Exploring the Different Types of Crypto Wallets: Which One is Right for You
Mastering the Basics How Crypto-Wallets Serve as Essential Tools for Managing and Securing Your Digital Wealth.
Crypto wallets store your private and public keys, which helps in keeping your crypto safe and accessible. They also allow you to send, receive, and spend cryptocurrencies like Bitcoin and Ethereum. Crypto-wallets don’t technically hold a user’s coins. Rather, it holds the key to their coins, which are stored on public blockchain networks.
To perform various transactions, a user needs to verify their address via a private key that comes in a set of specific codes. The speed and security often depend on the kind of wallet a user has.
Why Crypto-wallets are important?
Unlike your normal wallets, which can hold actual cash, crypto-wallets technically don’t store your crypto. Your holdings live on the blockchain, but can only be accessed using a private key. Your keys prove your ownership of money and allow you to make transactions. If you lose your private keys, you lose access to your money.
How a wallet aids us:
What is an Address?
An address is a string of text generated using cryptography to represent your account on the blockchain. The address can be shown publicly with others, and it is completely safe to do so. You can send and receive funds from and to your wallet address. The address is your unique identifier on the blockchain and represents your “account”.
An Ethereum address is a 42-character hexadecimal address derived from the last 20 bytes of the public key controlling the account with 0x appended in front.
Bitcoin wallet addresses have between 26 and 35 characters and also consists of both letters and number. They start with either “1”, “3”, or “BC1”.
What are private keys?
A private key is the counterpart of an address. Each Address has an associated private key. As the name suggests though, this is meant to be kept private and not shared with anyone.
You can think of it like a password, a really strong one that contains a bunch of letters and numbers that allow you to prove ownership over your address. Anyone who has the private key has access to make transactions from your address, i.e. send money from your address to theirs.
You think of your address as a username for your account, the private key is its password. Therefore, sharing your address is okay, but never share your private keys or someone might steal your funds and then nothing can be done about it.
Warning: Blockchains are decentralized, there is no “Forgot Password” option. If you lose your private key, you lose access to your account. Similarly, if someone steals your private keys and funds, there is nothing you can do about it.
What is a seed phrase?
A seed phrase is like a master password. Think of the seed phrase as a password manager, something like LastPass and 1Password. These applications, store your usernames and passwords for other apps securely, and they have a password. A crypto-wallet is like a password manager, where you can manage multiple blockchain accounts. If the private key is the password to a single account, the seed phrase is kind of like the master password for that wallet.
Types of crypto-wallets:
There are two types of crypto-wallets:
A. Software-based wallets and
B. Physical Cold wallets.
Hot and Cold Wallets — What’s the Difference?
Hot Wallets: Hot wallets are usually connected to the internet, while cold wallets are kept offline. This means that funds stored in hot wallets are more accessible and, therefore, easier for hackers to gain access to.
Examples of hot wallets include:
1. Web-based wallet: Metamask
2. Mobile wallet — Exodus
3. Desktop wallet — Coinbase Wallet
In a hot wallet, private keys are stored and encrypted on the app itself, which is kept online. Using a hot wallet can be risky since computer networks have hidden vulnerabilities that can be targeted by hackers or malware programmers to break into the system.
Keeping a large amount of cryptocurrency in a hot wallet is a fundamentally poor security practice, but the risks can be mitigated by using a hot wallet with stronger encryption or by using devices that store private keys in a secure enclave.
Cold Wallets: Cold wallets are entirely offline. While not as convenient as hot wallets, cold wallets are far more secure. An example of a physical medium used for cold storage is a piece of paper or an engraved piece of metal.
Examples of Cold wallets include:
A. Paper Wallets
B. Hardware Wallets
Ledger NANO S, and Trezor etc. These are physical devices specifically designed for storing cryptocurrencies securely. Hardware wallets provide an extra layer of protection against online threats. A hardware wallet is an external (accessory, usually a USB or Bluetooth device) that stores a user’s keys; a user can only sign a transaction by pushing a physical button on the device, which malicious actors cannot control.
