With the cryptocurrency market experiencing another boom in popularity, there’s a huge influx of beginners in this market. Investors are going crazy over the potential of crypto, and try to buy Bitcoins by any means necessary.
However, while cryptocurrencies bring plenty of advantages to their users, they also require some basic knowledge regarding their handling. In this article, we will explain the basics behind cryptocurrency wallets and why you should have one for your holdings.
Furthermore, we will explain the differences between the major crypto wallet types to help you find the one that suits you best.
What is a Crypto Wallet?
Cryptocurrencies are digital assets. Unlike traditional money, they don’t have a physical representation in the form of coins or paper money. Instead, they are represented by transaction records on a digital public ledger called a blockchain.
Accessing and using cryptocurrencies is secured by asymmetric cryptography, which is usually represented by two codes: the public and the private keys.
The public key (or address) is the location of the coins on the blockchain. This is the address that you will share with other users whenever you wish to purchase or receive cryptocurrencies.
The private key serves as a sort of code that allows you to spend your crypto. Only the holder of the private key will be able to use the cryptocurrencies and sign for transactions. As such, it’s essential that you never share this private key with anyone online.
Consequently, cryptocurrency wallets are not used for storing your cryptocurrencies. Instead, they present a way of keeping your private keys safe. Additionally, crypto wallets can be used as a user interface to access the blockchain and easily send and receive cryptocurrencies.
Custodial vs Non-Custodial Wallets
With that being said, you will encounter two main types of wallets when you begin your crypto adventure.
Custodial wallets (or online wallets) are wallets that are usually offered by trading platforms like Binance or Coinbase. This means that these companies keep hold of your private keys and acts as a third party between you and your funds. As a result, you will need their approval before you are able to withdraw your assets.
Non-custodial wallets give you full access to your coins. Usually, they provide a 12-word mnemonic phrase that can be used to recover your wallet in case you change your device. In any case, you have full control of your funds when using these types of wallets.
3 Wallet Types for Every User
We’ve only included non-custodial wallets in this list. This means that whichever type you choose, you and only you will be the sole custodian of the assets that are on your crypto wallet. This means that no matter the price of cryptocurrencies, you will never have to question whether you can access your funds or not.
These smartphone apps allow the user to carry their crypto assets with them at all times, within the safety of their smartphone. These wallets offer the most convenience for daily payments, as you can use them on the go to scan QR codes and transfer crypto instantly.
However, they also offer the least amount of safety, due to the nature of the device they are stored on. Smartphones can be easily lost or stolen, and your funds compromised.
For this reason, it’s not advised that you keep large amounts of crypto on such a wallet, but just the bare minimum. Compare this with your traditional wallet in your pocket. You wouldn’t carry thousands of dollars worth, knowing that it could be lost.
Desktop wallets are similar to mobile wallets, with the difference that they are installed on your desktop computer. The fact that they are stored on a fixed device renders them inherently safer than their mobile counterparts.
These software solutions turn your PC into a crypto vault and are virtually impossible to hack. Furthermore, they often offer integrated exchange features, allowing you to buy, sell and freely exchange crypto within the safety of your wallet.
Hardware wallets are the pinnacle in crypto safety, paired with great convenience. These USB-like devices use specialized military-grade encryption hardware, making them impossible to hack.
They are considered cold storage as well because even when connected to your computer, they remain offline at all times.
The only drawback is their price. Unlike the aforementioned mobile and desktop types, hardware wallets come at a price. However, considering their convenience and safety features, it’s recommended that you purchase one if you plan on holding large amounts of crypto.
Choosing the right crypto wallet is essential when getting started with cryptocurrencies. Hopefully, this short post gave you a good overview of the pros and cons of each of the three major types of wallets. This should ultimately help you in choosing the right type whether you are a short-time user or a long-time holder.