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What is a Crypto Wallet | All You NEED To Know

You can't fold up a Cryptocurrency and put it in your wallet. Yet you can hold the keys to your crypto by using a crypto wallet of your own. In this post, you'll learn What is a Crypto Wallet | All You NEED To Know!

If you’re planning on getting into crypto, before you decide which currencies to invest in, you’ll need to set up your crypto wallet. This is where you’ll organize your crypto portfolio. Each wallet comes with a private key that allows you—and only you—to access the wallet’s contents. But setting up your wallet isn’t just about socking away any Bitcoin or Ethereum you may buy on an exchange. It also allows you to securely send and receive these and other types of cryptocurrencies.

There are different types of crypto wallets available, including mobile apps and wallets that look like USB sticks. Although there is some variation, most function in a similar way by storing private key pairings that allow you to sync your wallet across multiple devices to send and receive cryptocurrency. 

You should definitely know how to use and set up a crypto wallet before you make your first cryptocurrency purchase. With that in mind, let’s take a closer look at how cryptocurrency wallets work and how to choose the best one for you.

Read more ☞ What You Should Know Before Investing in Cryptocurrency - For Beginner

In short, a crypto wallet is a tool that you can use to interact with a blockchain network. There are various crypto wallet types, which can be divided into three groups: software, hardware, and paper wallets. Depending on their working mechanisms, they may also be referred to as hot or cold wallets.

The majority of crypto wallet providers are based on software, which makes their use more convenient than hardware wallets. However, hardware wallets tend to be the most secure alternative. Paper wallets, on the other hand, consist of a "wallet" printed out on a piece of paper, but their use is now deemed obsolete and unreliable.

How do cryptocurrency wallets work?

Contrary to popular belief, crypto wallets don't truly store digital assets. Instead, they provide the tools required to interact with a blockchain. In other words, these wallets can generate the necessary information to send and receive cryptocurrency via blockchain transactions. Among other things, such information consists of one or more pairs of public and private keys.

The wallet also includes an address, which is an alphanumeric identifier that is generated based on the public and private keys. Such an address is, in essence, a specific "location" on the blockchain to which coins can be sent to. This means you can share your address with others to receive funds, but you should never disclose your private key to anyone.

The private key gives access to your cryptocurrencies, regardless of which wallet you use. So even if your computer or smartphone gets compromised, you can still access your funds on another device – as long as you have the corresponding private key (or seed phrase). Note that the coins never truly leave the blockchain; they are just transferred from one address to another.

Public vs. private keys—what’s the difference?

Crypto wallets generally use two types of keys: public keys and private keys.

Public keys operate in a similar way to your bank account number. A public key is a long string of random numbers that can be shared with a third party, such as a cryptocurrency exchange, without compromising the security of your wallet. This key allows you to receive cryptocurrency in transactions—oftentimes by using a wallet address, which is essentially a compressed version of the wallet’s public key.

Private keys, on the other hand, should always be kept private. A private key allows you to access the actual cryptocurrency on the blockchain. So if someone has access to your private keys, it’s as good as having access to the crypto in your wallet. 

Do I need a crypto wallet to trade crypto?

The simple answer is yes. Whether you are a frequent trader or a bitcoin HODLer, you need to have a wallet address to store and trade crypto. You can use the hot wallet provided by your crypto exchange, a mobile wallet you install on your phone, a browser extension, a desktop wallet, or a hardware wallet. 

  • Hot wallet: Binance exchange
  • Mobile crypto wallets: Trust WalletMetaMask.
  • Browser extension crypto wallets: MetaMask, MathWallet, Binance Chain Wallet.
  • Desktop crypto wallets: Electrum, Exodus.

Hot vs. cold wallets

As mentioned, cryptocurrency wallets may also be defined as "hot" or "cold," according to the way they operate.

A hot wallet is any wallet that is connected somehow to the Internet. For example, when you create an account on Binance and send funds to your wallets, you are depositing into Binance's hot wallet. These wallets are quite easy to set up, and the funds are quickly accessible, making them convenient for traders and other frequent users.

Cold wallets, on the other hand, have no connection to the Internet. Instead, they use a physical medium to store the keys offline, making them resistant to online hacking attempts. As such, cold wallets tend to be a much safer alternative to "storing" your coins. This method is also known as cold storage and is particularly suitable for long-term investors or "HODLers."

As a way to protect users' funds, Binance only holds a small percentage of coins in its hot wallets. The remaining is kept in cold storage, disconnected from the Internet. Noteworthy, Binance DEX provides an alternative for users that prefer not to keep their funds in a centralized exchange. It's a decentralized trading platform that allows you to have total control of their private keys, while also being able to trade directly from their cold storage devices (hardware wallets).

Software wallets

Software wallets come in many different types, each with its own unique characteristics. Most of them are somehow connected to the Internet (hot wallets). The following are descriptions of some of the most common and important types: web, desktop, and mobile wallets.

