There are several types of cryptocurrency wallets suitable for different tasks. Now we will analyze them in detail, as well as compare their advantages, disadvantages and use cases.
The main function of a cryptocurrency wallet is to store private and public keys that allow transactions to be conducted through the blockchain, and the public key is often understood to be the wallet address, which is partially true – in some cases, the wallet address is a shortened form of the public key. As cryptocurrencies are purely digital – coins cannot be physically transferred from one person to another. Instead transfers occur between wallet addresses. A reliable crypto wallet includes features for tracking transaction history and maintaining wallet balance.
The blockchain records every transaction made on the network with each participating computer storing a copy of this record. When you initiate a transaction your wallet prompts you to sign this transaction using your private key. Next, the transaction is sent to the blockchain (i.e. this transaction will be verified and validated by all miners of that cryptocurrency).
Types of Crypto Wallets
There are two distinct categories of cryptocurrency wallets: hot and cold wallets. Hot wallets are always connected to the internet and therefore accessible from anywhere. Cold wallets, most of the time are offline, and that makes them more secure than hot wallets. Cold wallets are more often used to store large amounts of cryptocurrency for long periods of time. Hot wallets are better suited for everyday transactions and frequent exchange transactions, also hot wallets are further classified into mobile wallets, desktop wallets, and online wallets.
Custodial vs. Non-custodial Crypto Wallets
A custodial wallet entails a third party provider managing your private keys, this means that the service provider has control over your funds and technically can initiate transactions without needing your consent. In contrast, a non-custodial crypto wallet has the ability to store your private keys only on your device. It is important to note that along with more control comes more responsibility – for better security of your cryptocurrency, you will have to yourself monitor regular updates of the system on which the cryptocurrency wallet is installed, as well as updates of the cryptocurrency wallet itself.
Different Types of Crypto Wallets:
Hot wallets, such as mobile or web wallets are always connected to the internet. While they offer better convenience, hot wallets also come with a risk of security breaches. In situations where the server of the wallet service provider is compromised your private keys become exposed to hackers.
Online (Web) Wallets
An online wallet is a browser based hot wallet that allows users to manage their currencies through a web interface. Although web wallets provide easy access to funds they can be vulnerable to hacking attempts and malware attacks. To ensure safety when using web wallets it’s advisable to store a small amount of cryptocurrencies required for immediate transactions.
Mobile wallets refer to software applications that enable users to store send and receive cryptocurrencies using their devices. They offer convenience for individuals who frequently engage in paced transactions while on the go.
Mobile wallets also offer functionalities, like the ability to scan QR codes for transactions.
Centralized (Exchange) Wallets
If we consider a cryptocurrency exchange as a type of wallet it could be categorized as a hot custodial cryptocurrency wallet. Exchange wallets are provided by platforms such as Coinbase. Are mostly used by traders for purchasing and temporarily storing cryptocurrencies. However keeping your crypto in an exchange wallet comes with risks. In case the exchange platform fails or gets hacked there is a possibility of losing your funds.
Cold wallets are regarded as the type of wallet for storing cryptocurrencies. They remain offline, which means they are not susceptible to hacking or security breaches at least until they are connected to perform a transaction. Cold wallets are ideal for those who want to store their cryptocurrencies for a long period of time.
Cold vs. Hot Wallets
Hot wallets remain connected to the internet making them vulnerable to hacking and other security breaches. Cold wallets generally stay disconnected from the internet, requiring internet connection when confirming transactions, this added layer of security enhances their safety.
A custodial wallet refers to a wallet where a third party service provider holds the keys. While these wallets offer convenience they may lack security as the service provider has control over your funds.
Non-custodial cryptocurrency wallets are most often variations of hot mobile or web wallets designed in such a way that the user’s private keys are stored only on the user’s device and nowhere else. This makes it very difficult for attackers to access the user’s cryptocurrency
Use Cases for Different Types of Crypto Wallets
Cryptocurrency beginner – For beginners seeking a user interface and a platform for buying and selling cryptocurrencies (hot) custodial wallets like Coinbase are an option. This solution is great for the first time, then if cryptocurrency will firmly enter your life you will definitely be concerned about more reliable permanent storage of your cryptocurrency.
Active exchange trading – crypto exchanges were not originally conceived as a place for long-term storage of crypto assets, yet all popular crypto exchanges have full crypto wallet features. They offers a range of trading pairs including options to convert fiat currency to cryptocurrencies and their user-friendly interface is favored by many.
Long-term storage – Hardware wallets like Trezor and Ledger are wallets that store your digital assets offline providing a layer of security. These wallets are perfect for long term investors who wish to hold onto their assets for periods. If you want to HODL cryptocurrency for a long period of time and at the same time not worry about its safety – cold cryptocurrency wallet will be your choice.
Balance of convenience and control – If you value control and customization options over your funds, non-custodial wallets like Arctic Wallet will be an excellent choice. Hot non-custodial wallets combine increased security through better control over your private keys while still being convenient for frequent use.
Selecting the right cryptocurrency wallet is crucial when managing your assets. Different wallets cater to types of users, with varying preferences; some offer security levels while being user friendly compared to others. Deciding on the wallet depends on your requirements, how you plan to use it and the cryptocurrencies you hold. It is essential to conduct research, on wallets assessing their security features and functionalities before finalizing your choice.