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- Feb 28, 2020
As you already know from our previous lessons, you should keep your crypto safely in a special cryptocurrency wallet.
There are a large number of wallets available for your crypto but they can be classified under 5 different kinds. However, before delving into what these 5 kinds of wallets are, there are a number of wallet terms you need to know first.
Necessary crypto wallet terms
Private and public keys
When making transactions online using crypto, the most basic form of security is the usage of public and private keys. These keys help protect your crypto as it travels and exists across the internet. Public keys encode the crypto so that it’s safe as it travels from point to point on the world wide web until it reaches its destination.
Once the encoded crypto has reached its destination, the private key then comes into play. Whoever the crypto was given to needs to use their private key to decode the crypto so that it can be properly used and accounted for.
Hot and cold wallets
The main difference between hot and cold wallets is their connection to the internet and whether or not they have access to or are mainly dependent on it.
A wallet is considered ‘hot’ if it’s connected to the internet. While a hot wallet can potentially be less secure than cold wallets, it’s far more user-friendly and accessible. On the other hand, a wallet is ‘cold’ if it’s mainly used offline like a safe. Cold wallets are better at storing larger quantities than hot wallets because of the increased security.
The hot wallet is better for small, daily purchases because it’s highly accessible and it helps minimize potential dangers because it’s connected online. For larger quantities that need increased security for the long-term, a cold wallet is a better option. This is because its safety depends entirely on how you make use of it. There are cold wallet options that can be used online which opens avenues for possible breaches, malware, and hacking.
A ‘multi-sig’ wallet is the term used for a crypto wallet that needs multiple signature inputs from all involved parties for a transaction to be completed. Because of its shared status, it’s best used for families or businesses who trust one another and act as one collective body.
This term used for wallets that can hold more than one currency. Multiple wallets that only hold 1 type of dedicated currency exist on the internet while other wallets allow for multiple currencies at once. This lessens the number of wallets you’ll need if you can access all your funds in one place instead of them being separated in their own dedicated wallets.
The 5 different kinds of cryptocurrency wallets
Once you’ve got all the wallet terms under lock-and-key, you’re ready to start learning about the 5 different kinds of crypto wallets. Each of them have their own pros and cons, so choose wisely.
1. Paper crypto wallet
Paper wallets are a ‘cold’ wallet that exists entirely offline and makes use of QR codes and your public and private keys which only you can access. Unlike some wallets, paper wallets are entirely cold.
They’re a printed copy of your public and private keys. Because they’re not online and not handled by a third party, paper wallets are one of the most secure options and are almost completely hacker-free. The only downside to using paper wallets is that it can be an immense hassle to move funds around.
2. Online crypto wallet
Online wallets are hot, third party wallets that hold your funds on a cloud and can be accessed from anywhere by anyone who can open it. Among all available wallets, an online wallet has the fastest transactions and ease of use.
However, it’s also the most susceptible to online dangers. Some of these include the most common security breaches such as malware, hackers, scams, and DDOS attacks. It’s because of this reason that online wallets are most viable for small day-to-day transactions instead of long-term storage.
3. Mobile crypto wallet
The mobile crypto wallet is easily the most portable option. It’s practical, efficient, and, as a ‘hot’ wallet, it also has additional features that aren’t traditionally available with online wallets such as QR code scanning.
The danger of a mobile wallet comes with the fact that because it’s a phone, not only is it vulnerable to the elements, it’s also less secure because of fewer security options compared to its desktop alternative.
4. Desktop crypto wallet
Desktop-based wallets can be both hot and cold depending on how you use them. If a desktop hasn’t ever been connected to the internet, it can serve as a very effective cold wallet because of its offline limitations. Additionally, a desktop wallet allows you to keep your private key to yourself as opposed to being held by a third party.
However, the stated benefits don’t mean a desktop wallet is immune to danger. There are a number of things that can threaten a desktop crypto wallet. Depending on your wallet of choice, a desktop wallet can be accessed by anyone with access to the desktop. This includes family members, friends, and even repairmen.
Another problem is the desktop’s obsoletion. If a computer can’t keep up and isn’t backed up, your wallet can potentially be lost forever. A third problem is the risks involved with allowing a ‘cold’ desktop to connect to the internet even once. This can cause malware and viruses to sneak in before you even switch the connection back off.
5. Hardware crypto wallet
The last wallet is the hardware wallet, which for the most part is considered ‘cold’. However, if it’s connected to a device, it can act as a ‘hot’ wallet. The hardware wallet is incredibly good at storing immense crypto funds for the long-term.
The hardware wallet (normally in the form of a USB) is one of the least user-friendly wallets, but it’s also one of, if not the most, secure wallet options. Depending on the type of hardware wallet, its conditions for upkeep and usage differ on a case to case basis. Some have batteries or screens while others don’t. If you get a hardware-based wallet with a screen, you’ve already got in your hands one of the most secure options anywhere.
Keeping the crypto wallets safe
Regardless of which wallet you choose, you can maximize security and minimize dangers by following these few easy steps. First, always have a back-up. If the original ever gets lost and you don’t have a back-up ready, you won’t be very happy—especially if it has, maybe, 10 Bitcoins.
Second, make sure that your keys are always secure, especially your private key. Without your private key, you’re permanently locked out of your wallet and can never access those funds ever again. Lastly, if you’re using a digital wallet that isn’t paper, make sure you stay updated so that nothing breaks down or becomes incompatible with the soft or hardware.
Missed our previous lessons? Here you go:
Lesson 1: Get to know the coins
Lesson 2: Where to buy and keep cryptocurrencies
Lesson 3: A guide to stablecoins
Lesson 4: How to keep your crypto safe
Please let me know if you have some thoughts or questions
Trading cryptocurrencies carries a high level of risk, and may not be suitable for all investors. Before deciding to trade cryptocurrency you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.