If you’ve given any thought to purchasing or investing in cryptocurrencies, you’ve undoubtedly already heard that you need a cryptocurrency wallet. However, you may be wondering, “What is a wallet?” Is a cryptocurrency exchange equivalent to a wallet? And which wallet works the best? This post will provide the answers to these concerns.
What Is a Crypto Wallet?
A “wallet” is, in its most basic definition, a piece of computer software that you can use to demonstrate that you are the legitimate owner of a specific cryptocurrency account or address.
A wallet can be used to securely store cryptocurrencies or to approve cryptocurrency payments to contractors or business partners.
Due to the unique nature of cryptocurrency accounts, a wallet may also be utilized to store, track, and validate your digital credentials. An instant messaging or social networking account, for instance, can be accessed using your wallet address rather than your email address.
Setting up a Digital Currency Wallet
A wallet can be downloaded and installed through a mobile app store, browser extension store, or the developer’s website. Once it’s installed and configured, you can request that someone pay you cryptocurrency by providing the sender with your wallet address.
You can send cryptocurrency to other people after it has been sent to your wallet address, and you can also use the wallet to engage with web-based wallet-enabled applications.
Comparing Exchanges and Wallets
Several reputable cryptocurrency exchanges exist, including Coinbase, Binance.US, and Crypto.com. They let consumers buy cryptocurrency using debit cards or money transfers. A crypto exchange can also be used to swiftly and affordably trade one cryptocurrency for another.
Additionally, just like with a wallet, you may use it to transfer and receive cryptocurrency or put it in an exchange.
But a wallet and an exchange vary fundamentally from one another.
When you keep cryptocurrency in an exchange, it is kept in a wallet that is directly under the exchange’s management. Additionally, when you use an exchange to transfer cryptocurrency to someone else, you are essentially telling the exchange to utilize their wallet to do so.
In contrast, you have total control over your cryptocurrency when you keep it in your own wallet. Additionally, using a wallet allows you to transfer money without the aid of a middleman. This implies that no one will be able to prevent you from utilizing your cryptocurrency however you see fit.
Different Types of Wallets
Wallets come in several varieties and are suitable for a variety of uses. Hot wallets are ideal for usage with online apps that support wallets or for frequent cryptocurrency transfers. For safe, long-term storage, cold wallets are preferable.
Here is more information about these two forms of cryptocurrency wallets.
Hot Wallets
Any wallet that is kept on a computer, laptop, or smartphone that has internet access is considered a “hot wallet.” Hot wallets are user-friendly and practical. However, your cryptocurrency could be taken from a hot wallet if your device becomes infected with malware.
Hot wallets today come in desktop and mobile versions.
Desktop Wallets
The most popular cryptocurrency wallets for beginners right now are desktop ones. The only thing required to set up a wallet for use on a desktop computer is to download the software from the website of the wallet’s developer and install it. Additionally, desktop wallets may be used on laptops, as you would have anticipated.
Mobile Wallets
You will require a mobile wallet in the event that you ever need to complete financial transactions while you are on the move. However, the additional risk of losing or having your mobile device stolen is present when using a mobile wallet. To prevent this from happening, you might choose to lock your phone with a PIN code. Additionally, having a strong password is crucial for a mobile wallet.
Cold Wallets
A “cold wallet” is a cryptocurrency holder’s wallet that is disconnected from the internet. A cold wallet cannot be used for transactions until it is connected to a computer or other device with Internet connectivity. Therefore, individuals who make frequent purchases may find cold wallets inconvenient.
Cold wallets, on the other hand, are much safer than hot wallets. In most cases, they cannot be hacked without first having their physical location secretly acquired.
This is why cold wallets are ideal for storing substantial sums of a cryptocurrency over extended periods of time.
A cold wallet could be a paper backup or a hardware wallet.
Hardware Wallets
Your private key can be safely kept in a hardware wallet, which is a USB device. To prevent theft, it requires a PIN code to open. A hardware wallet must be connected to your PC in order to be used for transactions.
Paper Backup Wallets
If your computer crashes while you’re using a desktop wallet, don’t worry; you can always recover your funds by entering the seed words you were given during setup. These words are merely a backup in regular situations.
Both the public and private keys are stored on a piece of paper that has either been written down or printed. Due to the fact that these keys are kept protected from phishing attacks, this is often safer than using a hot wallet to store coins.
However, it increases the chance that the document would be misplaced or destroyed, which could result in lost funds that cannot be recovered.
How Does a Crypto Wallet Work?
Read on if you want to know the ins and outs of how a cryptocurrency wallet operates.
Instead of a Password, a Private Key is Used
The usage of a password to approve transactions is unnecessary when using a crypto wallet. Instead, it employs what is known as a private key, which is a string of characters. A message is encrypted with this key whenever you give your wallet permission to do something, like send cryptocurrency.
If your account’s private key falls into the wrong hands, the hacker could impersonate you on websites that support wallets or potentially take all of your cryptocurrency. Therefore, you should assume that anyone who asks for your private key is up to no good.
Public Key
A “public key” is an additional string of characters generated from your private key during wallet setup. Messages that have been encrypted using the first key can all be decrypted using this second key.
The private key cannot be derived from the public key in any known method. Therefore, you can safely share your public key with anybody you like.
Address Instead of a Username
When you sign up for an account, your public key is hashed with another series of characters to generate a third set of characters known as an “address.”
Your address will serve as your username on any websites that accept wallet payments. Your address is connected to everything you do. Therefore, a cryptocurrency address is an identification, much like an email address or a username would be.
Seed Words
In the event that your device crashes, your crypto accounts can be recovered using a series of phrases called “seed words.” You’ll see them while setting up your wallet.
How to Select the Suitable Wallet
There are countless options for cryptocurrency wallets. So it can be confusing to try to decide which is best. But by getting some important information, you might be able to swiftly focus your search.
Here are some concerns to think about.
Does Your Wallet Suit Your Coins?
Since each cryptocurrency is tied to its own network, you can’t use a wallet designed for one cryptocurrency with another. Therefore, compatibility with your existing coin collection should be your top priority when choosing a wallet.
Is This Wallet Intended for Long-Term Storage?
The Trezor Model T or Ledger Nano S are two examples of ultra-secure hardware wallets that you might wish to choose if you intend to store significant sums of cryptocurrency in this wallet for an extended period of time.
Will You Be Using This Wallet Frequently?
This is contrary to long-term storage. If you anticipate using this wallet for a significant number of transactions, you should probably go with either a desktop or mobile wallet.
Do You Hold Crypto from Multiple Networks?
A multi-chain wallet, such as Exodus, can be your best option if you own cryptocurrency on numerous networks. However, multi-chain wallets frequently do not include tokens for all networks. Therefore, if you only utilize a limited number of networks, it is recommended that you use many wallets rather than relying on a single wallet that supports multiple chains.
Will You Be Using This Wallet to Stake Your Coins?
If you want to stake your cryptocurrencies with a validator in order to help safeguard the network and get rewards, you’ll need to get a wallet that supports this.
