Definition
A cryptocurrency wallet stores your private and/or public keys, and keeps your crypto assets safe. In addition, wallets also offer functionality for sending and receiving crypto like Bitcoin and Ethereum. These wallets can be online, on your computer, or a piece of offline hardware.
Private keys are the passwords that give you access to your cryptocurrencies. Crypto wallets keep these private keys safe and accessible. They also allow you to send and receive cryptocurrencies like Bitcoin and Ethereum. There are many types of crypto wallets. But generally, they can be either online (hot wallets) or offline (cold wallets).
Do I need a crypto wallet?
Unlike the wallet you use to hold your fiat cash, crypto wallets don’t really store your cryptocurrencies. They only hold the keys necessary to access them. Your cryptocurrencies are actually located on the blockchain and can only be accessed using your private keys.
Private keys are made up of very large numbers, that are used as a sort of password, that prove you own the cryptocurrency stored on the blockchain. You can use your private key to access, send and receive cryptocurrency. If you lose your private keys, you lose access to your money. This is why we use a crypto wallet to keep our private keys safe. Never give your private key to anyone. Always hide your hardware (cold wallet) somewhere safe and secure. If you choose to use an online (hot) wallet, always use a trusted service provider.
What types of wallets are there?
Just like your email password, it is extremely important to keep your private key safe. The most popular ways to keep private keys safe are:
- Hot Wallets (online): Most people choose to store their private keys online with a digital wallet provider. These are known as “hot wallets“. There are many such providers, but you should consider one with a long track record of security and with good features. Another option is an online exchange. The two largest exchanges are Binance and Coinbase. This makes it easy to access and use your crypto-assets. Most experts, however, believe cold storage is far safer for long term keeping of crypto assets.
Note: Exchanges don’t typically allow you to see your private keys. That is why they are sometimes called custodial wallets. You do not have full control over your assets with a custodial wallet.
- Cold Wallets (offline): Cold storage options range from a computer that is not connected to the internet to a piece of paper to even memorising your private keys. However, the most popular form of cold storage is using a cold wallet. These are sometimes referred to as hardware wallets. They look like a small USB stick that can be plugged into your computer. They can be expensive, but provide safe long term storage options for crypto assets that are not used on a day to day basis. And since there is no connection to the internet, they cannot be hacked.
Of course there are advantages and disadvantages to each type of wallet. Paper and hardware wallets are harder to hack as they are not connected to the internet, but they could also be lost or stolen. An online wallet is more convenient if you perform regular transactions and offer the simplest way to buy and sell cryptocurrencies. But, since it is online, it is prone to malicious hacking attacks. Always ensure your online wallet is with a trusted provider with a long track record of security. It is also a good idea to employ two factor authentication when using hot wallets.
