A crypto wallet is a place to store your cryptocurrencies when you’re not using them. Knowing how to properly secure your assets with a crypto wallet will go a long way toward helping to keep your crypto safe from hackers. Cryptocurrency wallets come in different forms. By learning about the types of cryptocurrencies and wallets, deciding how much money you want to put into cryptocurrencies, and knowing how you plan to use them, you can decide which type of wallet is best for you.
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Cryptocurrency Wallet Definition
As cited above, a crypto wallet is a place to store your cryptocurrencies. You may think of a crypto wallet as being similar to how a tangible leather wallet holds fiat currency — your $1s, $5s, and $20s. When secured properly in wallets, cryptocurrencies are difficult to counterfeit or steal.
To understand what a crypto wallet is, it’s important to know how cryptocurrencies are created and used. So, we review cryptocurrency briefly below.
The Importance of Crypto Wallets
Cryptocurrency wallets are used to store your private keys. These keys must be matched with your public keys to move crypto from one wallet to another. Some wallets can be used to store multiple types of cryptocurrency, while others can store only one kind of crypto.
Some wallets are convenient for buying and selling crypto quickly, but other kinds of wallets may be more secure.
Public and Private Wallets
Your public wallet address is what you give to someone when you want them to send you cryptocurrency. Anyone can look up that address and see how much you hold and your past transactions. However, the address is simply a string of numbers and letters, so unless someone knows it belongs to you, your holdings and transactions are anonymous. This transparency combined with anonymity is part of what appeals to many people about cryptocurrencies.
Crypto holders do not publish their private wallet address, nor do they give it to anyone. That would be like giving someone the password to your email account or a password-protected document containing personal information. The private key is what’s used to sign off on transactions. So, if someone has access to both your public and private keys, they now have control over your holdings. However, the chances of a hacker matching up potential public and private keys are highly improbable because of the way they’re encrypted.
The two main categories of crypto wallets are hardware (“cold”) and software (“hot storage”) wallets.
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Types of Cryptocurrency Wallets
1. Hot Wallets (Software)
When you choose to have a crypto exchange store your holdings, the exchange uses what’s called a “hot wallet.” The reason it’s hot is that it’s connected to the internet at all times — so, always online, hot with electricity.
You can access hot storage wallets on the internet by logging into exchanges or wallet-service providers. Some popular hot storage exchanges include Coinbase and Gemini. These exchanges hold your private keys. Although they implement the best, multi-layered, and most current security tech possible, exchanges are still vulnerable to hacks. Also, if you use a wallet through an exchange or third-party provider, there may be a risk of losing your holdings if the company goes bankrupt.
In general, it’s best not to store large amounts of crypto in online exchanges. You can move your crypto holdings into the exchange when you want to send or sell it, but otherwise it’s wise to keep it in cold storage.
Desktop wallets are types of software that you can download onto your PC or Mac desktop computer. They store and manage your private keys, just like any other wallet would, but they frequently have a few more features than you’ll find in other types of wallets. These are somewhat more secure, as they often give you access to your private keys, and are stored directly on your computer.
However, if your computer or phone breaks or gets lost, your crypto holdings could be lost along with it. In the unfortunate event that this does happen, if you have written down both your public and private keys, you likely would be able to recover your funds. If given the option, it’s always a good idea to keep a second copy of your address written down in a safe place.
A mobile wallet is software that you can install on your mobile smartphone if you intend to manage your finances from your hone. As with an old-fashioned physical wallet (with all the slots), mobile wallets can store the important cards you use frequently — your credit, debit, ID, gift, and transit cards. In this way, you can conduct transactions using a mobile device instead of a physical card.
Hot Wallet Advantages and Disadvantages
|Don’t need to worry about losing your private keys; exchange keeps them||If your computer or mobile device is lost or stolen, you could lose all your funds|
|Reputable exchanges have state-of-the-art security||Even with top-notch security, exchanges are still vulnerable to hacks because always online|
|Immediate access to your funds; convenience; always online||Third-party dependent; most exchanges don’t give access to your private keys; you never have full control of your account|
|Ease of use; good for beginners to store small amounts of crypto||Centralized servers sometimes cannot handle unlimited number of transactions: possibility of periodic delays|
2. Cold Wallets (Hardware)
Cold storage hardware wallets are offline, usually in the form of a physical hardware device.