Web wallets

You can use web wallets to access blockchains through a browser interface without having to download or install anything. This includes both exchange wallets and other browser-based wallet providers. In most cases, you can create a new wallet and set a personal password to access it. However, some service providers hold and manage the private keys on your behalf. Although this may be more convenient for inexperienced users, it's a dangerous practice. 

If you don't hold your private keys, you're trusting your money to someone else. To address this problem, many web wallets now allow you to manage their keys, either entirely or through shared control (via multi-signatures). So it's important to check the technical approach of each wallet before choosing the most suitable for you.
When using cryptocurrency exchanges, you should consider making use of the protection tools available. 

The Binance Exchange offers several security features, such as device management, multi-factor authentication, anti-phishing code, and withdrawal address management.

Desktop wallets

As the name implies, a desktop wallet is a software you download and execute locally on your computer. Unlike some web-based versions, desktop wallets give you full control over your keys and funds. When you generate a new desktop wallet, a file called "wallet.dat" will be stored locally on your computer. This file contains the private key information used to access your cryptocurrency addresses, so you should encrypt it with a personal password.

If you encrypt your desktop wallet, you will be required to provide your password every time you run the software so that it can read the wallet.dat file. If you lose this file or forget your password, you will most likely lose access to your funds.

Thus, it's crucial to backup your wallet.dat file and keep it somewhere safe. Alternatively, you can export the corresponding private key or seed phrase. By doing so, you will be able to access your funds on other devices, in case your computer stops working or becomes inaccessible somehow.

In general, desktop wallets may be considered safer than most web versions, but it's crucial to make sure your computer is clean of viruses and malware before setting up and using a cryptocurrency wallet.

Mobile wallets

Mobile wallets function much like their desktop counterparts but are designed specifically as smartphone applications. These are quite convenient as they allow you to send and receive cryptocurrencies through the use of QR codes.

As such, mobile wallets are particularly suitable for performing daily transactions and payments, making them a viable option for spending Bitcoin, BNB, and other cryptocurrencies in the real world. Trust Wallet is a prominent example of a mobile crypto wallet.

Just as computers, however, mobile devices are vulnerable to malicious apps and malware infection. So it's recommended that you encrypt your mobile wallet with a password, and backup your private keys (or seed phrase) in case your smartphone gets lost or broken.

Hardware wallets

Hardware wallets are physical, electronic devices that use a random number generator (RNG) to generate public and private keys. The keys are then stored in the device itself, which isn't connected to the Internet. As such, hardware storage constitutes a type of cold wallet and is deemed as one of the most secure alternatives.

While these wallets offer higher levels of security against online attacks, they may present risks if the firmware implementation is not done properly. Also, hardware wallets tend to be less user-friendly, and the funds are more difficult to access when compared to hot wallets.

To overcome the lack of accessibility, you can use Binance DEX to connect your device directly to the trading platform. This is a secure way of accessing your funds because the private keys never leave your device. Some web wallet service providers also offer a similar service, allowing hardware wallets to be connected to their browser interface.

You should consider using a hardware wallet if you plan to hold your crypto for a long time or if you're holding large amounts of cryptocurrency. Currently, most hardware wallets allow you to set up a PIN code to protect your device, as well as a recovery phrase – which can be used in case your wallet is lost.

Paper wallets

A paper wallet is a piece of paper on which a crypto address and its private key are physically printed out in the form of QR codes. These codes can then be scanned to execute cryptocurrency transactions.

Some paper wallet websites allow you to download their code to generate new addresses and keys while being offline. As such, these wallets are highly resistant to online hacking attacks and may be considered an alternative to cold storage.

Owing to the numerous flaws, however, the use of paper wallets is now considered dangerous and should be discouraged. If you still want to use it, it's essential to understand the risks. A major flaw of paper wallets is that they aren't suitable for sending funds partially, but only their entire balance at once.

For example, imagine that you generated a paper wallet and sent multiple transactions to fund it, summing a total of 10 BTC. If you decide to spend 2 BTC, you should first send all 10 coins to another type of wallet (e.g., desktop wallet), and only then spend part of the funds (2 BTC). You can later return the 8 BTC to a new paper wallet, though a hardware or software wallet would be a better choice.

Technically, if you import your paper wallet private key into a desktop wallet and spend just part of the funds, the remaining coins will be sent to a "change address" that is automatically generated by the Bitcoin protocol. If you don't manually set the change address to one that you control, you will likely lose your funds.

Most software wallets today will handle the change for you, sending the remaining coins to an address that is part of your wallet. But the important thing to remember is that your paper wallet will be empty after sending its first transaction out – regardless of the amount. So don't expect to reuse it later.

Which type of software wallet is best for me?

There are several types of software crypto wallets that you can access on your computer or mobile devices. Which one is best for you depends on your personal situation, but here’s a breakdown of some common types.

Desktop wallets

Desktop wallets are apps that run on your computer and store cryptocurrencies. There is no third party involved, so you are responsible for the security. For this reason, you’ll probably want to have antivirus software installed on any computer where you’re using a desktop wallet.

Mobile wallets

A mobile wallet is a crypto wallet app that lets you store and control your cryptos on your smartphone. Available on iOS and Android, these are convenient for face-to-face payments. Many mobile wallets also use QR codes, which can be scanned for quick transactions.

