Deciding how to store your cryptocurrency may be an afterthought when investing in decentralized finance, but it’s an important part of securing your assets. That’s where a crypto wallet comes into play. But how do you know if you’re using the right one to build your wealth?
In this article, we discuss what a crypto wallet is, what the different types of wallets are, and why you need one.
What Is A Crypto Wallet?
Despite the name, crypto wallets are not foldable leather Bitcoin holders. Rather, a crypto wallet is a physical device or a software program that lets you safely hold assets for transactional purposes.
To better understand this, let’s look at the key features of a crypto wallet.
Crypto Wallet Features
Public And Private Keys
The use of public and private keys plays a major role in the decentralized nature of cryptocurrency. By verifying transactions through these keys, you can receive and send crypto without the need for an intermediary, such as a bank.
Public keys act as cryptographic codes that let you receive crypto transactions and prove ownership of the private key. Private keys let you freely use the funds associated with your public address and can come in the form of various codes and phrases.
Put simply, these two keys work together as a pair. Sharing your public key allows you to receive crypto, and private keys let you access your assets. Since your private key is essentially the access code to your funds, it’s critical to keep this key to yourself.
How Crypto Wallets Work
To understand how crypto wallets work, we first have to understand the blockchain.
This public ledger accounts for and maintains all encrypted cryptocurrency information in what is known as a block, and these many blocks create the blockchain.
An important distinction between a crypto wallet and a real wallet is that while physical wallets are designed to hold money, crypto wallets are a means of accessing funds through software that grants interaction between a user and their crypto on the blockchain.
Not every wallet is designed in the same way or serves the same purpose. But here are a few operational features you’ll likely find across the board:
- The ability to store funds on the blockchain
- The ability to receive funds by retrieving a public key from your wallet
- The ability to send funds by requesting the public key from the receiving user
Additional features of a crypto wallet may include buying or spending crypto, but the determining factor for which wallet you choose should be how you feel about the way your assets are stored.
All of these factors contribute to why you need a crypto wallet for crypto investments. But to figure out your own ideal storage method, continue reading about the different types of wallets and their uses.
Crypto Wallet Categories
One of the most common ways to store cryptocurrency is with a hot wallet. These wallets are defined by their constant connection to the internet and are linked with private and public keys for optimal security.
Hot wallets have many advantages. For example, they are very user-friendly and seamless to access for quick transactions.
However, their reliance on the internet may lead to potential problems like cybersecurity and the threat of hacking.
While many people choose to keep their crypto stored in a hot wallet online, another suitable option is a cold wallet. These keep your assets offline and do not require an internet connection, which mitigates risk through stronger security.
Cold wallets are ideal if you are investing for the long term or utilizing the HODL method (holding on for dear life), since you will not require constant access to your crypto.
This is in contrast to day trading, in which you constantly need access to your crypto assets and would benefit from the immediacy of a hot wallet.
If you decide to use a cold wallet, then you can choose between options like storing your assets on a USB-like device or keeping everything on a device that does not connect to the internet. Whenever you need to access your crypto, you simply transfer it to a hot wallet.
Let’s break things down even further.
Under the category of hot and cold wallets are options like custodial and non-custodial wallets as well as hardware and web wallets. Again, your specific needs and the level of risk you’re willing to accept will help you identify which wallet is for you.
Custodial and non-custodial wallets are defined by who has access to the wallet’s private key. In the case of custodial wallets, the key is held by a third party that has control over your funds. You simply grant the intermediary permission to execute transactions.
On the other hand, non-custodial wallets give you full control over the private key which is held in encrypted storage. This gives you complete access to your crypto.
Hardware wallets are a bit costly and difficult for beginners to use, but they are a great way to keep assets secure even if the device you use isn’t completely protected from cyber threats.
These hardware devices provide an extra layer of protection beyond what most hot wallets are capable of but are not as safe as a web or desktop wallet. Visually, many are similar to a USB drive (minus the OLED screen and buttons).
While all hot wallets are at risk of possible cyberattacks, web wallets are the most vulnerable to these threats. Still, these wallets are exclusively accessible through the internet, making them perfect for those looking to complete instant transactions.
Any time you decide to store your funds online through a crypto exchange, it is important to check for some important features:
- Ensure the exchange is a verifiable and dependable platform
- Ask what security measures they have in place for your assets
- Ask whether your assets are protected should a cyberattack occur
Knowing the ways that you are protected can help you establish if a web wallet is a viable option for you, but not properly researching these internet-based wallets can result in financial hits.
If you’re looking for another cold-storage method to keep your crypto safe, desktop wallets are an excellent choice if the right precautions are taken. For example, antivirus software and regular computer backups are crucial for protecting against malware.
The advantages of a desktop wallet include:
- Reasonably secure storage
- Accessibility and usability
- The absence of a third party
- Increased privacy
When used on a clean and cared-for system, these wallets are known to be reliable for many crypto owners.
Similar to how desktop wallets are made for desktop usage, mobile wallets are designed to be used on smartphones. This optimizes speed and efficiency by pairing an easy-to-access device with a seamless user interface.
Do You Always Need A Crypto Wallet?
The short answer is yes, investing in crypto requires a wallet. There are new options, such as basic investments through Venmo or PayPal that store coins on their servers, but even these are technically just custodial wallets owned by the company.
The good news about deciding between a hot or a cold wallet is that hot wallets are growing safer by the day while cold wallets are becoming more accessible. Choosing which one to use is a matter of how often you transact your assets and what level of security you want.
Security measures are still problematic when handling various crypto wallets, but researching your options and ensuring adequate features are in place will decrease these risks significantly.
For example, storing your crypto through a trusted exchange like Vauld lets you protect your crypto while also having it readily available for transactional needs.
At Vauld, we ensure that your assets are safe by moving funds from your wallet to a centralized lending pool that’s insured for $100 million in BitGo, a leading digital asset trust and security company.
Secure Your Assets With Vauld
Not sure how to decide between the many available options? Find a few crypto wallet types that work for you and offset risk by diversifying where you store your assets.
Experts advise that it is actually safer to have multiple wallets because this distributes your crypto across a few different locations rather than having it all in one place. By doing so, the risk of being hacked decreases.
Here at Vauld, we protect your account as soon as you make your first deposit. And keeping company transparency and customer protection as top priorities ensures that you always have the best experience without sacrificing security.
Start safely earning with your crypto by partnering with Vauld today.