Contrary to what you may believe, cryptocurrency wallets don’t actually store your crypto coins or tokens. Rather, crypto wallets are digital representations of cryptocurrency holdings. They store your private keys which are used to access your cryptocurrency on the blockchain.
There are many different types of digital wallets, each with its own pros and cons. This guide will cover what a crypto wallet is and listed the most popular types of crypto wallets.
How do crypto wallets work?
There are two types of cryptocurrency wallets: hot and cold storage cryptocurrency wallets. Hot storage crypto wallets, also known as online cryptocurrency wallets or web cryptocurrency wallets, allow you to continuously access your cryptocurrency from the internet browser on a computer or mobile device. Cold storage cryptocurrency wallets mean that you need to physically have the hardware in order for you to access your cryptocurrency.
An important point to note with cryptocurrency wallets is that many wallets exclusively store one type of currency, eg. Bitcoin or Ethereum. There are, of course, multi-currency wallets out there, so ensure you do your research before settling on a wallet if you intend to hold multiple currencies.
What are wallet keys?
Like a physical key, the encrypted data contained in wallets can only be unlocked by someone with the right decryption key.
Today’s encryption methods use complex mathematical formulas known as algorithms, rather than simply adding or subtracting random numbers. This makes it harder for hackers to crack the code. And instead of a simple string of random numbers for a key (which would be easy to hack), modern keys are randomly generated even more times before they’re used–this way, hacking is much less likely!
These keys can come in two different forms; Public Keys and Private Keys.
A public key allows you to receive cryptocurrency transactions. It’s a cryptographic code that is paired with the private key, which only you have access to and allows for “unlocking” of your wallet which it has been sent to.
The address associated with this transaction will be a shortened form of your public key – think of this as being similar to something like an email or phone number that can be used in place on its full version while still allowing others who know how to contact you when they need to.
The private key is a string of digits and letters that provide you with ownership over your cryptocurrency. Unlike most passwords, it’s an astronomically large number because if someone had access to the code they could steal away all of your funds in one fell swoop!
The private key can be a string of 256 zeroes and ones, 64 digits in the hexadecimal system or a QR code.
Important to know: A majority of crypto wallets only store one type of cryptocurrency. If you want to store more it’s advised you look into multi-currency wallets
As mentioned above, cold wallets are physical wallets and thus not connected to the internet. This makes them less susceptible to hacking.
Cold wallets come in a variety of forms.
What is a paper wallet?
A cryptocurrency paper wallet is exactly as it sounds: a cryptocurrency wallet that is created by printing the cryptocurrency’s private and public keys onto paper.
Assuming no one else gains access to this paper this obviously makes it very secure from attacks. The downside of course being, like any physical object, it can be easily misplaced. Paper can also easily be damaged or destroyed, paper wallets have several vulnerabilities.
What is a hardware wallet?
A hardware wallet is a cryptocurrency wallet that is a physical device, typically in the form of a USB. Hardware wallets aim to combine security and convenience as users only utilise them when they want to actually access their cryptocurrency. Some examples of hardware wallets include the Ledger and Trezor cryptocurrency wallets.
In contrast to a cold wallet, a crypto hot wallet is an online cryptocurrency wallet. Hot wallets are typically used for everyday transactions and provide a high level of convenience, as the cryptocurrency is always accessible on your device.
A hot wallet can be accessed from any internet-connected computer or mobile phone app at any time. The downside to this type of cryptocurrency storage configuration is that it comes with some vulnerability as it is more prone to hacking.
What is an exchange wallet?
Crypto exchanges are platforms allowing users to buy, sell and store cryptocurrency. They have digital wallets inbuilt into trading apps meaning as soon as you buy crypto in Australia, it will be immediately stored in your own personal wallet associated with the exchange. Below are three of the best cryptocurrency in exchanges in Australia.
What is a web-based wallet?
A web-based wallet exists solely online. It’s accessed through a web browser, with private keys encrypted behind a password chosen by the user. Web-based wallets are generally advised against because they’re more highly susceptible to attacks.
Popular web wallets include MetaMask.
What is a desktop wallet?
Desktop wallets are downloaded and installed on the users desktop with wallets available for Windows, Mac and Linux systems. This means they’re still connected to the internet, but with some added security of storing information locally.
Many cryptos will have a desktop wallet you can easily download or you can use a compatible multi-currency desktop wallet. You’ll need to copy and paste your private keys into the wallet software to access your funds.
Examples of desktop wallets include Bitcoin Core, Atomic and Exodus.
What is a mobile wallet?
Mobile wallets are some of the most user-friendly wallets out there as they’re compatible with smartphone devices. They have the same functionalities as desktop wallets but in a mobile app form.
Mobile wallets can be downloaded and installed on Android, iOS or Windows phone operating systems.
Some popular examples include Bread wallet, ZenGo, LoafWallet and Hive Android.
Is there an alternative to a crypto wallet?
If you choose not to keep your coins in cold storage or you don’t want to download a hot wallet there is another option.
Many crypto exchanges and broker platforms offer storage for your cryptocurrency within the platform itself.
Which wallet is right for you?
Which wallet is right for you will depend on your unique needs.
While hot wallets typically offer more convenience, they have less security. Many view hardware wallets as combining the best of both worlds but ultimately the choice is up to you.