Paper wallets: A paper wallet is a physical location where the private and public keys are written down or printed. In many ways, this is safer than keeping funds in hot wallets, since remote hackers have no way of accessing these keys, which are kept safe from phishing attacks.
Wallets can be further separated into Custodial and Non-Custodial Types:
1. Custodial Wallets: Most Web-based crypto-wallets tend to be custodial wallets. Typically offered on cryptocurrency exchanges, these wallets are known for their convenience and ease of usage and are especially popular with newbies, as well as experienced day traders.
Custodial Wallets’ implication here is that users must trust the service provider to securely store their tokens and implement strong security measures to prevent unauthorized access. These measures include two-factor authentication (2FA), email confirmation, and biometric authentication, such as facial recognition, or fingerprint verification. Many exchanges will not allow a user to make transactions until these security measures are properly set up.
2. Non-Custodial Wallets: Non-Custodial Wallets allow a user to retain full control of their funds since the private key is stored locally with the user.
When setting up a non-custodial wallet, the user is asked to write down and safely store a list of 12 randomly generated words, known as a “recovery”, “seed”, or “Mnemonic phrase”. The user’s public and private keys can be generated. This acts as a backup or recovery mechanism in case, the user loses access to their device. Anyone with access to the seed phrase can gain control of the funds held in the wallet. It is imperative to keep the mnemonic phrase in a secure location, and not to store a digital copy of it anywhere. Do not print it out at a public printer or take a picture of it.
For additional security Purposes: Consider multi-signature wallets: Multi-signature wallets or multi-sign wallets require two or more private key signatures to authorize transactions. An individual using a multi-sig wallet can prevent losing access to the entire wallet in case scenario where one key is lost.
Multisig wallets can prevent the misuse of funds and fraud, which makes them a good option for hedge funds, exchanges, and corporations. Since each authorized person has one key, and a sign-off requires the majority of keys, it becomes impossible for any individual to unilaterally make unauthorized transactions.
NFT wallets: An NFT wallet is a secure place that stores non-fungible tokens (NFTs).
Things to consider when choosing an NFT wallet:
- Compatibility with NFT marketplaces: User needs a wallet that can integrate with the NFT marketplaces they want to buy from.
2. Strong security: Ca include two-factor authentication (2FA), Email confirmation, or biometric authentication.
3. User-friendly Interface: A good NFT wallet should boast a streamlined user experience, and be easy to set up.
4. Accessibility on Multiple Devices: Most NFT wallets are available via Web extensions or as mobile Desktop applications.
5. Cross-Chain Compatibility: Most Wallets support Ethereum-based tokens; however, for those who want to mint, buy and sell tokens on other networks, a wallet with cross-chain compatibility is needed.
Setting up a Wallet:
There are several wallet options available. They can be installed as a browser extension, or as a mobile app; suggestions concerning:
1. MetaMask
2. Coinbase Wallet
5. Frame Sh
How to setup a MetaMask Wallet:
a. Visit the webstore for your browser (E.g. Chrome webstore,Mozilla FireFox, Vivaldi).
b. Search for MetaMask.
c. Click “Add to Chrome” (or any equivalent for your browser)
d. Follow the setup instructions.
e. Create an account, keep and secure your seed phrase.
Wrapping up: When it comes to crypto wallets, there is no perfect solution. Each type of wallet has different strengths, purposes, and trade-offs.
Using a crypto wallet, You can:
a. Manage all your digital assets in one secure place
b. Control your own private keys
c. Send and Receive cryptocurrencies to and from anywhere in the world.
d. Interact with usernames rather than hexadecimal “Public Key” addresses.
e. Browser Dapps (Decentralized Finance application)
f. Shop at stores that accept cryptocurrency.
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