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Crypto Wallets Explained: Beginner's Guide

What are crypto wallets?

A cryptocurrency wallet functions as a physical wallet used for storing cash. Although in reality, the actual crypto is not stored in your wallet. The wallet merely stores the private and public keys that allow you to access your cryptocurrencies and other digital assets like NFTs. In essence, a crypto wallet provides an interface that lets you store, send and receive digital assets.

Types of crypto wallets 

Primarily, there are two types of crypto wallets – hot and cold.
Hot wallets are connected to the internet. This makes the transfer of coins and tokens faster. But they are also more susceptible to viruses and hackers. On the other hand, cold wallets are offline, making them more secure. But they are limited to the selection of coins and tokens you can store. Different crypto wallets offer different levels of security.
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Paper wallets are crypto wallets in the form of paper. But unlike a currency note, they do not have any intrinsic value. They have a single private key and crypto address.

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A BTC paper wallet

Paper wallets are comparatively unsafe to store crypto as they are subject to wear and tear like currency notes.

Though hardware wallets are disconnected from the Internet, they need internet connectivity for a transaction. Saleem Rashid, a 15-year-old hacker was able to crack the security of a Ledger device. He even wrote a  blog explaining how he did it.

Air-gapped wallets are another type of hardware wallet. They follow the same principle of being disconnected from the internet. However, unlike normal hardware wallets, they do not have a mechanism like USB or Bluetooth connectivity that hackers may exploit. Instead, they have a camera to scan QR codes that perform set up and sign transactions. So far, there haven’t been any reports of an air-gapped cold wallet being compromised. Though, if you manage to do so, please notify us (for academic purposes, of course!).

Software wallets can be either desktop or mobile based. They can also be broken down into custodial and non-custodial wallets. Custodial wallets are those crypto wallets that are controlled by a third-party provider. Meanwhile, non-custodial wallets allow you to have full custody. Non-custodial wallets follow the core principle of decentralization, in which the owner has complete control over their assets. iOWN Wallet is an example of a non-custodial wallet.

Which is the best crypto wallet?

This depends on a lot of factors like your trading level, investment strategy, timeframe, and portfolio. A day-trader may need a hot wallet that allows quick trading, while a HODLer may be comfortable using a cold wallet. Since cold wallets can be a bit on the pricier side, they are best recommended for those who need to store huge amounts of crypto for a long time.

If you have recently started crypto trading, you can opt for a crypto wallet hosted on an exchange or one that has backing from an exchange. For the former, you can opt for the wallets that are the default ones when you start trading on platforms like Binance or Coinbase Exchange.

Wallets like Coinbase, Binance (Trust Wallet), and iOWN belong to the latter category. This also helps if you prefer trading on a regular basis.
These wallets offer support for multiple cryptocurrencies and NFTs. They also allow you to trade quickly.

An experienced trader can however opt for a wallet that is optimized for a desktop or smartphone. This allows for trading, while not depending on a centralized exchange.
Although they can also use cold wallets, which are more secure, however, they are more for long-term storage. For trading purposes, the crypto will need to be transferred to another wallet.

Using a Single Wallet vs Multiple Wallets

This again is a matter of preference. Having a single crypto wallet allows you to have all your assets in a single place. Thereby, it allows you to have a hold of your assets without having to worry about your keys and seed phrases.
However, the ideal scenario for an experienced long-time investor would be to have multiple wallets. Having a separate crypto wallet for different functions seems like a good idea. You can have a cold or hardware wallet to store your long-term investments. Simultaneously, you can store all your stablecoins and short-term investment assets on an exchange-based wallet. And an entirely different one to store your airdrops. You can also store your NFTs in an NFT wallet like MetaMask. DYOR to figure out the crypto wallets that best suit your needs.

Tips to secure your Crypto Wallet

Hot wallets are connected to the internet, which makes them more prone to security concerns. But if you use an exchange-based or exchange-hosted wallet, you can always recover your password, using the ‘Forgot Password’ option. Following are the tips you can use to secure your hot wallet:
  1. Use 2FA, if available.

  2. Make a copy of your seed phrase or paraphrase and keep it in a secure place.

  3. Have a strong password, and change it frequently. And always keep separate passwords for separate wallets.

  4. Never share your password or paraphrase with anyone.

  5. If you are participating in a giveaway or airdrop, use a separate wallet than what you use for trading or holding other assets. This way, if you get scammed or phished, you will not lose the funds you already own.

  6. Always use a secure connection when using your wallet.

For cold wallets, the most important tip is to never share the paraphrase. Additionally, make sure you make a note of your paraphrase on a paper. Keep this paper in a secure location.

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