What are crypto wallets?
Crypto wallets are programs that function to display your cryptocurrency, much like you would be able to see your notes and change in a tangible wallet. They are called ‘wallets’ because they store the passkeys you use to sign in to engage in payment activities and gain access to digital currencies, like Bitcoin or Ethereum which can be used to in real-time to trade within these decentralised apps, without any of the hassle that arises from dealing with banks or paper bills and cheques.
Crypto wallets are different to your standard wallet in that they don’t store cryptocurrency. Instead, these programs are connected to the blockchain where the currencies are stored. The wallet reads the public ledger and displays how much balance is currently stored at any one of your digital addresses while holding your private keys which allow transactions to take place.
Cryptocurrency transactions are different to sending cash through mail. When you send digital coins or tokens, your private key broadcasts an update of the balance on the blockchain, meaning that both the sender and recipient can view any changes to their balance instantly.
What are public and private keys?
The keys that unlock your digital assets are long strings of random characters. While the public keys can be shared widely, private keys should only ever see daylight when used for decryption with their corresponding encryption algorithm. The best way to visualise this, is that your public key would be the equivalent of a sort code and account number on a credit card, you would also need your PIN in to move funds out of your account. Likewise, you cannot access your wallet with the public key alone, to approve any transaction in the wallet you must also use your private key, which as you can guess, remains private!
Different Types of Crypto Wallets
Crypto wallets divide into two main types, software-based hot wallets, and physical cold wallets:
The key difference between hot and cold wallets is their accessibility. A hot wallet is connected to the internet, leaving funds more susceptible to hackers because they can take advantage of network connectivity issues, while cold wallets are a form of offline storage which is able to protect against this issue by keeping your sensitive information out of reach.
Examples of hot wallets include Mobile wallets, web-based wallets, and desktop wallets while examples of cold wallets include paper wallets (where you store or print your key details) and hardware wallets (usually an external device like a USB that stores both keys).
Although cold wallets are offline, they still work like a hot wallet in the sense that they can still be accessed with a mobile device or hardware. Despite being less convenient than hot wallets, they are more secure and protected against cyber-attacks. Having said this you must take responsibility for your own security, as it falls on you to protect your external device or paper trail containing your details.
The decision of what wallet is most suited, is usually dependent on whether you want funds to be accessible or not. Many crypto enthusiasts maintain both hot and cold storage for these coins so that they have both accessible funds, and funds that are protected in the case of a bad actor. If you are someone who trades often, you may find it more convenient to have access to your funds and avoid a transaction being mistakenly blocked, however if you are long term investing, your funds may be better off in a cold offline wallet.
Custodial and Non-Custodial Wallets
Wallets can also be further understood as being either custodial or non-custodial.
Custodial wallets tend to be web-based crypto wallets offered by centralised businesses such as a cryptocurrency exchange. They are a convenient and easy means of storing your private keys. When you outsource your cryptocurrency wallet custody to an institution like a crypto exchange, they take on the responsibility and track your funds in the case that you are unable to. The biggest difference between custodial wallets and non-custodial wallets, is that when referring to custodial wallets, the user is not in full control of their tokens. For this reason, it is important to trust the service provide to securely store your assets.
On the other hand, non-custodial wallets such as hardware wallets, allow you to retain full control of your funds as the private key is stored locally by you. While applying for a non-custodial wallet, you are usually asked to store 12 recovery phrases that can be implemented in an emergency case where access is lost. Your seed phrase will give you full control over your funds making it imperative that you keep your seed phrase well protected and do not store a digital copy.
While custodial wallets provide better security practices and back up options (which is especially good if you are prone to losing passwords and devices), these wallets are a more popular option for beginners who have little to no experience in trading crypto, and the transaction fees tend to be cheaper. As the information have also stored in the third-party server. For beginners, this is one of the popular options since they have little to no experience in trading crypto. However, if you prefer to retain full control over your own funds, a non-custodial wallet may be what you are looking for.
Multi-Signature Wallets
Multi-signature wallets require two or more private keys signatures to authorise transactions. If you lose one key, there will still be two other keys that are able to sign transactions, another great option if you are prone to losing passwords! They are also a good option for corporations and exchanges since this system can prevent the misuse of funds and fraud.
Each type of wallet has different advantages, purposes, and trade-offs. Depending on where you are in your crypto journey, how forgetful you may or may not be and whether you are an individual or an organisation, you may choose an option that best suits you.
