Learn all about crypto wallets and how to choose the right one for you.
A crypto wallet allows users to store, access, and manage their crypto funds. There are many different types of crypto wallets to choose from, but chances are, if you own cryptocurrencies, you already have a crypto wallet.
In this article, we’ll outline the different types of wallets and help you determine which type is right for you. But before we get to that, let’s start by defining what a crypto wallet is.
Crypto Wallets Explained For Beginners
Unlike a traditional wallet, crypto wallets don’t actually store funds, either physically or digitally. Instead, crypto funds are digitally stored on the blockchain, where they reside in blockchain addresses that mark the location where funds can be sent or retrieved.
The blockchain is a distributed digital ledger. It records transactions and stores information about them in an immutable manner. Once written, the information cannot be modified or overwritten. This preserves a secure and permanent record, including who owns or has been granted access to cryptocurrency.
Crypto wallets simply give users convenient access to their funds by generating public keys, private keys, and wallet addresses that allow users to interact with cryptocurrency blockchains in an intuitive and user-friendly way.
How Do Crypto Wallets Work?
Let’s take a closer look at the keys and addresses mentioned above.
1) Public Keys
Public keys usually come in the form of a string of cryptographic code that users can share with others in order to receive cryptocurrencies. Think of it like a geographic coordinate that you can send someone to share your location, in lieu of your street address.
2) Wallet Addresses
Wallet addresses are essentially an abbreviated version of a public key, one that is shortened into an alphanumeric string or QR code. If public keys are like a geographic coordinate, a wallet address is similar to a street address, which is easier to remember and share.
3) Private Keys
Private keys should never, under any circumstances, be shared publicly. They consist of an alphanumeric string that is mathematically derived from the public key. Without diving into complexities, these keys allow users to access, manage, and send their crypto funds.
Private keys are like the code used to access the safe where valuables are stored. Anyone with the private key can access and control your funds.
Keep them in a secure location, because once they’re lost, it can be impossible to recover funds stored in the corresponding wallet address.
Types Of Crypto Wallets
There are several different types of crypto wallets grouped into two main categories: hot wallets and cold wallets. We’ll outline some of the most common types and what their benefits and drawbacks are.
Hot wallets, which include web-based wallets, mobile wallets, or exchange wallets, are wallets that online cryptocurrency exchanges typically offer. They are always online and easily accessible using a web browser or mobile device.
Most consumer-friendly digital asset exchanges offer some combination of hot and/or cold wallet storage solutions, which we’ll cover later in more detail.
Cold wallets, which include hardware wallets, cold storage, or offline storage, are physical wallets that “hold” crypto offline.
In many scenarios, cold wallets offer superior security compared to hot wallets, as private keys and other sensitive information is stored offline. However, cold wallets can be misplaced due to user error, stolen, or damaged beyond repair.
Cold wallet solutions range from incredibly sophisticated wallets held in secure vaults to high-quality consumer-grade hardware wallets to “paper wallets” that simply consist of a QR code or alphanumeric strings printed or written on paper.
For those looking to evaluate their crypto wallet options in more detail, click the following link to learn more about Digital Asset Custody: What are Hot and Cold Wallets?
Let’s look at a cold wallet in more detail.
If you’ve ever used a USB or hard drive, you have a good idea of what a hardware wallet is: a device on which your crypto key information is stored.
This can be a very secure approach because the actual “signing” — a mathematical way to verify the integrity and authenticity of a crypto transaction — occurs off of a computer and therefore beyond the immediate reach of potentially malevolent interference from the network.
Because hardware wallets have an offline aspect, they can be somewhat less convenient for rapid transactions at a moment’s notice. Some may also be more complicated to use than a software wallet with a well-designed user experience.
Most hardware wallets allow you to interact with your computer or mobile device via a web-based interface, app, or even a software wallet. These wallets typically cost around $100.
Now that we’ve covered the types of crypto wallets, it’s important to discuss the benefits and drawbacks of each.
Pros and Cons of Using Crypto Wallets
You don’t have to use a crypto wallet to buy and trade crypto. You can rely on the platform or service you choose to maintain information related to your investments. But there are advantages to having a crypto wallet.
On the pro side, wallets allow you to extend the basic advantages of cryptocurrency: self-ownership and the ability to avoid censorship or restriction. You’ll be able to interact with anyone, anywhere. And you’ll be able to do so quickly and with relative ease.
On the potentially negative side, you become totally responsible. There is no bank involved to hold accountable for what happens to your funds should something go awry, including any mistakes you make in handling transactions.
Another caveat: Although many wallets offer a good user experience, you should be computer-literate to successfully use crypto wallets.
Things To Consider When Choosing a Crypto Wallet
Which crypto wallet will be right for you depends largely on what you intend to do with your crypto investments. This includes your overall investment strategy, as well as specifics about the types of currency and assets you plan to buy, sell, or hold.
You’ll also need to factor in your personal preferences and concerns. Make sure you’ve thought these variables out, then research various wallets to see which best align with your needs.
1) What’s Your Crypto Investment Strategy?
Are you planning to invest in cryptocurrency as part of a long-term strategy, meaning you’ll likely hold onto it and not require frequent transactions? Perhaps you’ll use an approach such as dollar cost averaging.
If so, then, quick, on-the-go access may not matter as much to you, and the security of a hardware wallet may be appealing.
If, however, you plan to regularly exchange crypto coins, buy and sell based on market moves, or otherwise access them at a moment’s notice, a mobile software wallet may offer advantages.
2) What Currency Do You Want to Invest In?
Before you plunge into the crypto wallet waters, make a list of the cryptocurrencies you’re most interested in. That way, you can make sure any wallet you are contemplating supports them.
Also, if you are interested in investing in other digital assets, such as non-fungible tokens (NFTs), make sure the wallet will enable you to buy and sell them. The same applies to services you may be interested in, such as smart contracts.
Basically, do your homework. In some cases, you may need more than one wallet.
How To Use A Crypto Wallet
Once you know which crypto wallet you want to use, learn its functions and how to use it. Here is a basic breakdown of how a crypto wallet works:
Three Steps To Receive Funds
1) Retrieve a public key or address from your wallet.
2) Click on the "generate address" function in your wallet to copy the alphanumeric address or QR code.
3) Share it with the person who wants to send you crypto.
Four Steps To Send Funds
1) Secure the address (public key) of the wallet that will receive your payment or transfer.
2) Use the “send” function in your wallet and enter the destination address.
3) Specify the amount of crypto to send.
4) Confirm the transaction.
Crypto wallets allow users to conveniently store, access, and manage their cryptocurrency funds.
One common misconception about crypto wallets is that they physically or digitally store funds within the wallet itself. Instead, crypto wallets provide a user-friendly interface and features that allow users to interact with compatible blockchains, where crypto funds are actually “stored.”
While there are many different types of crypto wallets, most can be grouped into two categories: hot wallets and cold wallets.
No two individuals will share the same crypto investment strategy and approach to storing their crypto, but exchange wallets like the one Binance.US and other reputable exchanges offer make for a great way to start your crypto journey.
Exchange wallets from reputable platforms offer a balance of security and convenience, providing prospective customers with peace of mind without requiring them to manage their own private keys or hardware wallets.
If you’re clear about what your crypto investment strategy is, how you’ll likely use your crypto, and any strong preferences you have, you’ll be able to find the right crypto wallet approach.
Sign up with Binance.US today to buy, sell, and securely store your crypto.
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