cold storage

What is a crypto wallet and how to choose right type of crypto wallet?

What is a crypto wallet and how to choose right type of crypto wallet?

So what is a crypto wallet? In order to send or receive payments in crypto currencies you need an address to receive (or send) payments and a key to authorize payments if you want to pay somebody else. Address where you receive and store your crypto currency is called a public key. You can share this key with public if you want to receive payments. If you want to make payments, you will need a private key, which can be used to encrypt your payment instruction and should be known only to you; otherwise, somebody else can access your wallet and make transactions on your behalf (steal your cryptocurrency). In order for cryptography to do its magic on a blockchain, public and private key must be generated together as a pair, so that blockchain can recognize that your private key is linked to your public key and you can authorize payments.

How exactly wallet is created then? In simple words, you have to come up with something called seed, which is a “phrase” or very long password that will be used to generate your private key. Then, based on this information your public key will be generated and registered with the blockchain. Once it’s done you can start sending and receiving payments. You can also generate a QR code from your public key and share it with others, so other people can scan it and transfer you their crypto – major software wallets support this functionality.

Now that you know crypto wallet basics, let’s go deeper into details and wallets options available to you.

Hot vs Cold crypto coin storage

Hot and cold crypto storage

As the only thing required for sending payments is your private key, if a hacker gets this key he can steal your cryptocurrency. To avoid this scenario and secure their crypto assets, some people and organisations with significant crypto holdings prefer to use something called cold storage or cold wallet. The main idea behind cold wallet is to create a crypto wallet on a machine that is not connected to the internet from fresh install of operating system (usually from DVD image or USB drive) and connect to the internet only once to register your wallet. Then you would connect this machine to the internet only to make transactions. So called hardware wallets operate in a similar way. Some people just print their private keys and store it in a safe place or even bank safe, which is called a paper wallet. But if you lose your private key you may never be able to access your cryptocurrencies.

As opposed to a cold storage, where almost always wallet is stored offline, there is a hot storage or hot wallet storage option, where your crypto wallet keys (public and private) are stored in the wallet on device or server that is connected to the internet. As hot wallet is connected to the internet, there is a risk that hacker can access your wallet and steal your crypto currency.

Types of crypto wallets

Now that we know there are hot and cold storage, it’s time to dive deeper into crypto wallets available. Generally, there are five broad categories of crypto wallets:

Mobile crypto wallet

  • Mobile crypto wallets
    Mobile wallets store your public and private keys on your mobile, using phone authentication (or other security measures). As your phone is connected to the internet this type of wallet is classified as a hot-wallet, with corresponding security implications. Still, mobile wallets are most popular, as they can offer a wide range of services to their users, good usability and access to your holdings as your phone is always with you. Below I list few popular mobile wallets (please note links bellow and further down the page are affiliate links, you can check affiliate disclosure at the bottom of this page). Coinbase wallet is a well-known crypto wallet that allows to buy, sell and transfer most popular cryptocurrencies. Edge allows to buy and sell wide range of cryptocurrencies, both popular coins and alternative coins. TrustWallet was launched by Binance and allows buying, selling and transferring cryptocurrencies as well as gaining access to Decentralized Finance apps to make some income with cryptocurrencies. You can check this article on passive income with cryptocurrencies if you want to go beyond simply holding your cryptocurrencies.
  • Desktop based software wallets
    These wallets either require you to install software on your PC or install a browser add-on that will store your wallet keys on your desktop PC. Now many hot storage wallets are moving to mobile platforms, as mobile wallets provide better user experience.
    An example of desktop based wallet is Exodus crypto wallet, which offers desktop and mobile wallets and supports many cryptocurrencies.

Hardware crypto wallet

  • Hardware crypto wallets
    Hardware wallets are best for people familiar with cryptocurrencies and those seeking higher level of security, as hardware wallets are classed as cold storage and include additional level of protection – including physical one. Downside of using a hardware wallet is that if you lose your hardware wallet you may never gain your cryptocurrency back. Following hardware wallets are most popular:
    Trezor positions itself as a first hand most secure hardware wallet. It supports many crypto coins and can be integrated with hot wallets or used directly with Decentralized Finance apps.
    Ledger is another popular hardware wallet that’s secure and supports wide range of cryptocurrencies.
  • Paper wallets
    Paper wallet is simply storing your public and private key on a piece of paper. You can also generate a QR code representing your public key to facilitate payments
  • Web-based wallets
    Web-based wallets allow you to access your cryptocurrency from any device, but the biggest drawback is that both your private and public keys are stored on a server, so if this server is hacked then your crypto assets can be stolen. Most of centralized exchanges where you have an account will also create crypto addresses for you to allow trading in different cryptocurrencies. You can read more about centralized crypto exchanges here

Crypto wallets

  • Other providers
    Some popular fintechs also provide access to cryptocurrencies and if you want to invest into cryptocurrencies along with your other investment or banking services, these options might be good for you:
    Robinhood app (if available in your country) allows to trade cryptocurrencies from their platform. Revolut (if available in your country) allows you to buy cryptocurrencies through their mobile app. Please note that with Revolut you can’t make crypto transfers and you can buy / sell cryptocurrencies on a Revolut only.

To summarize, there are many different types of crypto wallets. You can store your wallet offline to get higher security and use hardware wallets or use mobile or software hot wallets. You can also use a combination of both, where material amounts of your crypto assets are protected by cold storage and you transfer smaller amounts of crypto currencies to your hot wallet for more frequent use.

Before you open your crypto wallet, please make sure that you are allowed to use it in your country and that your country allows you to hold cryptocurrencies.

Posted by Crypto Novice in Crypto 101, Wallets and payments