As digital currency is inevitably gaining global popularity, so is the desire for new investors to enter the cryptocurrency trading world. Although most people have at least a fundamental understanding of crypto and how to purchase them, a large demographic of potential adaptors remain unaware of how to store their newly acquired digital assets securely. Due to a lack of this knowledge, countless cryptocurrency holders have become subject to the loss or theft of their cryptographic assets due to numerous security issues. We aim to provide the essential knowledge on the what and the why of a blockchain or crypto wallet to help new and seasoned investors safeguard their crypto portfolios.
What is a Crypto Wallet?
Crypto wallets are similar to pocket wallets only by the principle of being able to hold currency, albeit digital currency that has no physical form. A cryptocurrency wallet is a physical medium, device, software, or service that safely stores and maintains your cryptocurrency holdings. The crypto or blockchain wallet does not hold the actual cryptocurrency but instead stores the cryptographic keys corresponding to your crypto holdings’ and the volume.
Whether you’re experienced or a new cryptocurrency investor, your crypto wallet is your most valuable tool. Without the crypto wallet, you will not be able to store and access your crypto holdings securely. Most beginner investors who keep their cryptocurrencies directly on exchanges don’t realize that this exposes them to a significantly higher level of risk. Sometimes, the exchanges have security vulnerabilities that bad actors can exploit to steal your crypto. In 2021 alone, malicious actors stole over USD$4 billion worth of user cryptocurrencies were stolen across multiple exchanges worldwide through numerous security vulnerabilities in their systems. It is also worth knowing that when you make crypto transactions with your exchange wallet, you rely upon the exchange as a middleman to facilitate the trade. Why do you need an intermediary instead of having the power to choose how, where, and to whom you want to send or receive your digital currency directly?
As you continue to invest more in these digital assets and your portfolio grows in the exchange wallets, so does your risk exposure. This demand for security is why cryptocurrency wallets are now becoming a preferred form of crypto storage that keeps your money secure. Once you start dealing with large sums of investments, the best practice would be to securely start storing them onboard a crypto wallet of your choice. This blockchain wallet gives you complete control and autonomy over your private keys and money, which most seasoned investors ensure they have, and so should you.
Crypto wallets are also a great way to monitor and keep tabs on all your cryptocurrency holdings which are especially useful when investors find themselves trading on multiple exchanges. In such instances, they can easily consolidate and manage all their holdings in one place. This feature of crypto wallets is important because crypto investors often trade across multiple marketplaces due to the varying range of coins available on each exchange.
Before understanding how crypto wallets work, we must first understand what public and private keys are. A private key is a unique identifier provided to you upon creating a blockchain wallet, while a public key is how you transfer and receive funds and can be shared. To understand this better, think of the public key as your home address and the private key as the key to your front door.
People can send packages to your doorstep with the public key, but with your front door key, they can enter and rob you of all your belongings. A good advice is to keep the private key confidential, as anyone with access can use it to gain control over your crypto wallet and the crypto deposited in it.
When you purchase a cryptocurrency, the transaction is recorded publicly on its blockchain ledger along with your public key. Once recorded, the software checks the user’s public key on the blockchain’s ledger against your wallet’s private key. If there is a match, your purchase and all other cryptocurrencies that match your public address appear in your crypto wallet. This is irrefutable proof that you are the rightful owner of the crypto, and your ledger will reflect the appropriate balances.
To send money through your blockchain wallet, you must enter the receiver’s public address, enter the desired amount and crypto you wish to send, and sign off on the transaction using your secret private key. Receiving cryptocurrency is done using the same methodology, only this time, you provide the sender with your public wallet address for them to perform the same routine. It’s that simple.
Now that we have covered why crypto wallets are essential and how they work, it still doesn’t mean you have a simple option of whether or not to choose a crypto wallet. The decision is broader because there isn’t just one type of cryptocurrency wallet. Several types of wallets offer their own set of advantages and disadvantages. If you intend to grow your digital currency portfolio, it would be wise to read on and understand the types of wallets ideal for you.
A hot wallet is essentially an internet-connected crypto wallet such as Coinbase. They are most commonly exchange wallets, mobile wallets, web-based wallets, desktop wallets, or third-party wallets. Hot wallets store your private keys on the cloud for ease of use and transactional efficiency. One of the most significant features of wallets is their multi-device compatibility and twenty-four-hour access contingent on internet availability. It allows users to trade crypto coins directly from it at their convenience. Frequent traders often find the simplistic, user-friendly interface of hot wallets alluring compared to cold wallets.
Contrastingly, a cold wallet, also known as a hardware wallet are physical wallet that typically does not possess internet connectivity. They are connected to the internet only if the user intentionally uses external means to achieve web access. They generally resemble a small dongle that can be accessed by connecting to a computer through a USB port. Cold wallet users make all transactional decisions offline, after which only the execution of the instructions happens online. These wallets provide users with an effective safety measure against online hackers. Its biggest strength of being securely disconnected is its most significant drawback because you can’t instantly trade your cryptocurrency as quickly as hot wallets without getting past a few additional steps to bypass security roadblocks.
A hot wallet is an excellent option if you regularly trade, as funds can be accessed and utilized quickly to make investments. It is worth noting that, in this instance, the transactional speed of the hot wallet depends entirely on the service providers or software capability. In such cases, a cold wallet may take additional time to perform transactions due to the extra security measures and lack of online connectivity, where crypto transactions primarily happen.
