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Beginner

3 months ago

Crypto Wallet 101: Definition, Types, and Security Tips


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If you are already familiar with cryptocurrencies, the next topic to cover is how to safely store these assets. Cryptocurrencies are digital assets, so there is a chance to be scammed. That’s where a crypto wallet comes into play. It is software or a device that stores keys that are needed to access coins.

Let's dig deeper.


Contents

What is a crypto wallet? 

Beginners may think that a crypto wallet is similar to a cash wallet or a bank account. And they are both right and wrong. On the one hand, it is identical to a bank account: it provides access to the blockchain network like a bank provides an interface to the monetary system. 

On the other hand, a cryptocurrency wallet doesn't store coins the way a regular one holds cash. The information stored in the wallet only points to the location of your holdings on the blockchain, and you need a private key to access it.

A cryptocurrency wallet is a device, an app, or a platform that stores the private and public keys required to buy, sell and manage cryptocurrencies. It also provides digital signatures authorizing each transaction.

Before talking about the history and types of crypto wallets, let's go over the essential terms you need to know:

  • Private keys are similar to security codes or passwords that protect your crypto. Only after entering the private key can a trader access and manage cryptocurrencies. Private keys are also used to recover public keys and public addresses. 
  • A public address is like a bank account number. It is a string of alphanumeric characters. The address points to which wallet the coins should be sent to. You can share your public address with others so they can send cryptocurrencies to your address.
  • A public key verifies the ownership of a public address. It is also a string of a combination of letters and numbers.

A bit of history

The first crypto wallet (also known as a Bitcoin-Qt wallet or “Satoshi client”) was introduced in 2009 when the first bitcoin protocol was released. It was a full client wallet, which meant that you needed to download the entire history of every cryptocurrency transaction performed in the world. In the beginning, that data took up less than 1 GB, and now the Bitcoin transaction history exceeds 300 GB.

Back then, the functionality of Qt was limited. Users could send and receive coins, and sign a transaction proving that they were the owner of a particular public key.

With the growing Bitcoin price in December 2013, the demand to safely store cryptocurrencies increased. This need was met by the Czech company Trezor, the company that introduced the hardware wallet to the market. A few months later, other hardware devices such as Xapo and Ledger were released. More types of crypto wallets emerged later with the increasing growth of the crypto trading market.

Crypto wallet types: Cold and hot wallets

There are two main types of crypto wallets: hot and cold wallets. They’re not about heating or cooling your crypto, but about the connection needed to power the wallets' functions. 

Hot wallets require an internet connection, while cold ones don't. Each of them has its trade-offs between security and convenience.

Types
Security
Convenience
Use cases

Cold wallets

  • Hardware wallet
  • Steel wallet
  • Paper wallet
  • You have complete ownership over the private keys. 
  • Multiple wallets can be used together for extra security.
  • The setup process can be complicated. 
  • More suitable for long-term investments.

Hot wallets

  • Desktop wallet
  • Online wallet
  • Mobile wallet
  • The platforms and apps are more vulnerable to cyber-attacks.
  • There are third parties that can potentially control your private keys.
  • You can access these wallets from anywhere in the world. 
  • User-friendly: managing coins is easy and fast. 
  • You can trade on the go.
  • More suitable for frequent trades.

Hardware wallet

Hardware wallets: Trezor, Ledger, KeepKey
Hardware wallets: Trezor, Ledger, KeepKey

A hardware wallet is an electronic device that stores your private keys offline. It looks like a USB stick, and you can access coins when connected to your computer, tablet, or phone. 

Each hardware wallet has a recovery seed, a unique combination of words used to unlock the device. If you lose a hardware wallet, you can buy a new one and use the seed to recover your coins.

Steel (or backup) wallet

Steel wallets: Cryptotag, Billfodl, Cryptosteel
Different types of steel wallets: Cryptotag, Billfodl, Cryptosteel

A steel wallet is used to back up the private keys of any hardware or software wallet on a hard piece of metal. These wallets are highly durable, and they can withstand far more damage than a hardware one or computer. 

