Just like cash, there are wallets for cryptocurrencies to keep your digital assets safe and secure.
A crypto wallet can either be a software or hardware application which stores private keys linked with your cryptocurrency. As cryptocurrencies digitally exist on a blockchain, they can’t be physically touched. However, as technology improves , there is a need for users and corporations to recognize the importance of owning these digital assets and the need to know how much is held, same as how banks show our bank balance.
Fundamentally, a crypto wallet is used for crypto owners to verify their account balance whereby they have amount visibility and also conduct sending and receiving transactions. This is a main tool to manage crypto balances for most owners.
Why are crypto wallets important?
As cryptocurrency can be used for a number of different purposes, it is essential for anyone looking to invest in it. They provide a secure and convenient way to store, manage and access your digital assets. Decentralization is one of the key benefits. Cryptocurrencies are of a decentralized nature, which means that they are not controlled by any central authority or institution. It enables individuals to take control of their own assets. Transparency also plays an important role as many cryptocurrencies are built on blockchain technology, which is a distributed ledger that allows for transparent and immutable transactions. This tool enables individuals to view and track their transactions on the blockchain, providing a high degree of transparency and accountability. Of course, one where most people are interested in is the investment opportunities. Cryptos offer a range of investment opportunities ranging from trading to staking to lending. Users are able to participate in these opportunities and potentially earn a return on their investment.
How does it work?
We use a physical wallet to keep our fiat currency or debit and credit cards which gives us access to our funds. On the other hand, crypto wallet does not store cryptocurrency whereas it keeps important details required through private keys to access the blockchain for a specific cryptocurrency. Blockchain is a decentralized system that is powered by both public and private keys in cryptography. Similar to banks where a I.D.number is required to use a bank card, one must have private keys to get access and perform any transactions.
Types of Crypto Wallets
Now that you understand the basics of a digital wallet and how it functions, let’s take a look at what are the types of crypto wallets available in the market. The 2 main types of crypto wallets are known as hot and cold storage wallets, basically software for the former and hardware for the latter. Depending on one’s usability, crypto wallets vary from easy-to-use applications for most people to complex security solutions. It is crucial for users to consider the functionality of each one that fits their needs before making a decision.
Examples of Hot Wallets are:
Mobile wallets
This is the most common wallet available currently. A few examples of mobile wallets are Coinbase, Metamask, Exodus, Swiftcoin, etc. These are popular among cryptocurrency investors with the ease of application and portability. Users are able to send and receive cryptos, do any online shopping and also sometimes connect with decentralized apps.
Web wallets (exchange wallets)
Web wallets are what we refer to as an online wallet. It is very convenient as it can be accessed from any device, anywhere, anytime due to it being cloud-based. This wallet might come off as significantly unsecure than other wallets. Knowing what security precautions to take for the protection of one’s funds and keeping transactions safe is crucial.
Examples of cold wallets are :
Desktop wallets
They are software applications that are created to let users store and manage their private keys on a computer hard drive. Desktop wallets tend to be more secure than any web or cloud-based wallets. A great plus point using this wallet is, it will be protected by password and has a recovery phase to “regenerate” the wallet given that one’s computer is stolen or destroyed.
Hardware wallets
This is the safest form of storing one’s digital assets even more than desktop ones. Hardware wallets are very secure as they work by generating some private keys where it is stored offline. It is secured by a PIN which will be erased after multiple failed attempts to prevent physical theft. In addition, one will have to sign off on each transaction for verification and also for an extra layer of protection.
What are the security risks of using a wallet?
Any digital devices are susceptible to some kind of security attacks, while they offer many benefits, of course there will be risks that come with them too. Here are some of the risks to take note of:
- User error
Using a hot wallet requires users to manage their private keys carefully. If a private key is lost, one may not get access to their digital asset and it will be very difficult to recover them.
- Phishing attacks
There are many scammers who try to use phishing to trick an individual into giving them access to their wallet. They do this by creating fake websites or emails that look like legitimate crypto wallet providers when they are specifically designed to steal private keys. Therefore it is important to do sufficient and accurate research beforehand.
- Software vulnerabilities
Crypto wallets are powered by software, sometimes containing loopholes that could be exploited by attackers. This is why it’s important to keep wallet software up-to-date with the latest security patches.
- Regulatory risks
The use of cryptocurrencies is still largely unregulated in many parts of the world, which means that there is a risk of new regulations being introduced that could impact the value or use of cryptocurrencies.
In short, crypto wallets are a crucial component of the cryptocurrency ecosystem. By understanding how digital wallets work and taking the appropriate precautions, users can maximize the benefits while minimizing the risks. It is also good to stay up-to-date on the latest security threats and their best practices.