Frequent investors typically use hot and cold wallets depending on how they wish to engage their capital. In such cases, long-term investors stash away their crypto securely into cold wallets, while short-term investors typically use hot wallets. This strategy is good to follow as you let your investments decide which type of wallet is the best based on your usage. So if you wish to make sizable investments for the long haul, we suggest placing your savings securely in a cold wallet. These investors store their crypto safely in disconnected cold wallets that cannot be hacked without bad actors physically accessing the wallets. Your crypto is safely kept away until a time of your choosing when you wish to cash in.
You could use a hot wallet if you are in the market to make short-term investments with a high frequency of trades. This suggestion is simply because trading through most hot wallets is quicker than cold wallets. Using a hot or cold wallet is not a debate with a clear-cut final answer. Ultimately, it all boils down to your personal goals as an investor and the best solution for your individual needs.
Interestingly, the options available in crypto wallets don’t end with hot or cold wallets, as they also have the classifications of custodial and non-custodial wallets. Don’t panic; allow us the opportunity to simplify what these wallet types are to help you choose a suitable option that is best for your investment strategy.
Custodial wallets are commonly present in exchanges or crypto wallet services as integrated wallets for customers to use on their platforms. These wallets have excellent user interfaces and are easy to use. This simplicity is why they are a perfect tool for beginners to use at the start of their crypto journey without dealing with any complexities they will face as they gain experience. Custodial wallets are trust-based means to store and transact with your crypto, where customers place their crypto portfolio in the hands of the exchange to handle securely. As the name suggests, the wallet service is the custodian of your crypto deposits. Hence, the responsibility of safeguarding your investments lies with the exchange. In most cases, crypto exchanges prioritize user safety by implementing security measures like email authentication, mobile authentication, two-factor authentication, biometric authentication, and other protective safeguards. Excellent custodial wallet providers also offer customers insurance to protect their investments in light of situations where their crypto wallets encounter hacks or theft.
In the case of non-custodial wallets, the user is the boss. Users who create a non-custodial wallet receive a randomly generated set of seed words that can recover wallets in adverse situations where access is lost. If the user holds the seed words, they have absolute control over their cryptocurrency holdings. When users deliberately or intentionally delete the wallet software, recovering the wallet is easy using the seed words. It is essential to know that divulging the seed keywords to others is the equivalent of handing them unfettered access to your crypto savings. Anyone with access to the seed words can easily access and take control of all your holdings, so avoid making this mistake at all costs unless necessary.
From a security standpoint, there is no argument that non-custodial wallets are the best. One can easily install the software, create a wallet, note down the seed keys as a paper wallet, make deposits onto the wallet, and delete the wallet software. By doing so, nobody can access or hijack your safely kept cryptocurrencies. They remain safe if you have the seed key safely hidden away. Later, when the user wishes to access their holdings, they may install the software again and enter the seed words to regain complete access to their crypto portfolio. It is that simple and yet offers the highest level of security against cyber threats.
This security feature of non-custodial wallets can also be a double-edged sword that can hurt the user. Imagine an instance where you forget your custodial wallet password or get locked out of your account; it’s still possible to reach out to customer care, verify your identity, and regain access to your wallet. This recovery option is not available in the case of non-custodial wallets. Once you lose access to your private keys, your wallet, and valuable cryptocurrency are lost forever. So with the high security comes the importance of being extra careful where and how you store your private keys.
The benefits of non-custodial wallets do not mean that custodial wallets don’t have their advantages. Numerous investors recognize and actively use regulated and reputed custodial wallets, which provide users with an unmatched level of capabilities like robust tools integrated into the wallets for planning and managing their crypto portfolios. Additionally, excellent custodial wallet providers offer insurance to protect themselves if users suffer financial damage due to attacks, fraud, or theft. We have observed that numerous seasoned investors are beginning to see the benefits of adapting to these wallets over non-custodial wallets.
Unlike crypto wallets, NFT wallets hold a user’s Non-fungible tokens (NFT) in a single virtual location. They don’t physically store the NFT themselves but instead, keep the NFT transaction detail on the blockchain along with private keys associated with the buyer. When considering what NFT wallet to use, you need to choose a hardware or software wallet depending on your preferences as an investor. As an NFT investor, you may wish to buy NFTs from multiple marketplaces, such as OpenSea and Rarible, that offer different catalogues of tokens. To be able to do this securely, you will need a wallet that has the compatibility to connect with a variety of NFT marketplaces.
Suppose you are a new investor in the NFT space; you should be looking for an NFT wallet with a simple and user-friendly interface with strong security measures that can be easily accessible across multiple devices. For instance, a wallet that provides a mobile app such as Coinbases Dapp that lets you buy or sell your favourite NFTs while on the go is an excellent feature for investors with busy schedules.
Finally, one of the essential features to look for is cross-chain compatibility. Buying, selling, or minting NFTs from networks outside Ethereum-based tokens requires a cross-chain compatibility wallet. Although the Ethereum blockchain network is the majority base behind most NFTs, with its rising popularity, who’s to say that other networks won’t increase their market share? So stay future-ready and find the perfect NFT wallet for you. To summarize, you should be looking for an NFT wallet that must have multiple marketplace compatibility, an easy-to-use UI, cross-chain compatibility, multi-device compatibility, and security.
In conclusion, we hope this guide helps you gain the confidence you need to enter the blockchain world and reap the benefits of decentralized finance. If you need further assistance, we at Kreatorverse, a dedicated web3 product studio where we specialize in all aspects of blockchain, cryptocurrency, NFTs, and everything in the decentralized web, are here to guide you through your blockchain journey. Want to know more? Contact us today.