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What is a Crypto Wallet?
Cryptocurrency investment has become an increasingly hot topic in the world of finance. As crypto investing continues to gain popularity, many people are interested in getting involved in the space.
However, consider how to safely store cryptocurrencies.
After all, crypto assets are an unregulated and highly volatile investment product. Only some reputable exchanges like Coinbase and Crypto.com offer insurance coverage. The business of insurance is such that it is difficult to assess and price the risk.
Other insurance agency executives have also spoken about the challenges of insuring crypto assets. For example, in an interview with CNBC in February, Jon E. Lovelace, CEO of Hub International, said that his company is “not interested in ensuring bitcoin.”
The insurance product development head of Aon, another large insurance broker, also said in a recent statement that Aon is “not currently providing insurance products that cover digital tokens or cryptocurrencies.”
That’s why, just like you might need a wallet to protect your cash and credit cards, you should also know the best place to put your crypto.
A crypto wallet is essential for crypto investing. To store crypto, you need a cryptocurrency wallet.
That aside, if you’re only dipping your toe in the water, some services such as PayPal and Robinhood allow you to buy coins — or fractions of coins — and store them on their servers.
There are other crypto debit cards that you can use. They include the Crypto.com Visa Card, the Binance Visa Card, and the upcoming Coinbase card.
Some credit cards now even offer rewards in cryptocurrencies — but not every card offers similar flexibility.
So, it’s still best to learn what a crypto wallet is.
Today, we’ll dive into different crypto wallets offered and how they work.
Keep in mind that all the content on this site is intended to be informational and educational only. It should not be considered investment advice or an investment recommendation.
What’s a Crypto Wallet?
A cryptocurrency wallet is a kind of app that allows cryptocurrency users to store and retrieve their digital assets. It is possible to have a cryptocurrency wallet, sometimes called a bitcoin wallet or crypto wallet. A cryptocurrency wallet functions similar to a traditional wallet, but instead of using paper currency, it keeps your digital currency. Many different kinds of blockchain and crypto wallets are free to download, and some of them don’t even charge anything for storing your crypto assets. A cryptocurrency wallet is like a bank account for cryptocurrency. A crypto wallet is a tool that facilitates interaction between the user and the blockchain network. You create your wallet and the wallet creates public and private keys. Using the keys, the wallet interacts with the blockchain to display the crypto that you own. The wallet stores your private keys, which safeguard your crypto. You can access your crypto funds with your personal key. The crypto wallet also allows you to receive, send, and spend different types of cryptocurrencies. They allow you to use currencies like Bitcoin and Ethereum. That said, just like the wallet in your pocket, keep in mind that the digital cash that is in your wallet is a target for would-be thieves. Just like desktop wallets, you are responsible for backing up your devices to keep the money that you have in your digital wallet safe from damage, theft, and loss.How Does a CryptoWallet Work?
