What is a crypto wallet? – Forbes advisor

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Crypto wallets hold the private keys of your cryptocurrency and keep them safe. They come in different varieties and they can be physical devices, software programs or online services.

But like cryptocurrency, the concept of a crypto wallet is quite abstract. Let’s take a closer look at these essential crypto tools and how they work.

What is a crypto wallet?

The first lesson of crypto wallets is that they are nothing like the wallet in your purse or back pocket, holding cash and credit cards. On the contrary, a crypto wallet is a form of digital storage to secure access to your crypto.

Cryptocurrency is a very abstract store of value, without a physical token similar to cash coins and bills. It exists as nothing more than a string of code on a larger blockchain.

What do you actually own when you buy Bitcoin (BTC)? A public key and a private key on the BTC blockchain.

Think of the public key as something like your bank account number: you can share it with anyone, but it won’t give you access to your money.

The private key is like a password for your bank account. Please don’t share it with anyone else they can steal all your money.

If you lose your private key, you may lose access to your crypto. Likewise, the person who has a private key has full access to the cryptocurrency. It is essential to keep your private keys safe in a crypto wallet.

“Coins and tokens are part of a blockchain system in the form of data, and the wallets serve as a means of accessing them,” said Martin Leinweber, digital asset product strategist at MarketVector Indexes.

How do crypto wallets work

A crypto wallet stores the public and private keys needed to send, receive and store cryptocurrency.

When you buy cryptocurrency, the company you bought it from probably gave you a wallet to hold the digital coins. This is called a hot wallet because it is online and connected to the internet.

“To avoid the risk of hackers stealing your online wallet, you can get a cold wallet that is not connected to the internet,” said Ric Edelman, founder of Digital Assets Council of Financial Professionals.

Cold wallets are essentially USB sticks or some other type of hardware device. “Once you have one, you simply transfer your coins from your hot wallet to your cold wallet,” says Edelman.

Types of crypto wallets

As mentioned above, there are two broad categories of crypto wallets: hot wallets that are connected to the internet and cold wallets that are not. Let’s take a closer look at these.

Paper wallets

A paper wallet is the easiest cold wallet to understand and operate. It’s what it sounds like: a piece of paper with your keys written on it.

“Because this is just a piece of paper, it is a cold wallet and therefore safe from hackers, but paper can be lost, stolen, torn, or made illegible by getting wet,” says Edelman. Given this, “as cold wallets go, paper isn’t ideal.”

Hardware wallets

A more secure type of cold wallet is a hardware wallet. Like a USB drive, hardware wallets help protect your private keys from hackers who would have to steal the physical wallet to gain access, says Leinweber.

Hardware wallets also have an extra layer of security over paper wallets by requiring users to enter a PIN to access the contents of the device. While these PINs provide an extra layer of security, if you forget your PIN, you will lose access to your coins. “So you have to be tech savvy to use such a wallet,” says Leinweber.

“The idea behind hardware wallets is to isolate the private keys from online storage such as on a computer or smartphone, which are more vulnerable to hacking,” says Leinweber. Storing the private keys offline prevents this, as hackers would have to physically steal the cryptocurrency hardware wallet to gain access to a user’s private keys.

You can typically get a hardware wallet for between $50 and $150, although there are some much higher price options. For example, you can buy the Trezor Model One for $72. You can also find cheaper ones, such as a SafePal wallet for $49.99.

Online wallets

Online wallets, also known as software wallets, are your hot wallets. Desktop, mobile or web-based applications, these wallets require an internet connection and are more accessible but also more susceptible to hacking than cold wallets.

“Your password is stored on servers online and thus poses a potential increased risk,” says Leinweber.

If you only trust your infrastructure, he says it makes sense to have desktop wallets like Electrum and Wasabi Wallet made. This will prevent any third party from getting involved and you will be solely responsible for the security of your wallet.

Leinweber says mobile wallets are often preferred by people who use cryptocurrency on a daily basis. These wallets are “positioned as an app on your smartphone, similar to Apple Wallet, and make transactions easy using QR codes.”

Meanwhile, web-based wallets are usually accessible through browsers and you can transact anywhere you have an internet connection, he says.

storable wallets vs. non-storable wallets

Now for some more crypto jargon. Non-custodial wallets are the types of wallets that put you in control of your own data. These are often the preferred wallets among crypto enthusiasts as there is no third party involved to secure your private keys.

Exodus or MetaMask offline wallets, both offline storage options, are examples of non-custodial options. These wallets are touted for their security, which means they are less susceptible to hacks.

Custodian wallets, on the other hand, are wallets offered by crypto companies such as crypto exchanges such as Gemini Wallet, BlockFi Wallet, or eToro.

If you choose this type of wallet, you are essentially outsourcing your private keys to them. But these wallets have some advantages when it comes to accessibility. To access and send coins from this type of wallet, log into your account and enter the location where you want to send your crypto.

These hot wallets usually also have other features, such as being available for free and offering the option to stake your cryptocurrency.

How to get a crypto wallet

It is not difficult to get a crypto wallet. Some crypto exchanges, such as Coinbase and Gemini, offer an online crypto wallet. If you want a cold wallet, you can buy one directly from a manufacturer, online or even on Amazon.com. If you peruse Amazon.com, you may find yourself buying the Ledger Nano S cold storage stick for nearly $60 or the Trezor Model T hardware wallet for $250.

But there are a few factors to consider when choosing a crypto wallet:

  • Customer service: It is a good idea to choose wallet support that is always available and helpful, especially if you are new to cryptocurrency ownership.
  • Cost: Third-party hot wallets may charge transaction fees, which will ultimately reduce your profits.
  • Security: Make sure your wallet provider is trustworthy and has sensible security measures in place to protect your cryptocurrency keys.
  • Supported crypto types: Some wallets may only support a handful of crypto projects, while others may support hundreds of crypto projects. For example, if you want to buy Cardano (ADA), make sure that the wallet supports that crypto.

With these factors in mind, there is no categorical “best” crypto wallet, says Leinweber, as each wallet has its strengths and weaknesses.

“Many users even opt for multiple wallets in parallel, which can ultimately lead to a more secure distribution of assets,” he says. “But which wallet is best and most suitable for someone should be decided by everyone, depending on their preferences.”

How to Use Crypto Wallet

The process of using a crypto wallet for cryptocurrency transactions depends on the type of wallet you have. Still, it’s a simple process overall, similar to how you’d send any other currency digitally.

“All you have to do is enter the recipient’s public address and the amount of cryptocurrency you want to transfer and confirm the transaction,” says Leinweber.

The difference between cryptocurrency versus fiat currency transactions is that there is less recourse if something goes wrong.

“Be careful when entering the address, because cryptocurrency transactions are irrevocable,” says Leinweber. “If you enter an incorrect address, you will not be able to get your coins back.”

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