Today you’ll learn one of the most essential components of dealing with cryptocurrencies; crypto wallets.
Wallets in the real world help you organize stuff - your money, your cards, receipts, and so forth.
In finance, a bank account makes things even more efficient and organized, right?
Crypto wallets combine the best of both, but for, you guessed it, crypto.
You can use them to organize private keys that allow you to access your assets and control your crypto.
Crypto Wallets defined
One of the easiest ways to think about them is like a bank account for your crypto.
Crypto wallets can hold multiple currencies, or crypto currencies, to be precise, all at once.
This makes them a great tool for organizing your different coins and tokens.
But not all crypto wallets are the same.
What are the different types of crypto wallets?
Well, the first type of crypto wallets are called Cold Wallets
Cold wallets store your keys on a device that's not connected to the internet.
Hardware wallets and paper wallets are both types of cold wallets.
Hardware wallets are usually pocket-sized devices, that might look like USB sticks, which store the private keys to your crypto.
On the other hand, paper wallets are simple pieces of paper that have the keys to your funds printed on them. These can be QR codes or simple English words, a.k.a. seed phrases.
The second type of crypto wallets are called Hot wallets.
Hot wallets store your private information on devices that are connected to the internet.
These can either be mobile or desktop-based apps. They store the keys to your crypto either on your device or a main server.
But before I do that, let's examine the advantages of a crypto wallet.
What are the benefits of a crypto wallet?
One of the main benefits of a crypto wallet is that it can gather your assets in one place so you can deal with them more easily
Rather than having your assets spread across a bunch of different exchanges, where you might have bought them in the first place, you can have them all in one place using a crypto wallet.
That makes it much easier to calculate how much your assets are worth in total, as well as move and invest them.
The other big benefit of a crypto wallet is that it gives you more control and security, so you can stop worrying about watching your funds the whole time.
Most of the popular crypto wallets are non-custodial.
What's a non-custodial wallet?
Well, in contrast - custodial wallets are wallets where a third party, such as an exchange, holds your private keys and manages your assets for you.
Non-custodial wallets are the opposite of that. They allow you to store your own private keys - giving you ultimate control over your assets.
Since a lot of the most common crypto wallets are non-custodial, they help you to keep exclusive control over your crypto and take responsibility for its security.
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Okay, so now that you know what the point of using a crypto wallet is…
How do Crypto Wallets actually work?
You can think of how the whole crypto wallet system works, kind of like how regular banks work.
At the core of any banking system is a network of trust - and in the case of crypto, this network is represented as a blockchain that your coin or token is associated with. For example, ETH is associated with the Ethereum blockchain.
Here, Ethereum would be the bank. Like how there are tons of different banks in the real world, there are tons of different blockchains in the crypto world like Cardano, Solana, Bitcoin, and so on.
Your crypto wallet would be the banking app that you use.
A key difference is that crypto wallets are not necessarily limited to just one bank, as the majority of internet banking apps are. With some wallets, you can perform actions across all of your assets from all of your different bank accounts in one place.
How do we know where to send funds?
You know how you need your friend's bank account number when you want to send them money? The crypto wallet equivalent of that is called a public address. So whenever you want to send someone crypto, you need their public address.
A public address is also a part of your login details, similar to how your banking app needs login details. The other part is the password.
The crypto equivalent of the password is the private key. Holding the keys is the most important aspect of retaining full control over assets.
How are Crypto Wallets secured?
The last thing you need to know about how crypto wallets work is seed phrases.
You know how when you sign up for Gmail, you have to answer some backup questions like 'What's your mother's maiden name?' Or 'Who was your best friend when you were a kid?'
If you ever lose access to your account, you can get it back using the answers to these questions.
That's kind of how seed phrases work. They could be a bunch of random words like 'flame, quick, grass, golf' and so on. Some seed phrases can have up to 24 of these words.
For example, you get a seed phrase whenever you create a wallet like Metamask. It's your job to keep the seed phrase secure because if it gets into the wrong hands, you can lose everything in your wallet.
As such, you have to protect your seed phrase and private keys regardless of which type of wallet you get.
Which kind of wallet should I get?
Well, to start off… cold wallets are the most secure.
The reason cold wallets are generally more secure than software wallets is that they are not connected to the internet all of the time.
This saves you the worry of losing your assets because it’s very difficult for hackers from the internet to mess with your crypto.
Hardware wallets are also custodial, which means that you have the private keys to your assets on your own little device. This is generally preferable to having them stored on someone else's server.
Two of the best hardware wallet brands currently in the market are Trezor and Ledger. Trezor's Model T and Ledger's Nano X are kind of flagship products from the two brands.
If you're interested in a cold wallet, those two are likely to be your best bets.
And if you want to get your stuff totally off-grid, you can have your seed phrase or private keys on a piece of paper, or a paper wallet, as well.
Should I use a Hot Wallet?
On the flip side of the coin, it’s fair to say hot wallets are more convenient.
Hot wallets are more convenient than hardware wallets because you don't have to plug in a separate device every time you want to access your crypto.
But since your computer or mobile can always be connected to the internet, it can be a security concern for some.
And by concern, there is always the possibility of something going wrong.
In 2022, millions of dollars worth of Solana's token, ADA, were stolen from a bunch of users' wallets. The team investigating the matter came to the conclusion that this was due to flaws in the hot wallets that these users had.
The main point is, hot wallets can be vulnerable, and if your funds are lost there’s very little recourse.
So overall, wallet types all come down to your risk appetite, and how much is acceptable for you.
Conclusion
Crypto wallets are like the internet banking apps of the crypto world. They allow you to get all of your cryptos in one safe and secure place. They are also quite convenient.
The two main types of wallets are hot and cold wallets. The ones that are connected to the internet are hot, while the ones that are not are cold.
Trezor and Ledger are the best cold wallets, while Metamask is a very popular hot wallet.
So which one should you have?
Cold wallets offer the most security. Hot wallets are more convenient but you hand security responsibility to a third party.
So, the type of wallet that suits your priorities is the best one for you.
