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You can’t hold a Bitcoin in your hands or put it in your back pocket. Yet you can hold and store keys of your crypto using the crypto wallet of your own.
A crypto wallet allows you to store your private keys, ensuring your crypto is safe and accessible and allows for the sending and receiving of cryptocurrencies like Bitcoin and Ethereum.
It consists of two major keys: private keys and public keys.
A public key is an address used to send and receive crypto to the wallet.
Whereas the private key is like a password to your locker, if you lose the key, you lose your crypto.
Anyone can take control of the balance held in your wallet if they have access to your private key.
But unlike your safe locker, there is no third party involved, and only you can control it using that private key, unless, of course, you lose your key or share it with another person.
How do crypto wallets work?
Each crypto wallet has a private key that you can use to access your funds in the wallet. Now, there is a public key, which is like a phone number (but alphanumeric), where you will send or receive the crypto.
There are a couple of steps involved in sending and receiving cryptocurrency payments via a wallet.
It's important to remember that people can only send you coins if they have your public address aka key. Find your wallet's generate address feature; click on it, copy the alphanumeric key or use the QR code to share it with others.
Regarding sending transactions, you need to input the receiver’s address into the wallet, you are using. On wallets, select send, and then enter an address of a wallet that you want to send crypto to, and enter how much crypto you would like to send. Note that transaction fees will be paid for miners in exchange for processing your transaction, plus a small extra fee for handling minor things like transaction priority.
Types of Crypto Wallets
The most crucial part is to find the suitable types of crypto wallets which can offer security. Let us take a look at the common types of wallets you can find for crypto assets.
According to the ownership, they are of two types:
Custodial wallet
In this type of wallet, a third party accesses your wallet. That means a third party has full control over your crypto funds, but only you can give permission to send or receive payments, just like stockbrokers.
Non-custodial wallet
It allows you to be your bank and be the sole owner of your funds and the private key.
As more people understand the importance of decentralization and become conscious about their data privacy and security, non-custodial wallets will continue to get an edge over custodial ones.
According to the way they operate, cryptocurrency wallets may also be defined as "hot" or "cold".
A hot wallet is any wallet that is somehow connected to the Internet and offers great accessibility but less security.
Cold wallets, on the other hand, are used for cold storage and have no connection to the Internet. They use physical mediums such as drives to store the keys, which make them resistant to online hacking attempts, suitable for investors, willing to HODL.
Types of hot wallets
Hot wallets are generally software wallets and consist of mobile crypto wallets, web wallets, desktop wallets, etc.
Desktop Wallet
Desktop wallets are essentially a full-blown version of the Bitcoin client that provides users with all the functionality of managing incoming and outgoing transactions, complete access to all bitcoin addresses, and countless other administrative functions within the interface.
The biggest advantage to using desktop wallets, however, is that users retain control over their private keys, meaning no one else can access them without knowing your password or other security measures put into place by the owner of the keys. However, these funds will always be at risk on a PC, as there is virtually no way of insuring against complete viruses or accidental loss (such as drive failure).
Web Wallet or hosted wallet
Hosted wallets are implemented as custodial services in which you entrust the keys to your crypto assets to a third-party company. Because web wallets are hosted on a centralized server, they act at times as a security risk.
Mobile crypto wallet
Mobile wallets are also one of the most commonly used crypto wallet categories, which function in a similar way to desktop wallets with slightly diminished security features. They store private keys, another cryptocurrency, and can be downloaded as an app on mobile devices. Mobile wallets present more flexibility than their desktop equivalents for exchanging funds but still present some security risks.
Types of cold wallets
Mainly used by HODLers or long-term investors is of two types: paper wallet and hardware wallet.
Paper Wallet
A paper wallet is a type of crypto wallet where the private and public keys are saved on physical paper. Paper crypto wallets offer one of the most secure options for crypto storage. They are highly recommended when it comes to storing your cryptocurrency offline, but they lack some convenience features, like spending from a portion of your funds as easily as you could with an exchange wallet.
Hardware Wallet
Hardware wallets are arguably the safest option for storing your crypto coins offline. They truly represent the principles of designing the crypto-cold storage, because you never make an internet connection between your computer and the device, so there's no way for information about your private keys to ever leave it. And not only are hardware wallets the most reliable crypto storage devices out there, but they're also easy to connect with because all you have to do is plug in a USB drive!
How to choose the best crypto wallet?
Well, there is no definite answer to that. A web wallet is a better option if you are a frequent trader. Assuming it gives you access to secure your account with a two-factor authentication system, your crypto is generally safe.
But if you are a long-term investor or HODLer, then cold storage or a physical wallet is the better alternative, as they are not connected to the internet, thus safe.
Closing Thoughts
Paper or hardware wallets have a risk of losing, whereas software wallets can easily be hacked.
So, in both cases, you have to be cautious and make sure nobody can access your wallet's private key.
Earlier, it was difficult to understand how crypto wallets work, but now it has become user-friendly in recent years. Hence, no matter how small you start, start now. And then slowly expand once you get a deep knowledge of the platform.
Author bio
I'm Nitesh Ahuja and I love 2 things to do in my life, one is marketing and the other is cooking. Following that, I'm a B2B tech marketer and I write content for B2B SaaS and crypto startups and their CXOs in the manner that it tells a story, but with data and can easily connect with the audience. I will help you build your presence online (mainly on LinkedIn). Let's connect here - https://www.linkedin.com/in/niteshahuja08/
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Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.