In reality, crypto wallets do not store your cryptocurrencies as digital currency. They provide the necessary interaction with the blockchain. The wallets store the information required to send and receive crypto via the blockchain. The information that the wallets store is the pairs of private and public keys. The wallets contain an address that identifies the “location” on the blockchain where the coins can be sent. Think of the address like your PayPal email address and your private keys like your password. You can share your address with people to receive funds, but you should keep your private keys secret. No matter what kind of wallet you use, the private key is what you use to access your cryptocurrencies. If one of your devices is damaged or stolen, you can access your wallet on another device with your private key. Remember that coins do not leave the blockchain, they simply exchange addresses. You use your address or public key for a crypto wallet and you should share it with others to be a part of a blockchain transaction. That’s why, unless you’re dealing with a daily crypto transaction or own only a modest amount of money involved, it is recommended that you do not store your cryptocurrency in an exchange account.The Importance of a Crypto Wallet
An old-fashioned physical wallet holds your cash, but a crypto wallet does not store your crypto. The blockchain stores coins, but you can only access them with your private keys. Those public and private keys are necessary for doing crypto transactions. When you spend your digital money, your keys show that you own it. So you can make transactions. Using your private keys from your crypto wallet, you prove ownership of the coins. Without the private keys, you cannot access your coins. That’s why using a trusted, secure crypto wallet is so important.Cold vs Hot Crypto Wallets
The two main types of crypto wallets are cold and hot. Here’s what each kind means:Cold Wallets
Cold wallets are great for storing your keys offline, on a piece of hardware, or on a sheet of paper. They are not connected to the internet. Therefore, cold wallets are not susceptible to online hacking. However, since the wallet is not connected to the internet, it is not accessible at all times. Today’s cold storage wallets can be quickly and easily connected to the internet for quick transactions, and so most advanced users are probably the ones who are interested in having a cold storage wallet. When it comes to hot wallets, it is possible to recover access with the use of a seed phrase, but with cold wallets, it is impossible to gain access to your account, due to the two-key security system. Cold wallets store your digital keys offline on a piece of hardware or sheet of paper. Cold wallets are a very safe and secure way to store coins, which makes them ideal for long-term investors who do not plan to use the coins often.Hot Wallets
Hot wallets are connected to the internet. There are many types of hot wallets that we’ll explore shortly, but these mobile wallets are easy to set up and use. With hot wallets, your crypto funds are easily accessible. Hot wallets are ideal for traders and others who send and receive crypto frequently. The hot storage wallets are accessible through an internet service such as Coinbase, which is the biggest cryptocurrency exchange in the world. Users have online wallets and client-side wallets that they can manage locally on their computers and mobile devices. A secure Coinbase wallet can hold non-interchangeable tokens (NFTs) and digital collectibles. It supports over 500 crypto assets. That is the largest number of hot wallets on this list. Coinbase wallet is very convenient to use, and you can access it from anywhere with an internet connection. It is also easier to recover access in the event that you lose your private key. It is still less secure than cold wallets, as Coinbase wallets are more susceptible to many kinds of attacks. It is estimated that Coincheck lost over 1 billion dollars of cryptocurrency from its hot wallet service. Custodial wallets are stored on the servers of the exchange. Coinbase wallet is non-custodial, which means that only you can access your private key, which was generated by entering a 12-word recovery phrase when you signed up for Coinbase. First, set up a pin. Next, set up a 24-word seed phrase. The seed phrase is your wallet’s private key. Most crypto investors benefit from using a combination of hot wallets and cold storage options. For example, many stores what they need for daily transactions in a hot wallet, and the rest for long-term investing in cold wallets.Types of Crypto Wallets
Mobile Wallets
A mobile wallet is a type of hot wallet that’s designed for smartphone applications. It’s a convenient option to receive and send crypto via QR code. A mobile wallet is ideal for daily payments and transactions. You can use one as a Bitcoin wallet, or to spend Bitcoin and other cryptocurrencies on everyday purchases. The app is available for download on Android or iOS. The interface is easy to use, and the wallet is integrated with the company’s exchange and services. That makes it easy to buy coins and tokens with traditional currencies. The downside is that mobile devices are susceptible to malware and cyberattacks. To protect your crypto against online threats, encrypt your wallet and backup your private keys in case your smartphone is compromised. The keychain is the only way to prove that you own your digital assets, and you can only execute transactions that involve those assets or that change those assets. So it is necessary to understand the cryptocurrency ecosystem.Paper Wallets
