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Cryptocurrency Wallets Explained
Learn about the different types of cryptocurrency wallets, their pros and cons, and how to choose the best one for yourself.
1. Addresses, Keys & Wallets
Cryptocurrencies are very different from other assets that you can buy or sell.
When you buy gold, you actually get coins (or bricks) of the shiny metal. You can keep these coins safe in... a safe! When you buy a house, you actually get physical possession of it.
Cryptocurrency is very different. You don’t really get anything physical. Your Cryptocurrency journey starts with a ‘wallet’.
This is what a typical Bitcoin wallet looks like:
[private] => fa9af8856397ab2fcd0546cd248791ad9a3046aa3d49fddbdc380ccbce4a5527
[public] => 03c3948b65fc5c86e74af384cd5ef965dc5bf0e940d7ecafd98dc75517a9d45efc
[address] => 1Mk13r5uu51F5jQ6yGuBPxkuZw91nM4MeY
[wif] => L5crYHJ3wP1KF88guJChXPDaqNJ6dS3WBv56JN1o491K7FdMtXdd
The address is similar to your bank account or UPI ID. Anyone can send cryptocurrency to your address. If you send cryptocurrency to the “wrong” address, it’s gone forever! Also, remember that the same address doesn’t work for all cryptos e.g. a Bitcoin address won’t work for Ethereum.
The private key is what you would need to “sign” transactions i.e. to send cryptocurrency to someone else. If someone gets hold of your private key, they can transfer all your cryptocurrency to another address. This is what happens in most cryptocurrency ‘hacks’.
Anything signed with your private key can be verified using your public key.
The Wallet Import Format (WIF) is a shorter version of the private key.
A cryptocurrency wallet is designed to:
store your public and private keys,
send and receive cryptos,
Monitor ‘balances’, and
interact with supported blockchains.
2. Types of Cryptocurrency Wallets
Hot Wallets (Online)
Desktop Wallets: Installed on a computer, these offer a good balance of security and convenience. They're accessible only from the device they're installed on. Example: Electrum
Mobile Wallets: These are apps installed on smartphones. They're handy for on-the-go transactions and come with QR code scanning features. Example: Trust Wallet
Web Wallets: Accessible through browsers, they’re the most convenient but can be vulnerable since they’re online. Example: Blockchain.info
Cold Wallets (Offline)
Hardware Wallets: Physical devices, like USB drives, that store private keys. They're highly secure since they're offline and need to be plugged into a computer to access. Example: Ledger
Paper Wallets: Literal printed or written down pieces of paper that contain your private and public keys. While very secure from online threats, they’re vulnerable to physical threats like theft or damage. Example: BitcoinPaperWallet
Custodial vs. Non-Custodial
Custodial Wallets: Offered by centralized platforms (like exchanges), they hold your private keys for you. This makes transactions easier but gives you less control over your assets. Example: Binance Wallet
Non-Custodial Wallets: You have complete control over your private keys and hence your funds. These wallets do not rely on third parties. Example: Metamask
Deterministic vs. Non-Deterministic
Deterministic Wallets: These generate all their keys from a single seed. If you have the seed, you can always recreate the entire sequence of private and public keys.
An example of a seed phrase is: history lumber quote board young dove robust kit invite plastic regular skull
Simple Deterministic Wallets: These produce a sequence of keys from a single seed but don't have a hierarchical structure.
HD (Hierarchical Deterministic) Wallets: These not only produce keys from a single seed but also organize these keys in a hierarchical manner, allowing for more complex structures, like separate branches of keys for different purposes or even for different cryptocurrencies.
Non-Deterministic (Random) Wallets: These generate random private keys. Over time, as you keep adding new keys, backing up such wallets becomes cumbersome because each key needs to be individually backed up.
3. How to Choose the Right Wallet
Security: Determine your risk tolerance. If you have significant assets, consider hardware or paper wallets for higher security.
Convenience: If frequent transactions are your thing, online wallets, especially mobile ones, may be more suitable.
Control: Decide if you want full control (non-custodial) or if you're okay with third parties managing your keys (custodial).
Cost: Hardware wallets come with a cost, while online wallets are free.
Reputation: Do research and choose wallets from reputable providers to avoid scams.