Cryptocurrency has acquired worldwide recognition, and its popularity continues to rise. It is considered similar to a stock exchange system. You can withdraw your cryptocurrencies from a crypto exchange and keep them in an external wallet, just like you do with stocks at a stock exchange.
Knowing about the types of crypto wallets is also an essential step when dealing with crypto transactions regularly. Choosing the best crypto wallets makes storing and managing your cryptocurrency portfolio simple (and maybe even enjoyable).
In this article, let’s overview the different kinds of crypto wallets available.
What is a crypto wallet?
Before you jump off to know the “different types of crypto wallets”, you must first understand them.
First things first, owning cryptocurrency is different from owning regular money. Cryptocurrency is a collection of codes that don’t exist in a tangible form and are present on a blockchain with unique addresses.
There are two keys, the private and the public keys, that help you in transactions and dealings of cryptocurrency. The public key is used to assist other users in transferring crypto assets, and the private key is used to unlock them in the wallet simultaneously.
A crypto wallet is similar to a standard wallet to keep your funds safe. On the other hand, different crypto wallet types provide more security than regular wallets. In reality, Crypto wallets never hold the actual coin; they only assure the safekeeping of crypto-asset keys. The information for connecting persons to funds and ensuring their safety might be stored in the crypto wallet.
Importance of public and private keys in Crypto wallet
Before we learn about the types of Crypto wallets, let’s see how the private and public keys are related to a Crypto wallet. When you establish a Crypto wallet, you will be provided with a private key and a public key linked to your wallet. As an example, consider your email. You provide your email address to someone you wish to get an email.
However, sharing your email address does not imply that others will be allowed to send emails from your account. Someone would need to know your email account’s password to do so. A public key and a private key are used similarly in Crypto wallets.
A public key acts as an email address that can be shared with anybody. It is created at the time when you make your wallet accept cash from somebody.
The private key is a guarded secret. It’s similar to your password, which shouldn’t be hacked and shared with anybody. You spend your money using this private key. If someone gets access to your private key, there is a good chance that your account will be hacked, and you will lose all of your bitcoin deposits.
Features of a Crypto wallet
Here is a quick overview of the features of a Crypto wallet:
- Simple to use: It works simply like any other software or wallet you use daily.
- Extremely secure: It’s merely a matter of keeping your private key safe.
- Allows for cross-border transactions in real-time: These are barrier-free with no intermediaries.
- Low transaction cost: Compared to regular banks, the transactional cost is significantly lower.
- Allows transactions of several cryptocurrencies: This makes currency conversions simple.
Different Types of Crypto wallet
There are two types of Crypto wallets with their own set of advantages and disadvantages. They are:
Hot wallets are wallets that are in some manner connected to the internet. On the other hand, cold wallets are physical wallets that are not connected to the internet.
Hot wallets are more flexible than cold wallets but are less safe. As hot wallets are digital, it allows you to access your cash while on the move. On the other hand, being digital, they are vulnerable somehow.
Since cold wallets aren’t connected to the internet, they’re usually more secure. To lose money from a cold wallet, it would have to be physically taken. However, this level of protection makes it more challenging to exchange cash when travelling.
A mix of cold and hot wallets could be the best option for those with considerable bitcoin holdings. A cold wallet can safeguard most assets, while a hot wallet can provide more flexibility.
A hybrid strategy can give you the best of both worlds: security and flexibility. For example, you may better customise your security by selecting a specific type of hot or cold wallet.
Both the hot and cold wallet categories have different types of crypto wallets. However, we have three primary varieties:
- Software wallets,
- Hardware wallets, and
- Paper wallets.
Since they are connected to the internet, most software wallets are classified as hot wallets. Web wallets, desktop wallets, and mobile wallets are the three most prevalent forms of software wallets.
- Web wallets:
A web browser is used to access web wallets. So you don’t need to download any specialised software to your computer or phone because you can access them through a browser.
Browser access also means that you can manage your crypto from anywhere as long as you have your password and a device with a web browser.
However, the website frequently owns the key to your crypto with a web wallet. So you’ll have a bit less control over your cryptocurrencies due to this.
- Desktop wallets:
A desktop wallet necessitates the installation of a programme on your computer. Next, you’ll create a data file using the program to store your keys. Finally, to get access to the keys, you’ll need to establish a password.
One of the advantages of using a desktop wallet is that you have control over your key. However, it would be best to guarantee that your computer is clean of viruses and malware because you own your key. It’s also critical not to forget your password.
If you choose a desktop wallet, make a copy of the data file and save it somewhere else. Then, you’ll be able to access your funds even if you’re away from your computer or if it crashes.
- Mobile wallets:
Mobile wallets function similarly to desktop wallets. The key distinction is that the wallet is a smartphone application.
A mobile wallet gives additional freedom for where you can go when you’d like to trade funds. They provide you the facility of QR codes that makes it easier for you to purchase and sell cryptocurrency.
Mobile wallets provide more freedom, but they also require additional security measures. For example, mobile wallets must be virus-free to keep your cryptocurrency safe. Furthermore, it would help if you exercised greater vigilance to avoid losing your phone.
Your keys are stored on a physical device rather than in software using a hardware wallet. The majority of hardware wallets function in the same way as a flash drive. A USB drive can connect them to a computer or other device.
One of the most significant advantages of a hardware wallet is this. It is not connected to the internet, eliminating a considerable security risk. You establish a seed phrase using a hardware wallet to let you access your crypto if you lose your device.
Your private key will never leave your device when generating transactions. The gadget asks for transaction/ payment information and then checks the data. Therefore, your private key will not leave the device in this manner.
When compared to software wallets, hardware wallets are more secure. And without a doubt, they are more expensive. Therefore, they’re highly suggested for people with a substantial amount of cryptocurrency or who plan to keep their assets for a lengthy period.
A paper wallet is a type of cold wallet that is made up of a sheet of paper. The paper has all the information you’ll need to get your bitcoin.
Although cold wallets are more reliable, the nature of a paper wallet makes it vulnerable. In case, you lose your paper wallet, you’ll also lose your money.
Another drawback of a paper wallet is the inability to transmit partial amounts of money. Workarounds exist, but they can be time-consuming. Paper wallets are generally disfavoured due to these drawbacks.
Crypto wallets are a crucial part when you are dealing with Bitcoin and other cryptocurrencies. This is because they are one of the essential pieces of infrastructure that enable blockchain networks to transfer and receive funds. However, each wallet type has its benefits and drawbacks, so it’s critical to understand how they function before moving cash.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.