Web wallets

This online-based crypto wallet can be accessed via desktop or mobile, allowing you to store and send crypto from anywhere. However, since your passwords are kept on online servers, there’s an increased risk of theft.

What crypto wallet should I use?

There is no definite answer as to which crypto wallet you should use. If you are a frequent trader, using a web wallet allows you to quickly access your funds and trade conveniently. Assuming you have taken extra steps to secure your account with two-factor authentication (2FA) methods, your crypto is generally safe. However, if you HODL a large quantity of crypto that you are not looking to sell in the meantime, cold wallets are better alternatives as they are not connected to the Internet, thus more secure and are resistant to online phishing attacks or scams.

How to set up a crypto wallet

To set up a crypto wallet, you’ll need to enter your personal information and set up a security password. Similar to banking security, there is usually a two-step verification process to go through to set up your cryptocurrency wallet. 

Non-custodial crypto wallets usually require some kind of app. You shouldn’t need to store any personal information or even give an email, but it’s important to record your private key in a safe place. If you lose or forget this key, you won’t be able to access your cryptos.

As mentioned above, the most popular hardware crypto wallets are produced by Ledger and Trezor. Though hardware wallets can be pricey, it’s a good idea to only buy a hardware wallet from a verified seller and avoid the second-hand market altogether. After you’ve purchased the device, you’ll need to download the software to accompany it from the official company website.

How to choose the best crypto wallet

The best crypto wallet for you will depend on your level of experience and previous activity with cryptocurrencies. The main areas to consider include:

Security. Traditional banking apps offer a range of security options to protect your money. Each crypto wallet will have slightly different security aspects, so you should check these carefully before putting your trust—and money—into them. 

Fees. How transaction fees are charged can vary. They can be automatically set to make transactions quicker, but if you want to cut costs, some crypto wallets allow you to customize each fee. Just be aware that this can slow down transaction times.

Cryptocurrencies. Some crypto wallets offer a wide variety of cryptocurrencies, while others are more limited. Think about how often you might need to swap between currencies, as this will guide you on the level of capability you need.

Customer support. Some companies offer 24/7 support as part of their service. Always review the level of support you get, as it can vary greatly in terms of response times and the type of queries they deal with.

Access. Where and when you trade cryptocurrencies should guide you on which crypto wallet to use. If you’re using a computer regularly, you might want to look at hardware and desktop wallets. For those who need to be more mobile, smartphone apps and browser-based wallets might be more suitable.

As with any banking service, finding the right crypto wallet for your needs is important, so take some time to find the one that works best for you.

The importance of backups

Losing access to your cryptocurrency wallets can be quite costly. So it's important to back them up regularly. In many cases, this is achieved by simply backing up wallet.dat files or seed phrases. Essentially, a seed phrase works like a root key that generates and gives access to all keys and addresses in a crypto wallet. Also, if you opted for password encryption, remember to back up your password as well.

What is a hardware crypto wallet?

A hardware crypto wallet is a physical device, which stores your private keys offline, and is therefore not accessible via the internet. They are often small, plug-in devices, similar to a USB stick. Your cryptocurrency transactions are recorded in the blockchain and accessed using this private key. If the system were to be hacked, these offer a higher level of security that may give you more peace of mind.

How do I back up my crypto wallet?

To protect against computer failure or software issues it’s good practice to back up your crypto wallet. How you do this will depend on the software you are using. For example, Bitcoin wallets will ask you to generate and record a 12-word backup phrase that you can use to restore your wallet if you lose access. These can sometimes be a 24-word phrase, but the process will be similar with all companies. Make sure you look into what you need to do with your particular software, so you’re ready to back it up when needed.

What cryptocurrencies can I keep in my crypto wallet?

It depends on the type of crypto wallet you have. Some are able to hold only selected currencies, while others can deal in multiple currencies. Crypto wallets that allow the storing of different cryptocurrencies can be much easier than using a different wallet for each currency. Depending on whether you tend to stick to one form of currency or go between different ones should therefore be a factor you consider when choosing the best crypto wallet for you.

What is a crypto wallet app?

A crypto wallet app is a downloadable piece of software, available via the App Store or the Google Play store. The app stores the private keys that are needed to access your cryptocurrencies. It can be accessed via your mobile phone or on another portable device, similar to how online banking apps work. Crypto wallet apps are great if you think you’ll need to access your crypto wallet on the go.

Closing thoughts

Crypto wallets are an integral part of using Bitcoin and other cryptocurrencies. They are one of the basic pieces of infrastructure that make it possible to send and receive funds through blockchain networks. Each wallet type has its advantages and disadvantages, so it's crucial to understand how they work before moving your funds.

#bitcoin #cryptocurrency #blockchain 

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What is a Crypto Wallet | All You NEED To Know
Aylin Hazel

Aylin Hazel

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The origin of the article: https://www.youtube.com/watch?v=9gcutFdutvw
🔺 DISCLAIMER: The article is for information sharing. The content of this video is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. Not investment advice or legal advice.
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