Wallet Types
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A cryptocurrency wallet is your first step in order to send and receive cryptocurrencies.
You can think of a crypto wallet like an email inbox. There are many types of emails accounts, but most people that I know go with Google, Microsoft, Apple, or other online free email services. If you’re like me, then you’ve become somewhat numb to news of online hacking, where your data is being sold bought and sold by hackers.
The difference with cryptocurrency, is if you or any of the online crypto companies get hacked the data is actually money, and in most cases it is unrecoverable. For this reason you, the user, must take extra precautions and you must take the responsibility to secure your money yourself.
I will give you information on the different wallet types so that you can make an informed decision about which is right for you.
Before we begin, I would like to explain something important to you first.
Private Keys, Keystore File, Mnemonic Phrase (recovery phrase)
These are ways to unlock your wallet. Your email account requires a password in order to gain access to your mail. With cryptocurrency, you gain access to your funds with your Private Keys, Keystore File, or Mnemonic Phrase (recovery phrase). I cannot stress how important these are.
They actually are in effect your wallet. With these, anyone can gain full access to all of your funds. If you loose these, your cryptocurrency will be gone forever, and nobody will be able to gain access to them.
Cold Wallet vs Hot Wallet
Cold Wallet
A cold wallet is when your private keys, keystore file, or recovery phrase are written down or stored somewhere offline, and disconnected from the internet.
This is somewhat like writing your password down in a notebook. A hacker would have to gain physical access to it in order to read it. You could also save your private keys, keystore file, or recovery phrase on a thumb drive on a computer that has never been online.
This gets a bit complicated, but there are ‘hardware wallets’ that are a digital paper wallet. You know how in spy movies, when the bad guys are transferring money with something connected to the computer, and they have to wait until the money transfers or they will get caught (or something along those lines). That thing that they have plugged into the computer is how a cryptocurrency hardware wallet works.
Advantages:
Enterprise level security
Disadvantages:
A little difficult to set up.
Examples of a hardware wallet: Wookong (悟空) (Goku), Trezor, Ledger
Hot Wallet (Decentralized & Centralized)
A hot wallet, is when you store your private keys, keystore file, or recovery phrase on a computer or a device that is connected to the internet.
It is like a word document on your computer (if you’re computer is connected to the internet)
Decentralized Hot Wallet
A decentralized wallet actually isn’t really a wallet at all. It’s more like an interface to your funds sitting on the blockchain. It’s kind of like accessing your online bank account from a browser. Your funds are not sitting on the browser.
With a decentralized wallet, you have custody and control of the private keys, keystore file, or recovery phrase. In other words, you are actually in control of your cryptocurrency, which means you take responsibility for storing them (that’s a good thing).
*When choosing a hot wallet make sure the wallet that you choose does security testing. Also, look at their website to see if there in information on where the company is located and if there are photos of the team. Without this, they can possibly walk away with your money. This has happened many times in the past.
Advantages:
You have full control over your crypto.
Disadvantages:
Your crypto is lost forever if you loose the private keys, keystore file, or recovery phrase.
Hot wallets are not fully secure.
Examples of decentralized hot wallets: ZILLA, IMToken, Bread, MyEtherWallet (MEW)
Centralized Hot Wallet
A centralized wallet is where you entrust a company to hold your cryptocurrency for you. It can be convenient if you don’t want to store your private keys, keystore file, or recovery phrase by yourself. However if they decide to freeze your account, or they get hacked (this can happen to most companies, crypto included), or the government tells them to freeze your account, then you completely loose access of your money.
Keeping your crypto in a centralized wallet is absolutely not recommended in crypto since hacks are commonplace and your chances of loosing all of your money is comparatively high. If your online bank account gets hacked, or your credit card numbers get stolen online, your funds are most likely insured and recoverable. This is not the case with crypto. If your money get’s stolen, it’s gone forever, and you probably will not recover your money.
Cryptocurrency exchanges also have centralized hot wallets. Many crypto newbies store their funds on these types of wallets. Newbies feel safe because they see their friends also using these wallets but you wont find experience people in crypto making that mistake.
*When choosing a hot wallet make sure the wallet that you choose does security testing. Also, look at their website to see if there in information on where the company is located and if there are photos of the team. Without this, they can possibly walk away with your money. This has happened many times in the past.
Advantages:
It uses the Login/Password system which is easier for newbies to understand.
Disadvantages:
You relinquish control of your crypto.
Hot wallets are not fully secure.
Highest susceptibility to hacks.
Examples of centralized hot wallets: Coinbase, MtGox, Coincheck, Upbit, Binance
In 2011 I was gifted 0.5 Bitcoin which at the time was worth about 5 USD. I didn’t think much of it, and eventually I lost the private key access to the wallet. Now that unrecoverable wallet is worth more than 3,000 USD.
My advice is to properly store your crypto from the beginning because when you need to recover it in a few years when it’s enough to retire on, you want to be sure it’s secured and you have access to it. Failing to properly secure your crypto from the outset can end in disaster. Here’s what happened to a friend recently.
It is common for hackers to identically copy a wallet or an exchange website, and disappear after you upload your funds. This is why our wallet is a mobile app. It is more difficult to spoof a whole mobile application.
It’s important that you stay alert when sending or receiving cryptocurrency.
