What is a Crypto Wallet?

Beginner Jan 22, 2021 · 3 min read

Crypto wallet
Key Takeaways:
— A crypto wallet is an interface that lets you interact with your blockchain assets
— Crypto assets are essentially data on the blockchain. Crypto wallets contain the private key to their location on that blockchain, and this private key determines whether you can access that crypto
— Crypto wallets are broadly classified as hot wallets and cold wallets. Hot wallets store the keys to your cryptocurrencies on an internet-connected application while cold wallets keep them offline, disconnected from the internet.

If you’re thinking of buying some crypto – or even NFT’s – you’ll need a wallet to keep your assets safe. But just what is a crypto wallet? And how does it work?

Introduction

Because of the media coverage of 2017, most people either perceive cryptocurrencies as a scam or an extremely complex form of money. It is neither of the two. 

The case with cryptocurrencies is the same as it was once with smartphones or the internet. Even signing up on Gmail once seemed like a hectic process. And the truth is, you can’t master anything new all at once. Similarly, you can only understand the importance of cryptocurrencies and how they can benefit you if you have the right information and experience.

In this article, we will help you understand crypto wallets and their types.

What is a crypto Wallet?

In simple terms, crypto wallets are like your bank accounts, but without an intermediary. Similar to how bank accounts let you manage your fiat currency funds, crypto wallets help you manage your cryptocurrency funds.

Crypto transactions occur on a blockchain using public and private keys. These keys can be called the crypto equivalent of a bank account number and internet banking login details respectively. The former is something you can share with others to receive funds in your account. But your private key is more like the key to your secret safe. Whatever’s in it is only safe for as long as you do not share its key with someone else. The private key gives you access to your crypto funds that are always stored on a blockchain. 

When you set up a personal cryptocurrency wallet, it creates your public and private keys and interacts with the blockchains to display the right amount of cryptocurrencies you own. You can say that the crypto wallet is the bridge between you and your crypto funds that are originally on the blockchain. Cryptocurrency wallets also allow you to buy, sell, store, and spend cryptocurrencies.

Primarily, there are two types of cryptocurrency wallets: hot wallets and cold wallets. Let’s go over them.

Hot wallets

Cryptocurrencies have gained wide adoption in the past few years. In addition to being famous investment assets, many users now also use crypto to pay their bills at online and brick and mortar stores. Hot wallets help you perform crypto transactions almost instantly.

Hot wallets or online wallets are cryptocurrency wallets that are connected to the internet and the blockchain at all times. This means, when you use a hot wallet, your private keys to access your cryptocurrencies are stored on an internet-connected application.

There are both custodial and non-custodial hot wallets. Custodial wallets do not give you full control over your funds. Storing your cryptocurrencies in a custodial crypto wallet is like parking your car in someone else’s garage. Even though you own the car, the key to the garage is with the garage owner. In case the garage owner doesn’t share his key with you someday, you’ll not be able to drive your car around despite owning it.

The best example of a custodial crypto wallet is an exchange wallet. When you set up an account on a cryptocurrency exchange, you get access to a crypto wallet. But you do not get to store its private keys. All you have is the public address of the wallet to deposit funds.

Non-custodial hot wallets are exclusive wallets where you own the funds and you own the keys. In simple words, you’re the boss and you’re free to make all decisions regarding your funds. 

Irrespective of the type of hot wallet you use, you must only store as much crypto funds in a hot wallet as you may need for your day-to-day transactions. This is because hot wallets are connected to the internet and are always exposed to hacks and thefts.

Cold wallets

If you have heard of too many instances of hacks and thefts related to cryptocurrencies, we know exactly how overwhelming all that news can be. While hot wallets help you instantly transact using your cryptocurrencies, it’s not necessary nor recommended that keep all your funds connected to the internet.

We have cold wallets to save you the anxiety of having your funds exposed to cryptocurrency hacks and thefts. A cold wallet is an offline cryptocurrency wallet that stores the private keys to your cryptocurrency funds in a more secure manner, away from the internet. Even if you make transactions from a cold wallet, the wallet confirms the transactions in an offline environment. This process helps keep your private keys away from the internet at all times.

All cold wallets are non-custodial wallets, i.e., you are the only one who owns access to your private keys and funds. Thus, when you use a cold wallet, you own the private keys associated to your cryptocurrencies. Even the biggest of investors and exchanges prefer to keep a majority of their funds in cold storage. 

The best type of cold wallets are hardware wallets such as Ledger‘s. Apart from giving you full control of your funds and keeping your keys offline, hardware wallets secure your keys using security element (SE) chips to reduce the possibility of attacks on the wallet. These are the same chips used to secure biometrics in your passport.

What is the best crypto wallet?

If you actively trade cryptocurrencies, you may want to store a part of your crypto funds on an exchange wallet. However, if you are holding one or more cryptocurrencies for the long-term, you should prefer to store your funds in a cold wallet for safety and ownership. If you want the speed and flexibility of hot wallets and the security of cold hardware wallets, Ledger can be your best choice: the most trusted hardware wallet on the market combined with Ledger Live, a software that enables you to easily manage your assets from your desktop or mobile. Ledger is the gateway to all your crypto needs, safely.

Knowledge is power – so keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video Beginners’ Guide to Crypto.

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