Ownership of Bitcoin or other cryptocurrencies is determined by digital keys, addresses and signatures. The keys are not stored on the network, but are stored by the users in a file or a simple database called a wallet.
There are different types of wallets, all of which have their advantages and disadvantages. In this article we want to tell you more about crypto wallets, their functions and the different types.
What are crypto wallets
With a wallet, you can manage various cryptocurrencies such as Bitcoin, Ethereum and many other coins, tokens and NFTs. However, the wallet itself does not serve as a storage location for these coins, but only contains the keys a private key and public key to the respective addresses in which the digital values are stored. All addresses and values are stored in a so-called blockchain, which can be viewed by all participants.
The comparison of a wallet with a money purse is therefore not really correct. It’s more like a bunch of keys and addresses to several lockers where your assets are stored.
A wallet can store the keys and addresses to hundreds of different cryptocurrencies. Since there are many different types and providers of crypto wallets.
Functions of crypto wallets
In general a crypto wallet has three different functions. The storage and management of keys, and the sending and receiving of cryptocurrencies. Without a wallet and corresponding address, you cannot send or receive digital assets. To receive cryptos, it is enough to share your wallet address or public key. For sending cryptos, your private key is also necessary. In many wallets, however, the private key is stored digitally, so that you do not have to enter it manually. You can now find out what the differences are between the public and private key.
Public and Private Key, Bitcoin Address
A public key can be compared to your IBAN number. The public key consists of a long string of numbers and/or letters. You can share this address with others to receive payments.
The private key, on the other hand, is like your PIN number. You should never lose it, publish it, or give it to anyone else. Unlike a bank, you cannot simply ask for a new PIN or block your account. If someone else gets hold of your private key, they can have full control over your crypto assets. There are several ways to prevent this, such as a hardware wallet that keeps this private key for you.
Types of crypto wallets
Crypto wallets can be divided into two different types. There are hot wallets, which are connected to the Internet, and cold wallets, which store your cryptos offline. Both types have their advantages and disadvantages. A hot wallet is, for example, your balance on a crypto exchange or your Crypto.com trading app. Here you have the possibility to buy or sell very quickly. Such wallets are therefore more suitable for daily trading and for smaller amounts. Cold wallets, on the other hand, are much better suited for HODL’n, as they simply offer much more security against theft.
Online wallets are, as the name suggests, nothing more than wallets stored on the web. This means that your keys, public and private key, are stored on a website and are managed by a service provider, you yourself have no access to them. This makes an online wallet very easy to use. You usually only have to log in with login data and can then access the coins in your wallet. This is often the best solution, especially for beginners, because you are not responsible for the storage of the private keys, and if you lose your access data, you can ask the provider for it. However, this is also a big disadvantage, because you do not have full control over your coins.
Not your Keys – Not your Coins – A saying you have surely heard or will hear often. You should definitely keep this in mind when choosing a provider. Because if an online wallet provider is hacked, files for bankruptcy or is simply a SCAM, your complete coins are also gone.
Advantages and disadvantages of an
Links to Online Wallet providers
Mobile Wallet Apps
Mobile wallets are apps on your smartphone that store your public and private keys for you. The biggest advantage of mobile wallets is that you always have them with you and they are very easy to use. A transaction can be made within a few seconds by scanning a QR code or NFC communication. There are many providers on the market that also support multiple coins and so especially for beginners a good way to store their coins.
It is important to know that a mobile wallet is only as secure as the smartphone itself. If your smartphone is stolen from your pocket, breaks down or is hacked, your wallet with the coins it contains is also gone – if no backup of the smartphone or private key was made. Therefore, only small amounts for daily use should be stored on it.
Advantages and disadvantages of an
Links to Mobile-Wallet providers
A desktop wallet is a program installed on your computer that stores your private keys. Probably the best known desktop wallet is the Bitcoin Core Wallet. It contains not only your keys but also a complete copy of the blockchain. This way you are part of the BTC network and actively support its security. But beware. This can overfill your hard drive very quickly, because currently the size for a Bitcoin full node is about 350GB. But there are also alternatives to a core wallet. For example, from Exodus or Electrum. With these providers, the entire blockchain is not downloaded . Nevertheless, desktop wallets are not suitable for beginners and are rather recommended for advanced participants.
Advantages and disadvantages of an
Links to Desktop Wallet providers
Hardware wallets can be compared to a key box. In the hardware wallet itself, your private keys are stored securely and protected by a pin. You don’t know which key fits which lock, you only know the respective “house number” and the hardware wallet then opens the corresponding door.
The advantage of hardware wallets over software wallets is that your keys are not permanently stored somewhere on your computer or in an app, but are offline as long as the hardware wallet is not connected to a device. This means that the risk of losing your crypto assets due to malware, hackers or a technical defect is zero. Although your hardware wallet can also be physically stolen, the thief would still need to know your pin. Most hardware wallets, such as the Ledger Nano X, have a built-in security feature that deletes all data from the wallet if the pin is entered incorrectly 3 times. Don’t worry, your cryptos are still not completely gone, because you usually have a passphrase as security, which serves as a backup for your hardware wallet like a paper wallet.
Paper wallets are nothing more than a generated and printed private key. Paper wallets are suitable for creating an offline wallet (cold storage) or as a backup for a software wallet. Every digital device can break unexpectedly and if no backups of the hard disk were made, a desktop wallet with all the private keys in it can quickly be gone. Paper wallets are not suitable for everyday use, as they are quickly destroyed and difficult to handle. However, if you want to lock your coins in a Swiss safe deposit box for the next 20 years, for example, a paper wallet is a good choice. Paper wallets should not be created online but locally on the computer to prevent the data from being tapped online.
Advantages and disadvantages of
Links to Paper-Wallet providers
Which crypto wallet is best for me?
It is difficult to say which type of wallet is the best solution for you. It depends on your trading behavior, your invested capital and your convenience. Most of the time, it comes down to a combination of several wallets. You start with a simple online wallet, as this is usually already offered with the larger exchanges such as Coinbase or Binance. If you have a bit more money in your portfolio, you should definitely get a hardware wallet like the Ledger Nano X to secure the coins that you don’t necessarily want to trade in the next few days.