Even though cryptocurrencies are changing the global perspective about money, there are a few conventional aspects that remain the same.
Crypto assets are not as concrete as fiat currencies are. However, once someone purchases a digital asset they have to store them somewhere, such as some sort of digital wallet.
Storing any kind of digital asset in a digital wallet makes sense, however, it may not be as seamless as you might think. There are numerous aspects to consider here, one of which is to know which kind of crypto wallet to choose.
Let’s see what is a crypto wallet, what are the different types, the importance of carefully choosing a wallet, and more.
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What are Crypto Wallets?
Before you begin investing in crypto, the first basic step should be to learn what a crypto wallet is. Owning cryptocurrencies and traditional currencies is quite different. While fiat currencies have been in the world for hundreds of years, digital assets are relatively newer. Many people do not fully understand what they are and how vast their utility is.
Simply put, cryptocurrencies are more like a cluster of codes and are stored on a blockchain with a particular address.
Now crypto wallets are like traditional wallets and are meant to safeguard the digital assets you own. They do not actually store the cryptocurrencies but keep the storage of keys to the digital currencies safe.
However, there are different types of crypto wallets that vary on the basis of security measures. This is why it is necessary to be aware of the various types of crypto wallets and choose the right one.
Significance of Choosing the Right Kind of Crypto Wallet
Opting for the safest option while stepping into the crypto space is essential considering the crypto space is volatile and poses many risks, especially to novice parties.
However, before you dive into the different categories, you should know the importance of choosing the right wallet.
The right kind of crypto wallet means the one that ensures you are able to store your funds and assets with minimum losses and threats. The type of crypto wallet you opt for can also contribute to the kind of experience you have while buying, trading, and especially holding crypto.
What are the Different Types of Crypto Wallets?
When you purchase any digital asset you can store it on the exchange you buy it from. This is essentially your first or basic crypto wallet that you get by default. However, crypto wallets offer varying levels of security, which is the basic difference between different categories of crypto wallets.
Even though the major cryptocurrency exchanges offer security protocols that ensure your funds are safe, they are not always enough. This is where the need for a good and secure crypto wallet comes in.
The two different types of crypto wallets to know about are:
- Hot wallets
- Cold wallets
Here is how they both differ from one another.
Hot wallets are one of the most prominent types of crypto wallets. These types of wallets are basically the ones that are connected to the internet. Because of this feature, hot wallets offer a few benefits as well as drawbacks.
One of the drawbacks of hot wallets is that since it is connected to the internet, it offers a low level of security. This is what makes it more vulnerable to safety threats and cyber-attacks.
On the other hand, the benefits of hot wallets are that:
- They are highly user-friendly.
- They offer better accessibility due to the available internet connection.
- Quick buying and selling as they are always connected to the internet.
Cold wallets are the second type of crypto wallet you should know about. These types of wallets are designed for the cold storage of cryptocurrencies, which means the digital assets owned by you will be stored in an offline mode.
This is why cold wallets function as vaults that can be accessed and used by you for everyday transactions.
However, there are different types of cold wallets and some of them even connect to the internet while maintaining their basic functionality.
Since cold wallets offer a higher level of security, it can be determined that they are more suitable for people who want to store a larger number of cryptocurrencies.
A combination of both types of wallets can also be used where the larger share of assets or funds can be stored in cold storage while improved flexibility for funds offered by hot wallets is utilized. Therefore, a hybrid version of the two can offer high levels of security as well as flexibility.
Different Types of Hot Wallets
Understanding the basic difference between the two types of crypto wallets can help you decide which storage option is more suitable for you, according to your experience and funds.
However, there are further sub-types of the main types of wallets. All types of “software wallets” are considered to be the sub-types of hot wallets.
If you are interested in using hot crypto wallets then here are the sub-types to know about.
One of the most common hot crypto wallet types is desktop wallets. As the name suggests, this type of hot wallet is an application that you can download on your laptop or desktop. This application assists in generating a data file to hold the keys of the users.
As a user of a desktop wallet, it is crucial that you also create a password for your keys, which adds to its security and makes the key inaccessible to anyone else. The benefit of this type of hot wallet is that you will have ownership of your key. However, there will be security risks and possible damages as well.
Mobile wallets are one of the most important types of hot wallets to know about and are quite like desktop wallets. Instead of using your laptop or desktop, you can simply download a mobile application on your device.
This would function as a hot wallet and make it easier for you to access your funds, even while on the go. While this type of hot wallet does offer more flexibility, it lacks offering a good level of security.
Web wallets can be accessed by the users through the web browser. This type of hot wallet does not require the users to download any kind of software or application.
With the help of these wallets, you can access your funds from anywhere, all you will need is a device, web browser, and your password. Even though this may be a convenient and suitable option for you, you need to know that web wallets do not give ownership of the keys to the digital currencies to the users.
In such a case, you can opt for multi-signature crypto wallets that offer some level of control to the users over their funds and wallets.
Different Types of Cold Wallets
The cold wallets are comparatively safer than the hot wallets as mentioned above, however, this type of wallet also has some variants you need to know about. The prominent types of cold wallets are hardware wallets and paper wallets which are discussed in a bit more detail below.
Hardware wallets are likely the safest types of crypto wallets available for crypto investors. A hardware wallet fully serves the purpose of a cold wallet by offering high-end security and avoiding any online exposure of private keys.
The private keys are instead stored on a physical device in a completely offline environment and function as a flash drive. This makes it one of the best and most user-friendly types of cold wallets as it can be connected to any device or computer by using a USB drive.
Even if the device is linked to an internet connection, the private key is not exposed or compromised in any way.
In such a case, the device requests the users to specify the details of the transactions and provide validation for the data. The details of the transactions go to the online network where they are registered. This is how the transactions are completed.
Cold wallets are generally known to offer a higher level of security as compared to hot wallets. However, paper wallets might not be one of the best types of cold wallets in terms of the safety offered.
As the name suggests, these types of crypto wallets are literally physical pieces of paper. This paper has all the necessary information you need to access all your data. If you lose that piece of paper, you will also risk losing your funds or assets in the wallet.
There are other setbacks that come along with using paper wallets, which include:
- Limitations in sending partial funds
- Transactions becoming time-consuming
Nothing in crypto is as simple as one might think. There are various kinds of digital assets, crypto exchanges, and even crypto wallets. As a new crypto investor, it is crucial for you to understand the differences between varying categories, such as knowing the different types of crypto wallets. If you have the necessary information about your available options, it can be easier for you to choose which type of wallet is best and safest for you to use.
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