What is a Cryptocurrency Wallet?
A crypto wallet is essentially a piece of software or hardware that stores your cryptocurrency. We know that cryptocurrencies are digital assets. So what exactly is a wallet storing? It is storing your private keys. Private keys are a piece of digital information that give you the right to transact in your share of a cryptocurrency. Unlike your public key it should be kept secret.
You might not know it but when you sell or transfer cryptocurrency you are using a private key. A cryptocurrency wallet keeps your private keys safe and utilizes your private key for you when you send your crypto to another wallet address.
Types of Wallets
Wallets can be broken down into two categories – “hot wallets” and “cold wallets”. A hot wallet is a cryptocurrency wallet that is connected to the internet. A cold wallet is just the opposite, it is not connected to the internet. Take a look below and see the different types of wallets and how they are categorized:
The most well-known type of crypto wallet is the wallet that is included on a cryptocurrency exchange. When you leave it on the exchange you are essentially allowing the exchange to hold your private keys in their wallet. It’s connected to the internet all the time, even when your computer is off. This is the riskiest way to store your crypto because hackers can steal your information.
A software wallet downloaded onto your computer or another personal device is another form of hot wallet. Examples of software wallets include the Jaxx and Exodus wallets. Once activated you can send your crypto from the exchange to the wallet address associated with your crypto wallet.
Storing your coins on a hardware wallet like the Nano Ledger or Trezor is a good idea if you are investing for a long term period. When you use your hardware wallet you move the private keys onto a flash drive like piece of hardware. It is similar to moving photos onto a external hard drive. This type of wallet is obviously not connected to the internet when it is not plugged into your computer. However, if you lose the drive the private keys that are stored there are gone unfortunately. The process of moving your coins all the way back to the exchange is also more time intensive meaning cashing out takes longer.
Lastly, we have the paper wallet. This is the ultimate form of cold wallet. At the end of the day the reason we have a wallet is to keep our private keys safe. Private keys are just a combination of letters and numbers. So we can write these private keys on a piece of paper and store this piece of paper in a safe place. We can even make multiple copies and store them in different secure places. The coins are off the internet until you initiate a transaction with your private keys.
So which type of wallet is better? It depends on what your investment strategy is. If you are constantly moving in an out of different cryptocurrencies (you’re a trader) it makes sense to keep your cryptocurrency in a hot wallet.
If your goal is to buy a cryptocurrency and hold it for a long period of time before selling, then a cold wallet is probably the better choice. Why have a wallet that is always connected to the internet? You aren’t going to sell your crypto in the short term.
In most circumstances it’s probably best to keep a portion of your investment in both hot and cold wallets. This is the best way to protect your investment. Think of it this way, most people have both a checking account and a savings account. They have both because it makes financial sense to do so.