Popular hardware wallets include the Trezor and Ledger devices. These are physical devices that plug into your computer, and store your private keys. This way, your private keys are never online, but you can still conveniently buy and sell digital assets without needing to upload an address from a piece of paper. Both Trezor and Ledger support multiple types of cryptocurrencies.
You can also purchase physical coins, such as physical Bitcoin (BTC) that come preloaded with a certain amount of the cryptocurrency. These can be useful for offline trading, may be a fun collector’s item, and generally are created with a tamperproof seal to hide the private key. A further delineation of hardware wallets are hardware security modules (HSMs). These devices handle only the keys and signing of data, but not the signing of complete transactions.
Cold Wallet Advantages and Disadvantages
|Very secure; don’t connect to any device, software, or network that could become compromised||Vulnerable to loss, fire, or flood, or other kind of destruction|
|Highly portable; can carry with you, attached to any computer||Might need technical knowledge to set up|
|Come with option to set up recovery phrase||Longer transaction times; can be expensive|
3. Paper Wallets
Typically, a paper wallet contains both a public and a private key, which is what you need to trade on your crypto account. These keys are just two strings of characters and two quick response (QR) codes that you may print out on a piece of paper — thus, a paper wallet. They are considered noncustodial cold-storage wallets, which means that you control the keys yourself (some are controlled by crypto exchanges), and they are not connected to the internet.
The cryptocurrency industry no longer recommends using paper wallets, as today there are safer methods of storing and trading crypto. Some still like them, however, and you can still create a paper wallet if you wish.
Pros and Cons of Crypto Wallets
Many crypto enthusiasts prefer using their own non-custodial wallets due to the added security and personal independence. The ability to hold one’s own private keys is the main difference between a crypto wallet and exchange.
At any rate, there are pros and cons to such a thing. Let’s start with the pros.
Some of the pros of using crypto wallets include:
• Ability to take full control of your funds
• No risk of a third-party like an exchange being compromised
• Anyone can use a crypto wallet anywhere in the world to transact with others
While these benefits make using a personal wallet worth it to some, others may find the drawbacks to be too much to handle. This is part of the reason some people prefer to keep their funds on a crypto exchange vs. a wallet.
Some of the cons of using crypto wallets include:
• Additional user responsibility and risk of making errors
• If something happens to the wallet or you lose your backup and password, all funds will be lost
• Most wallets are less beginner-friendly than exchanges
|Pros and Cons of Crypto Wallets|
|Ability to take full control of your funds.||Additional user responsibility and risk of making errors.|
|No risk of a third-party being compromised.||If something happens to the wallet or you lose your backup and password, all funds will be lost.|
|Anyone can use a crypto wallet anywhere in the world to transact with others.||Most wallets are less beginner-friendly than exchanges.|
Storing and Securing Your Crypto Wallet
The most important part of selecting your wallet type is making sure that your stored crypto and your crypto transactions are secure. Many of the most popular exchanges store your private keys for you, but don’t give you access to them. Though it can be convenient to hold crypto in exchanges, not having access to your private keys could make you vulnerable to hackers and even scams. So, you may decide to use cold storage for your crypto holdings, moving only as much into hot storage as you plan to send or sell at any given time.
Part of trying to keep your information secure might include being wary of any emails you receive that come from exchanges or wallet apps. Check the email address to make sure it’s legitimate, and never send your private keys over email; even better, don’t send them at all. It’s always wise to double-check all of your transactions before hitting the send button, And check the website address when you visit an exchange or online wallet. Fake email and website addresses can look convincingly similar to the real ones.
