We will explain the different types of cryptocurrency wallets, how they work, and the difference between cold and hot wallets. Bitcoin and other cryptocurrencies give you the power to have absolute control over your money. And with the fact that the price of Bitcoin and other cryptocurrencies has been increasing. It is crucial to understand the types of cryptocurrency wallets in order to store and manage your digital coins safely.
What is a Cryptocurrency Wallet?
In short, it’s a software program that stores your coins. In order to conduct transactions on the
blockchain network, you need to run this program called a „wallet.“ The cryptocurrencies are not
technically „money,“ so it sounds logical that the Bitcoin wallet isn’t really a wallet. Instead of leather,
wallets consist of two unique and distinct cryptographic keys: a public key and a private key.
The public key is where funds are deposited and withdrawn (imagine your bank
account). That is also the key shown on the blockchain ledger as a digital signature of the user (as
opposed to your social media username). The private key is the password (similar to your IBAN PIN
code) required to buy, sell, and trade the cryptocurrencies like Bitcoin in a wallet. In other words,
private keys match and prove ownership of public keys. Owners use their private keys to make all the
transactions with the cryptocurrency that they own.
Cryptocurrency wallets can also be used by companies accepting payments in cryptocurrency to store or
exchange blockchain assets.
How do Cryptocurrency Wallets work?
Unlike traditional wallets, cryptocurrency wallets do not store real currency. The cryptocurrencies are not
stored anywhere and do not exist in any physical form. All that exists are transaction records stored in a
The wallet also contains an address, which is an identifier generated based on the public
and private keys. That address is essentially the specific location on the blockchain to which coins
can be sent. When you send cryptocurrency (like Litecoin) to someone, you’re sending VALUE in the form of bits by using the private key. For a recipient to use newly transferred digital assets such as Litecoin, their personal keys must match the public address to which you sent Litecoin. If the public and private keys match, the balance in your digital wallet will decrease, and the recipient’s balance will increase accordingly. However, there
is no actual exchange of real coins.
Users can view or access cryptocurrency wallets from smartphones and computers.
Please remember that owning your private keys gives you total control over the funds associated with
your respective public keys. You should make sure that you keep your private keys secretly
hidden (and also to have a backup copy of them) so that ONLY YOU know them.
While some cryptocurrency wallets can provide only support for a single coin, many are multi-asset
solutions that allow users to own multiple cryptocurrencies, including Bitcoin, Bitcoin Cash, Ethereum,
Litecoin, Monero, DigiByte, Tezos, among many others. These solutions ensure that the cryptocurrency and blockchain assets owner is the only one who can access the funds, requiring complex passwords and other security measures.
Different Types of Cryptocurrency Wallets
Few crypto wallet types can be divided into three groups: software,
hardware, and paper wallets. Depending on their working mechanisms, they can be distinguished into
hot or cold wallets. At its most basic level, the difference between a hot wallet and a cold wallet is simple. Cold wallets are not connected to the internet, while hot wallets are connected.
Hot or web wallets are, as they are named, require an internet connection. With an Internet connection, you can store and access your crypto coins at any time. Some investors choose to keep their cryptocurrencies in accounts linked to exchanges like Bitstamp or Binance. Those companies that hold your funds in their own infrastructure can be considered hot wallet service providers as they store some part of their coins in hot wallets. That is necessary for liquidity purposes. Mobile wallets like Coinomi or Jaxx installed on your smartphone are also hot wallets. Desktop wallets are also considered hot wallets as they are connected to the internet as well. And since hot wallets are connected to the internet, they tend to be more vulnerable to hacks and theft than cold storage alternatives. It is essential to check the technical approach of each wallet before choosing the right one for you.
As the name implies, mobile wallets are applications that you can download on your smartphone to hold your
cryptocurrencies. Your phone makes your wallet extremely easy to access and provides instant options for sending and receiving cryptocurrency. Most mobile wallets have integrated QR code
capabilities, which increases transaction ease.
Just like computers, however, mobile devices are vulnerable to malicious apps and malware infection.
So, it’s recommended to encrypt your mobile wallet with a password. You also have to back up your private keys (or
seed phrase) in case your smartphone gets lost or broken.
Here are some mobile wallets you can check out: Coinbase, Jaxx, Copay, Coinomi, Mycelium.
The first type of software wallet we will discuss is for desktops. Using your laptop or computer, you can
download the software to your device and send your tokens to it. Desktop wallets are only available
from one computer on which they are downloaded. They offer one of the highest levels of security. The negative is that if your computer is hacked or infected with a virus, you will likely lose the coins.
Many desktop wallets are available, such as Exodus, Mist, Electrum, Copay, Armony, and many more.
Cold wallets are offline wallets used to store digital coins. In cold storage, the crypto
wallet is stored on a platform not connected to the internet. So it protects the wallet from unauthorized access, cyber hacks, and other vulnerabilities to which a system connected to the internet
is susceptible. For that reason, cold wallets are usually a much safer alternative to storing your
cryptocurrencies. This method is suitable for long-term investors or so-called „HODLers.“ The two forms of cold storage are paper wallets and hardware wallets.
A paper wallet is a sheet of paper on which a crypto address and its private key are printed. The public key is shown as a QR code, so cold be scanned to perform cryptocurrency transactions. These wallets are highly resistant to online hacking attacks can be considered to be a safe option. A significant drawback of paper wallets is that they are not suitable for partial sending of funds, but only for your entire balance at once. Technically, if you import the private key of your paper wallet into a desktop wallet and spend only part of the funds, the remaining coins will be sent to a „change address“ generated automatically by the Bitcoin protocol. If you don’t manually set the „change address“ to the one you control, you will probably lose your assets.
A hardware wallet is a physical, electronic device that stores the user’s private keys.
Hardware storage is a kind of cold wallet and is considered one of the most secure alternatives.
These wallets have considerable advantages over standard software wallets. The first is that private keys are
often stored in a safe area of a microcontroller and cannot be extracted from the device. They are
immunized against computer viruses that can steal from software wallets. Most of the time, their
software is open-source, allowing the user to validate the device’s entire operation. Hardware wallets tend to be less convenient to use, and the coins are more difficult to
access than hot wallets.
Which Cryptocurrency Wallet is The Best?
Each wallet type has pros and cons, so it’s essential to understand how they work
before transferring your funds. But for your convenience, you can read the article on the best hardware wallets. Most importantly, before you pick up a wallet, you need to think about how you intend to use it. You
should make sure that the wallet you choose is compatible with the coins you transact or trade. Also, do you plan on using multiple cryptocurrencies or a single coin? Because
not all wallets support all cryptocurrencies. You also need to decide if you need a wallet for everyday purchases or buy and hold your digital currency for investment? Finally, please consider whether you need access to your crypto wallet from anywhere or just from home. Take some time to evaluate your requirements and then choose the most suitable wallets for you. Good
We hope that now you have a better understanding of the different types of cryptocurrency wallets.