A cryptocurrency wallet is an app, service or hardware that allows cryptocurrency users to store and retrieve their digital assets and monitor their balance.
If you acquire a crypto coin, such as Bitcoin, you can store it in a crypto wallet and use it to carry out transactions. When you want to send or receive coins, you can use your own unique cryptographic address issued by the crypto wallet.
A key difference between a regular wallet and a crypto wallet is that cryptocurrency itself is not actually stored in the wallet; it is stored in the currency’s blockchain. Your cryptocurrency wallet only points to your crypto money's location on the blockchain - the public ledger - that records and verifies all transactions for a cryptocurrency.
How do crypto wallets work?
The digital wallet generates and stores the private key (a form of cryptography) of a user to access the crypto coins. The cryptocurrency user is given a public key to be used for sending and receiving coins or tokens. But the user will only be able to access the coins deposited into their address with the private key. It's like a lock and your own special key that fits that particular lock. You can prove you are the owner of the address with the private key - a secret code that gives access to your cryptocurrencies. If you lose your private keys, you lose access to your money. Be axtra careful when adding the address of the wallet! If there is an error, such as adding the wrong address, your coins, the transfer will be lost!
Let's look at an example! If John wants to send Bitcoin to Jane, John would receive Jane's cryptocurrency wallet address and send the crypto coins there. The transaction is encrypted by a public key allowing only Jane to access it if she has the corresponding private key to that public key. Once Jane proves this with her private key, she can enter her Bitoin wallet and retrieve the funds.
Some crypto wallets are built for a single cryptocurrency, while some can be used for more than one type of crypto coin. Other wallets include so-called custodial or hosted wallets; for example those managed by cryptocurrency exchanges such as Coinbase or Binance. It means that your private key is managed by a trusted third party or intermediary, such as Trust Wallet in the case of Binance. Check out our reviews of Coinbase and Binance! These services offer to protect your crypto assets, but at the same time you relinquish full control over your crypto assets.
Types of crypto wallets
There are two types of digital wallets: “hot” (online) and “cold” (offline). The difference between the two is much like the difference between money stored in a bank account and cash kept in a drawer.
A hot wallet is an online tool, such as an app, that allows cryptocurrency users to store, send and receive crypto tokens. Hot digital wallets include wallets for mobile phones and desktop computers, while most custodial wallets managed by crypto exchanges also belong in this category. Hot wallets are preferred by users who want to make purchases with their Bitcoins or other cryptocurrencies.
On the down side, if your hot wallet or the exchange that holds it is hacked and your account becomes compromised, your funds could be lost. Cryptocurrency exchanges do not provide insurance, so secure storage of your crypto tokens is very important. Make sure you have as many layers of protection around your hot wallet as possible.
Cold wallets are also called offline wallets, or hardware wallets. Because they are offline, they are considered to be the safer crypto wallet option to keep your Bitcoin or other digital currency.
The most secure way to store your digital assets offline is on a paper wallet, which can be generated from different websites. These produce both public and private keys that you can print out on a sheet of paper. Some people prefer to keep the paper wallet in a safe or a deposit box, as access to their digital assets is only possible with that piece of paper.
A hardware wallet is usually a USB drive that stores a user's private keys. Hardware wallets have significant advantages over hot wallets in terms of secure storage, as they are not connected to your network, so they are unaffected by viruses and software vulnerabilities.
Wallet providers can be crypto exchanges, brokerage platforms or specialized companies offering software and hardware wallets. When you shop around for a wallet for your Bitcoins or other cryptocurrency, you should consider how comfortable you are with different technologies and what you want to use your digital assets for. Beginners should look into various online wallets that charge low fees for transactions. More experienced users should probably go for a hardware wallet.
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The bottom line is that a hot wallet is directly connected to the internet, whereas a cold wallet does not have a direct internet connection. In both cases, keep only a small amount of funds in your cryptocurrency wallet that you would use daily, and remember to keep your private key in a safe, secure place!