Crypto Wallets: A Quick Review
Although cryptocurrency wallets are used mainly to store and transact cryptocurrencies, there are other uses for this technology. Tokens or digital information stored on a blockchain could represent anything from goods in a supply chain, or a plane ticket, to a set of dental records. Blockchains can also store personal information such as your identity, tax history, voting information, and more. In the future, we may find ourselves using blockchain-based wallets in many facets of our lives.
Before you purchase cryptocurrencies, think about how you plan to use and access them. If you’re planning to purchase crypto and hold it for the long term, a secure cold storage wallet is probably your best option. If you want to access cryptocurrency from your phone, you may want to download an app from a particular exchange or wallet provider.
Also, think about which cryptocurrencies you want to hold and look into the options available for each coin. Doing your due diligence on both the coin and the wallet might help keep you from getting scammed. Despite that some exchanges have been hacked, there are plenty of reputable options to choose from.
Getting Professional Insights and a New Cryptocurrency Wallet
Cryptocurrencies are still new, volatile, and risky. For this reason, you may not be ready to start trading them.
Or, you may be excited about jumping in early while the industry is young. Either way, gaining professional insights into your investment strategy and using state-of-the-art tools can help you build a strong, diversified portfolio.
On SoFi Invest, investors can start trading cryptocurrencies with as little as $10. New SoFi members who buy at least $50 worth of crypto in the first seven days are eligible for a bonus of up to $100 in bitcoin. See full terms at sofi.com/crypto. You may trade cryptocurrencies like Bitcoin, Cardano, Dogecoin, Ethereum, and Litecoin, 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors’ crypto holdings secure from theft.
Do you need to have a crypto wallet to trade cryptocurrencies?
The short answer is “Yes.” Crypto wallets are not flat, physical objects with storage slots that can be made of fine leather or synthetics. But, as with your fiat cash, cryptocurrency is an asset that needs to be stored somewhere safe when you’re not using it. So, in that sense, you do need to have a place to keep your crypto holdings — whether we call it a “wallet,” or something else.
You do have choices, however, as there are various types of wallets. Among the first things to decide is whether you want to keep your own wallet or have a crypto exchange store your holdings for you. Some believe that a good goal might be to work toward keeping your crypto holdings yourself, in a cold storage wallet. But, if you’re just getting started in crypto, or if you lose or misplace things easily, then it might be wise to keep the crypto in hot storage with a regulated, reputable exchange.
What kind of crypto wallet is safest?
One way of answering this question would be to search the internet for “safer, safest, secure, and most secure,” crypto wallets. You’ll find that more than 150 makes and models of hardware wallets return — some with pictures of the small electronic devices and some with just descriptions. You also may choose to limit your search to your favorite news feeds, crypto portals, and so on — whatever’s most comfortable. Just make sure that they are professional and reputable sites.
You could start with say the first 10 hits that come up. Check to see if any makers’ names recur repeatedly. Then, note how many times those repeat names are cited as being the “best for security,” or something like that.
Once you’ve determined that XYZ model has the best security features, then you may consider other qualities that are important for you, personally. After safety, the sites rank the wallets’ features in terms of “the best for…” android users, advanced users, digital storage, beginners, mobile users, Bitcoin-only investors, desktop, simplicity, durability, coins supported, accessibility, software, and — well you get the picture.
In this way, you can be assured that you’ve found a highly rated safe wallet, with the extra features and conveniences you want and need.
How easy is setting up a cryptocurrency wallet?
In this instance, the word “easy” is highly relative. While setting up a crypto wallet might be relatively easy for a developer or engineer, it might be confusing, frustrating, or downright painful for those who are not technically minded.
As a newcomer to crypto, can you even imagine reading through a set of small-print instructions that are long, dense with new terminology that you may not know, and which might even have been (poorly) translated from another language!
For some, the concept of a crypto wallet may indeed be easier to grasp than its setup instructions. But here’s where technology might come to our rescue — in the form of online videos! It could be a good place to start. And written instructions don’t usually come with devices any more anyway. So, browse the internet for videos about how to set up XYZ crypto wallet in a style that appeals to you, and enjoy!
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Photo credit: iStock/Elena Perova
|First Trade Amount||Bonus Payout|