a wallet.
Security
The wallet you choose should be safe to use. Using cold wallets reduces the chances of being hacked. If you use a hot wallet, ensure it has security features like multiple-factor authentication.
Compatibility
Check for compatibility in terms of both devices and cryptocurrency. Therefore, it should be able to store different cryptocurrencies. On the other hand, it should work on multiple devices like laptops, mobile, windows, or apple devices.
Recovery and Backup
I am sure you have forgotten your Facebook or Instagram password before. A private key is hard to memorize. A good wallet lets you link a seed phrase to your private key to help you access your digital assets.
FAQs
- What is a seed phrase?
A seed phrase is a series of numbers or words generated by the cryptocurrency that gives you access to your wallet.
- Which is the safest wallet to use?
Hardware wallets are not susceptible to online hacks. They are considered the safest wallets to use.