In 2017, cryptocurrencies came into the spotlight for many people because of the huge rise in their value. Consequently, many people saw crypto as either a fraudulent scheme or an extremely convoluted form of money. However, both of these assumptions are wrong.
Generally speaking, the situation with cryptocurrencies is the same as it was with smartphones or the internet. After all, once upon a time registering a Gmail account seemed like something unbelievable, didn’t it? That’s right: a person cannot learn something new in a second, because it takes time. And in the case of cryptocurrencies, people are also unlikely to be able to grasp the full potential of cryptocurrencies and their importance to the current world in a couple of days. Not only an abundance of correct information will be needed here, but also personal experience.
Therefore, you need to start gradually. In this article, we are going to talk about cryptocurrency wallets and their varieties.
What to look out for when choosing a crypto wallet
Cryptocurrency wallets differ not only in price, but also in the range of features. But how do you know if you need all these features or if they will be useless for you, what features should each wallet have at its disposal? The more features a wallet has, the more difficult it will be to work with and the more time you will have to spend on researching it.
For example, if you prefer ease of use, this may come at the expense of security. But security is probably the main reason why you are considering buying a cryptocurrency wallet.
Creating a personal cryptocurrency wallet means forming a pair of public and private keys. These are needed to interact with the blockchain network, including displaying the correct amount of cryptocurrency in your possession. In essence, a cryptocurrency wallet is a link between you and your crypto-assets, which do not leave the confines of the blockchain. In addition, a crypto wallet allows you to buy and sell cryptocurrencies as well as store and use them.
Online wallets
Online wallets provide relatively fast access to money from any internet-connected device. At the same time, they are mostly risky – you can easily lose your cryptocurrency in case of a stock market crash, theft or fraud.
An online (web) cloud wallet is usually created for an investor after registering on an exchange. It makes it easy to store cryptocurrency and easy to use on a daily basis. You have such a wallet on the Binance or Coinbase exchanges, for example.
Since the owner of the private key is the company that manages these wallets, the wallet is not under your control. If the company is hacked, you could lose your cryptocurrency.
There are other risks – blocking your account, which blocks your ability to withdraw your cryptocurrency, or confiscation of your assets.
An exchange can only freeze funds if requested to do so by law enforcement authorities in any country. In all other cases, it must request all necessary documents and unblock the funds.
Hot wallets
Cryptocurrencies have become a much more popular phenomenon over the past few years. But today, it’s not just a common investment asset: Crypto-assets are also a means to pay bills and buy goods from conventional and online shops. In this case, hot wallets are used for this purpose, as they provide almost instant transactions.
Hot wallets are cryptocurrency wallets with a permanent connection to the internet and blockchain. Accordingly, with a hot wallet, your private keys for accessing cryptocurrencies are stored in an application with an internet connection.
Hot wallets can be custodial or non-custodial. Custodial wallets don’t give you full control and ownership over your money, so interacting with them is like keeping your car in someone else’s garage. Yes, the car actually belongs to you, but the keys to the garage are still in the pocket of the owner. If one day the latter suddenly doesn’t want to give you the key, you will not be able to drive your favorite car. And all this is true even if you have the car’s papers.
The most obvious example of a custodial cryptocurrency wallet is cryptocurrency exchanges. Of course, when you create an account on a cryptocurrency exchange, you gain access to the cryptocurrency wallet. However, no one gives you private keys to the address, and instead you have to settle for just a public address to receive and deposit funds into your account.
Cold wallets
Cryptocurrencies have seen a huge number of large-scale hacks and thefts of digital assets over the years – and it’s really alarming to hear such news. Given this experience, we strongly advise against keeping all crypto-assets on a hot wallet with an internet connection. Yes, they are convenient to use for transactions, but their security leaves a lot to be desired.
Fortunately, all is not lost. So-called cold wallets exist to reliably protect cryptocurrencies from hackers and fraudsters. A cold wallet is a cryptocurrency wallet that stores private keys for accessing your cryptocurrencies outside the internet, which in itself is secure. Most importantly, even when a transaction is made with a cold wallet, it is validated offline. Accordingly, your private keys are off the internet at all times, with no exceptions.
All cold wallets are non-custodial, which means that only their users have access to the private keys and the cryptocurrencies inside. What this means is that with cold storage, you and only you have the private keys to interact with your crypto-assets. And here’s another argument in favor of cold wallets: they are used by the world’s largest crypto exchanges and investors with huge amounts of assets.
The most reliable type of cold storage is hardware wallets like Ledger devices. First, they provide full control over cryptocurrencies and store private keys off the Internet. Second, hardware wallets secure private keys with Secure Element (SE) security chips designed specifically to prevent hacker attacks. These are the same chips used to protect your biometric data in passports.
Hardware wallets
Cryptocurrency wallet hardware is usually safer than software solutions. They come in many forms, from a small USB stick to a larger device with its own display.
The wallet generates private keys securely in offline mode. The advantage of offline mode is that your cryptocurrencies are not at risk of the attack online.
Hardware wallets are good in that you can always carry them with you and plug them into any computer as needed. Another option is paper with a handwritten, so-called recovery seed. However, especially for everyday use, this solution is neither practical nor convenient. Moreover, if the paper is lost, the owner simply loses their code.
Ledger Nano S – This wallet is one of the most popular hardware wallets on the market. It currently costs about $100 and is sold by a French company that deals with securing bitcoin transactions. The Nano S is the most versatile hardware wallet – it supports the largest number of cryptocurrencies.
The wallet generates private keys in the form of a security chip and stores them offline, that is, away from internet traffic. The Nano S wallet also includes a display that allows all outgoing transactions to be verified and validated, thereby increasing the security of the traffic. Trezor Wallet – with features very similar to Ledger. The manufacturer is Satoshi Labs (a Czech company), which was the first to invent a display for a cryptocurrency wallet.
Like Ledger, the vault generates private keys in the form of a security chip and stores them offline. The Trezor wallet currently costs around $75.
Hardware wallets and their use are relatively well thought out. Even if you lose such a wallet or it is stolen, all you have to do is buy a new one and use the recovery seed to move your cryptocurrencies back into it before someone else breaches the security. However, if you lose the recovery seed, you could be in trouble.
Which cryptocurrency wallet is the best?
If you actively trade in cryptocurrencies, it is probably more convenient to keep some of them in cryptocurrency exchanges. However, if you have a couple or three crypto-assets as a long-term investment, cold wallets are better for added protection and full ownership. Well, if you want to combine the speed of hot wallets with the reliability of cold hardware wallets, you should opt for Ledger. These are the hardware wallets that are trusted more than others. You can interact with them using Ledger Live, an app for easy coin management on your PC or mobile device. Ledger is a guide to all your crypto needs without security risks.