Paper wallets are cold wallets. Think of it like printed paper money. A printed QR code contains the crypto address and private keys. You scan the code to complete crypto and blockchain transactions. With “paper” wallets, print-out QR codes are not the only option. Your private keys and crypto address can be written on a piece of paper or engraved on some other material, such as metal. Technically, paper wallets in which you write down your access codes on a piece of paper are also a form of cold storage. With a paper wallet, you can download the code from a wallet website to generate new keys and addresses offline. This helps protect you from online attacks. However, paper wallets have several downfalls. Without proper use, you can lose some of your funds because you cannot resume a paper wallet even if you do not empty the funds.Online Wallets
Online wallets are hot wallets that provide blockchain access via a browser interface. You can use them as exchange wallets and browser-based wallets. Oftentimes, online wallets function like Samsung pay or apple pay when purchasing from somewhere that accepts crypto. You can use them for contactless payments like a credit card. To use a digital wallet, you create a new wallet and set your personal keys to access it. Some online wallet providers offer to hold and manage your private keys, but you should not give someone else access to your private keys. A better solution is when web wallets allow users to manage their keys via shared control. Always evaluate the technical approach of a wallet before considering it. To use a digital wallet, you create a new wallet and set your personal keys to access it. Some online wallet providers offer to hold and manage your private keys, but you should not give someone else access to your private keys. A better solution is when web wallets allow users to manage their keys via shared control. Always evaluate the technical approach of a wallet before considering it. Ensuring your digital assets is important. It’s one way to protect yourself from theft or loss. Many online wallet providers offer insurance for digital assets. Check the terms of service to see if your assets are covered. Aon partnered with BitGo in March 2018 to offer insurance for digital assets stored on BitGo’s platform. The policy covers up to $100 million in digital assets. And in July 2018, blockchain security company Ledger announced that it had partnered with insurance business company Lloyd‘s of London to offer insurance products for digital assets stored on Ledger‘s devices.Hardware Wallets
Hardware wallets are a cold storage option that’s not connected to the internet. These wallets are one of the most secure types of cold wallets available. They are physical devices that use a random number generator to select public and private keys. The device stores the keys via hardware not connected to the internet. Hardware wallets provide excellent security against online hackers. Implement firmware correctly to ensure security. Additionally, these wallets are not as easy to use or access. Some platforms allow you to connect your hardware wallet directly for trading. The private keys still never leave your device. Hardware wallets are ideal if you plan to keep your crypto for a long time and/or if you have a lot of funds. Always set a PIN code to secure the device and implement recovery if the wallet is lost. Just like other wallets, as long as you keep the private key safe, you won’t lose your crypto assets — even if you lose your wallet. The hardware wallets sold by Ledger and Trezor are both good options, although popular offerings from companies such as Ledger and Trezor can be quite expensive. At Ledger, they are developing hardware wallet technology that provides the highest level of security for crypto assets. Though there are security advantages in that, it also comes with limited tech support options; basically, if you get stuck, you can submit a help ticket to the email address listed at the bottom of their webpage. For more advanced users, Mycelium supports QR codes, allows you to set custom transaction fees, and offers compatibility with hardware wallets from Trezor, Ledger, and KeepKey. As the number of people who use cryptocurrencies has increased, so has the rate of cyber theft related to cryptocurrencies and other digital money. It is important to mention that Ledger experienced a data breach in July 2020. The breach allegedly caused some people to lose their data, but they lost none of their crypto assets.Bitcoin Wallets
There are many different types of coins, but Bitcoin remains some of the most popular. Bitcoin wallets in the market will not only keep your digital assets safe and secure — which is better than any insurance product — but also offer plenty of useful features and tools other insurance agencies might not provide you. Here is a list of some of the top Bitcoin wallets to consider:- Nano S – hardware wallet, provides great value.
- Trezor – hardware wallet, a good option for those with a large number of crypto.
- Nano X – hardware wallet, top-rated hardware wallet
- Mycelium – hot wallet with the cold option
- Electrum – hot wallet with the cold option, ideal for advanced users interested in multiple types of coins
- Exodus – hot wallet, great for beginners. Since it is a hot wallet, your assets are stored online. But it’s also noncustodial, which means that only you have access to your private key — a 12-word password phrase that protects access to your crypto assets. This includes advanced technology such as 2-factor authentication and multi-signature support.
