What is a crypto wallet?
A crypto wallet allows users to store, buy, sell, and trade cryptocurrencies. Cryptocurrencies are not physical coins; instead, they exist as blockchains on public databases.
Crypto wallets have cryptographic keys that transfer cryptocurrencies. They're set up and managed by a centralized crypto exchange. Many traders prefer using cryptocurrency wallets to better monitor their crypto money.
How crypto wallets work
Crypto wallets consist of private and public keys. These keys are necessary for sending, receiving, and trading cryptocurrencies.
A public key is used to create a wallet’s public address. This is shared with others to receive cryptocurrencies. It’s public and open to the system.
A private key can never be shared with the network. To ensure security, private keys inside a crypto wallet must be kept safe. While a public key works like a bank account number, a private key is like the combination of a username and password.
Types of crypto wallets
Below are some common types of crypto wallets.
- Hot wallet: A private key is stored and encrypted within the app. This wallet is kept online, but it’s not safe to store a large number of cryptocurrencies on the internet. However, any risks can be avoided with stronger encryption. Convenient and easy to use, hot wallets are suitable for beginners or traders making quick online payments.
- Cold wallets: Cold wallets work entirely offline. Even though they’re not as convenient, they’re far safer than hot wallets. The threat of hacking or online attacks is limited compared to hot wallets. This type of crypto wallet suits those who store massive amounts of cryptocurrencies for extended periods.
- Paper wallet: Public and private keys are printed in this physical location. It’s safer than storing cryptocurrencies in hot wallets. Though there won’t be any phishing attacks, a paper wallet has the risk of the paper getting destroyed or lost.
- Hardware wallet: With this version, a hardware device like a universal serial bus (USB) or Bluetooth stores keys. To sign a transaction, users must push the physical button on the device. Cyber attackers cannot gain access to it.
- Custodial wallets: Web-based crypto wallets are usually custodial wallets. They’re common among beginners as well as experienced traders. The difference is that users don’t have control over their tokens, and private keys to sign transactions are held by the exchange. Users have to trust the service providers to safely store their tokens.
- Non-custodial wallets: This type provides full control of funds to their users. The private key is stored locally. Users must write down 12 randomly generated words before starting a non-custodial wallet. They are recovery, seed, and mnemonic phrases. Using these, a public and a private key are generated. These steps ensure faster recovery if users lose access to the device.
- Multi-signature wallets: These require two or more private key signatures for transactions. If a user loses one key, this individual can still sign transactions. It also prevents misuse of funds and is eligible for hedge funds, exchanges, and corporations.
- NFT wallets: Non-fungible tokens are stored here. To choose the right NFT wallet, factors like experience, security needs, and types of tokens are considered. The wallet must integrate with the NFT marketplace.
Benefits of crypto wallets
Crypto wallets protect cryptocurrencies from online fraud and provide many other benefits to users.
- Long-term storage provides the safekeeping of cryptocurrencies for an extended period.
- The freedom and convenience of crypto wallets give users complete control over how to spend their coins. Users can either buy items or gift them to a friend.
- Reliability is a hallmark of the crypto wallet. Crypto wallets help users access coins whenever they need them.
- Hassle-free conversions are a popular appeal among crypto users. Exchanges mean paying more money. Third-party wallets ensure users don’t lose a notable portion of their coins through these trades.
- Security assurance is important because many people feel uneasy using these unconventional, digital forms of payment. They must depend on and have faith in the supplier to be assured of the efforts that go into manufacturing these for their peace of mind. As a result, the wallet that is providing the application or website must separate it for them.
Crypto wallet vs. crypto vault
A crypto wallet stores users’ public and private keys and provides an easy-to-use interface for trading. Cryptocurrency transfers through blockchain are also supported. Some wallets even permit users to carry out specific operations with their cryptocurrency assets, such as purchasing and selling or utilizing decentralized applications.
To avoid losing money when investing, it's crucial to know where to store your cryptos. And a crypto vault is a significant improvement over keeping users’ coins and digital currency in a crypto wallet. Crypto vaults are a service provided by an exchange or other reliable source.
Cryptocurrency transactions do not signify the "sending" of crypto tokens from a user’s mobile device to another person's mobile device. In reality, when a user transmits a token, their private key is used to sign the transaction and publish it to the blockchain network. The revised balance in both their address and the recipient’s address will be reflected in the network's inclusion of the user’s transaction.
Crypto vaults provide a safe storage service. They apply a withdrawal delay and approval procedure to improve security. In contrast to regular crypto wallets, owners of crypto vaults are alerted of intended transactions and must approve them before payments are made. This adds a degree of protection.
To further safeguard funds, additional approvers can be added if desired. For each vault, more restrictions, such as transaction limits, can be imposed. Canceling a transaction is also available to vault owners throughout the waiting period, typically a few days.
Learn more about crypto custody software to safely store and secure cryptocurrency assets.
Sagar Joshi
Sagar Joshi is a former content marketing specialist at G2 in India. He is an engineer with a keen interest in data analytics and cybersecurity. He writes about topics related to them. You can find him reading books, learning a new language, or playing pool in his free time.