Paper wallet

A paper crypto wallet
A paper crypto wallet with the private key and address as a QR code

A paper wallet is cold storage that stores the keys as a QR code on a piece of paper. This type was considered the most secure, since you weren’t storing the keys on any hardware or software. 

However, paper wallets are now considered obsolete. A major inconvenience of paper wallets is that you can’t send funds in parts, but only the entire balance at once.

Desktop wallet

A desktop wallet – Atomic Wallet
A desktop wallet called Atomic Wallet

A desktop wallet is an app that you download and install on your computer. While using a desktop version, there is no third party that can freeze or lose your funds. However, you need to be sure that the computer is secure from malware. 

When you create a desktop wallet, a file called "wallet.dat" is created. This file contains the private key information used to access your cryptocurrency addresses, so you should encrypt it with a personal password.

Online wallet

An online crypto wallet
Web wallet interface on a tablet

Online wallets are platforms that work within your browser where you need to log in. They offer user-friendliness and worldwide access. However, you should take care of your private keys, because some of these platforms manage private keys on their own. 

Mobile wallet

A mobile crypto wallet – Trust Wallet
The mobile version of Trust Wallet

Mobile wallets are similar to desktop wallets but are used on mobile devices. It is a convenient solution for traders who want to manage crypto 24/7. Again, you are responsible for security while managing your digital investments.

Remember that each crypto wallet has its own drawbacks and advantages. Hot wallets are better suited for quick trading. Cold wallets are good for securely storing access to long-term crypto investments.

“Not your keys, not your bitcoins”: Сrypto wallet security

This well-known phrase was coined by Andreas Antonopoulos, the bitcoin and blockchain expert. And he is right: if hackers know your private keys, then they can easily steal your digital investments. Below, you'll find the main security tips to avoid losing your funds. 

#1 Keep your private keys private

It sounds obvious, but this is actually the key to a secure account. Just don't share your private keys with anybody else. 

If third parties have access to your keys, make sure you have access too. In 2018, the CEO of QuadrigaCX, Gerald Cotten, unexpectedly died (or staged it—there is still no answer). Over $250 million of customers' funds vanished because Gerald was the only one who had the keys.

#2 Back up the seed phrases and wallet data file 

It's vital to have a duplicate of the seed phrase written down on paper. Do not take pictures of the seed phrases if there is any chance your device could be connected to the internet. 

If you use a desktop wallet, regularly make backup copies of the wallet.dat file.

#3 Mind phishing attacks

Phishing attacks are cyber-attacks that use disguised email to steal personal information. Never provide your private key or other security information via email or SMS. If you ever receive such an email, don't hesitate to communicate with the wallet provider directly. 

#4 Avoid using public networks

Be careful when accessing a hot wallet via a public network (e.g., a WiFi hotspot at a coffee shop). Despite the convenience, this type of connection is not secure. 

#5 Double-check before choosing the crypto wallet

Before choosing and using a crypto wallet, it's essential to understand the trade-offs of every type. If you need a software one, don't just install the first app you find. Remember: the best crypto wallet is a secure one.

The bottom line

A crypto wallet is the first step to using any cryptocurrency. There are different types of crypto wallet: hardware and software, paper and steel. Remember that there's no “one size fits all” wallet. If you want to learn more about using the crypto wallet on 3Commas, check this crypto wallet guide.

FAQ

What is a crypto wallet?

A cryptocurrency wallet is a device, an app, or a platform that stores the private and public keys required to buy, sell and manage cryptocurrencies.

How do crypto wallets work?

Crypto wallets don't store cryptocurrencies; they store the information necessary to send and receive cryptocurrency via blockchain transactions.

What are the types of crypto wallets?

There are four main types of crypto wallets: hardware wallets, desktop wallets, online wallets, and mobile apps.