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What is a Crypto Wallet

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15.08.2023
5min.
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What is a crypto wallet

Cryptocurrency and blockchain entered our lives not that long ago. There are still people who only know what Bitcoin is and don’t understand how many advantages this technology has. Although one should be very careful when it comes to trading and using cryptocurrencies, you can find a lot of helpful information on the Internet. And, of course, anyone needs practice first. One of the first things any new trader has to understand is what is a wallet for crypto and how do crypto wallets work. Yes, it may sound complex, but in reality, this concept is quite simple and easy to understand. Let’s find out more about this mysterious phenomenon! Our new article is full of useful information for beginners and crypto enthusiasts. Discover more info right now:

How do crypto wallets work

Let’s start by giving a crypto wallet definition. The principle is similar to your normal wallet: this is the place where you keep your funds in various currencies. So what is a crypto wallet?

A crypto wallet is software or hardware that can allow people to store information about private and public keys. It doesn’t actually store digital currencies because they all live on the blockchain. However, it allows conducting transactions with crypto. A cryptocurrency wallet can be in a form of an app, a USB, or even a browser extension. Each wallet has its own private keys, which give the owner access to cryptocurrencies. Because of it, no one but the owner can access its contents. This is where traders organize their crypto portfolio.

Now that we know a crypto wallet definition, let’s learn more about the types of wallets. A user should be aware of how a wallet works before making the first purchase. Every type of cryptocurrency wallet functions differently, so there is no standard process. Here’s how it can go with some of them:

  1. If you use a hosted cryptocurrency wallet (like those on centralized exchanges), all you need to do is pick a trustworthy platform and create an account. After that, you can transfer or buy digital currencies.
  2. If you use a self-custody wallet, start by downloading the app and setting up your account. Make sure to save your private key. After that, you will be able to transfer and buy digital currencies.
  3. If you are using hardware crypto wallets, you need to buy the hardware first, then install the software, and you will be able to transfer your funds.

Types of crypto wallets

As we mentioned earlier, there are many types of crypto wallets. Depending on your needs, choose the one that fits you better. Here are some of them:

  • Paper wallets. It’s when your keys are written down on a piece of paper and kept in a safe place. Please note that this makes them more difficult to use, as you will need more time to buy what you need.

  • Hardware wallets. When it comes to this type of wallet, the keys are usually kept on a device, which is normally only gets connected to your device or the internet when you need to use crypto. This helps to combine safety and convenience.

  • Online wallets. In this case, the keys are located in an app (or any other online outlet) and preferably have two-step encryption. This type of wallet makes all transactions incredibly fast, but it is not as safe as paper or hardware wallets.

Cold wallet vs. Hot wallet

Cryptocurrency wallets are often referred to as “hot” or “cold”. But what does it mean, and what is the difference between these two?

Let’s start with a hot wallet. This one is connected to the internet and is considered to be more vulnerable to hacker attacks and fraud. However, they are very easy to use and are perfect for beginners. They can be in the form of an app, desktop wallet, web-based wallet, and so on.

Cold wallets, on the other hand, either do not have an internet connection or are kept offline most of the time (they are connected to the internet only when used). They are definitely safer and can not be hacked or stolen as easily as the hot ones. However, they are considered to be less convenient yet expensive. Cold wallets are perfect for those who store large amounts of crypto for a long period of time.

What is a paper wallet

A paper wallet is a cold wallet with your keys written on it, and it is obviously not connected to the internet. This type of wallet used to be one of the best ways to store cryptocurrency safely. However, there are a lot of great methods of cold storage now.

They gained popularity in 2010, and the situation changed in 2016. Of course, there’s no way to hack a piece of paper. The option to create paper wallets was even available on major exchanges back then. Now, most experts prefer other secure options, such as hardware wallets.

What is a hardware wallet

As of now, hardware wallets are considered to be the safest place for keeping private keys. Such wallets are usually offline physical devices. Here are some advantages of hardware wallets:

  • You are the one who manages your keys, which means you have full control over your money.
  • They are almost always kept offline. That’s why they can resist malicious attacks unless it is defective.
  • In case your wallet is lost, you can generate another key and access the assets on your wallet using the seed phrase (also known as the recovery phrase). It is important to store your seed phrase offline.

Of course, there are some disadvantages of hardware wallets. Such as:

  • Hardware wallets are usually quite costly.
  • Beginners can have some difficulties with setting up a hardware wallet.
  • You can’t just transfer your funds from a hardware wallet whenever you want. It needs to be plugged in for you to start using your assets. So they are not as accessible as hot wallets.

Benefits of a crypto wallet

Companies that offer cryptocurrency wallets are usually doing their best to attract new customers. That is why they include a lot of pros in their products. Crypto wallets have a lot of benefits compared to bank cards. Here’s why you need a crypto wallet:

Fees They are different for each crypto wallet and can depend on many things. However, crypto transactions are generally cheaper.

Time Again, depending on your wallet, transactions can be faster or slower, but they are usually not as slow as bank transfers. Some banks take up to seven days to send money from one person to another. When it comes to crypto, the standard time is up to 24 hours.

Options Most of the time, cryptocurrency wallets offer more than one currency (often a wide range of assets), while with banks, you are generally limited to up to three currencies.

Customer support As it was mentioned before, many companies are competing for customers' attention, which leads them to offer such benefits as 24/7 customer support that can help you with any question no matter where in the world you are.

Access To get yourself a cryptocurrency wallet, you don’t need to go through the bureaucracy like when you are opening a bank account. You can use it from anywhere, and it doesn’t matter what country you are from. You don’t need to prove your income or status. All you need is internet access and a computer or telephone.

How to create and use a crypto wallet

Let’s see what steps you need to take in order to create a hot wallet.

Step 1. First things first, you need to select the wallet you want to use. Make sure you are choosing the one you can trust, with lots of customers, reviews, good history, trust-worthy partners, etc. There are tons of crypto wallets on the market, so do your research first.

Step 2. Then download the chosen crypto wallet to your device.

Step 3. Once you have the app on your device, create your account. Most of them require only minimal information from a new user.

Step 4. After that, you can start transferring your funds. There are multiple ways you can do that. The easiest one is to transfer them from an exchange.

When it comes to a hardware wallet, there are also a few steps you need to take to create it:

Step 1. Pick the hardware wallet you want to use. Again, do your research on its pros and cons and only then make a final decision. Some of them are cheaper, and some are more expensive, so you need to take all the things into account.

Step 2. Install the needed software. It usually comes with a hardware wallet and helps users to manage it.

Step 3. Start transferring your funds. It can also be done from an exchange or another wallet.

Sending assets to other crypto wallets is usually very easy. To do so, you need to enter the wallet address of the person you want to send your funds to, choose how much you want to send, and click ‘Send’.

Are crypto wallets safe

Crypto wallets are considered to be safer than crypto exchanges, especially when it comes to hodling funds for a long time.

The assets are protected by private keys. They are similar to the PIN code you use for your bank cards. They prove that you are, in fact, the owner of this wallet. Of course, as we mentioned earlier, cold crypto wallets are a lot more secure than hot ones. However, if you use a hot wallet properly, there should be no issues with its safety. Make sure you are keeping an eye on these factors:

  1. You are not using a public Wi-Fi network.
  2. You are using a VPN.
  3. You are diversifying your portfolio.
  4. You are not downloading malicious software.
  5. You are using two-factor authentication (2FA).
  6. You are not keeping all eggs in one basket.
  7. You are keeping your private key in a safe place.

As you can see, how secure your crypto depends mostly on you. Of course, you can find an easier method to store your assets, like keeping them directly on the exchange. However, it is only useful if you prefer to store not a lot of crypto and use it to trade or transfer all the time.

If you are planning to store more assets, it is better to keep them in a trusted cryptocurrency wallet. Doesn’t matter if it is a hot or a cold one. With its help, you will be able to have full control over your funds.

Conclusion

If you are thinking about investing in digital currencies, first, you need to learn a lot of information about this fast and always-changing area. The basic knowledge includes understanding where and how it is better to store cryptocurrency. Without this info, you are risking your own funds every time you use them. The right choice can ensure the safety of your assets, even for a long-term period.

After the situation with one of the biggest and most successful exchanges in the world, FTX, the idea of safe storage became very clear and important. Those people who stored their funds only on FTX have lost a lot of money. After the situation with FTX many experts recommended being mindful about where you keep your assets, doing your own research, and storing them on the safest options.

Storing assets somewhere where you have full control of them is usually recommended by experts. This way, you can manage your funds how you want without being afraid of losing them to some accident. However, it should be stressed out that everyone needs to do their own research before picking the wallet to store assets.

Obviously, with the popularity of cryptocurrencies comes increased attention from criminals and hackers. Scams are getting crazier and more clever, so you must be mindful of every step of your crypto journey. There is already data that shows that thefts are happening more often these days. Many people still resort to using third-party services or exchanges only, but there are always some risks that come with them. So make sure you research everything you need before starting to use cryptocurrency.

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