The first thing to understand before entering into the cryptocurrency world is that there is a need for a perfect wallet just like the normal one that everyone uses in day-to-day life, but a bit safer and more secure one where you can store all the crypto of your choice and your portfolio also. Unlike the normal wallets that we use, these crypto wallets are only accessible to the owner by the use of distinct passkeys and because of this, the wallet will be protected much better. Yes, it sounds more overwhelming in its description but with a proper understanding of crypto wallets, it will become much easier in the crypto world.

Too many crypto wallets are already there in the crypto ecosystem which provokes much more confusion and makes it more difficult to choose between each of them by looking for which one is the best. With the information included in this article, it will be a little less confusing for you to understand which wallet should you check out, what is crypto wallets, and how they work.

About Crypto Wallets

Even though it is named as a wallet it doesn’t come as a normal wallet, rather it can be considered as a physical medium, service, or even an application that operates just like a wallet for the cryptocurrency. It stores passkeys that are the same as that used in the crypto transactions and these will give an interface that will help the user to get in and access the crypto. 

The crypto that we see is not stored inside a specific wallet, it is stored in a blockchain and these wallets allow the user to connect and communicate between the users and the holding they possess. The modern wallets will make sure that everyone will be able to access the blockchain. It was not this easy or simple when it was first introduced, it took a lot of time to send cryptocurrency which had to be done manually which happened to be a demanding job to do. Today with the introduction of newer software it all became simple and efficient.

Because these wallets are presented as software they possess an internet connection to be connected with the blockchain network for the particular cryptocurrency that the user uses. These cryptocurrencies are never stored in a specific physical place, they are data bits that happen to be kept in a database which are scattered all around. These bits are searched by the wallet to find all the matching bits of data with the user’s address and give the sum of the amount in the application’s interface. 

How Crypto Wallets Works?

These wallets can be seen as software or hardware, no matter what their appearance is their function is to keep the cryptocurrency safe and secure. When looking into more detail it will be found that the wallets do not store the cryptocurrency rather they store the public or private key information which is essential to proceed with the transactions. These private and public keys are mentioned below

Public key

It is the key or information that shares a similar character to a normal account number which can be shared with other people to send or receive the crypto. The wallet address can be considered as a form of public key.

Private key

It is a highly confidential secret key which will be the access code for accessing the wallet. It cannot be shared with any other person. This is used to sign the transaction and make clear that you are the owner of the crypto without unveiling the key. To keep in mind how important these keys are, if someone somehow came to know this key then they can take control of the user’s wallet which will lead to losing all the funds.

The transferring of these cryptos using the wallet is also a very simple process. Just need to enter the address of the sender the fund will be transferred from the wallet to the receiver’s address or wallet.

Different Types Of Wallets

Different types of crypto wallets can basically be categorized based on their functionality and the user’s needs. The detailed classification is mentioned below.

Hot wallets

These are the wallets that need an internet connection. They are processed by software technology to store crypto and because of this these wallets are the obvious choice for many for frequent transactions and also they are very easily accessible. These are again sub-classified into three which are:

• Mobile wallets: these are applications specially built for smartphones to store the private keys for cryptocurrencies. These can be very handy for everyday use cases and for paying for goods and services also for trading with smartphones. Because the risk of security issues in smartphones and the reliability of the device is a major question, it becomes a major drawback for its use case.

• Web wallets: these are fully controlled by third parties known as cryptocurrency exchanges. The private keys are stored in a web server and these servers are owned by other groups. It allows users to check the data online but they need constant internet connection. Being on the server will be never secure as there is always the constant risk of cyber attack and hacking and by gaining this access the crypto that is stored will not be safe.

• Desktop Wallets: this is the use of a computer system that uses its hard disk space to store the cryptocurrencies. By comparing the other two, this is way more safe and secure because it doesn’t allow any third party to take control of the funds. There is not that much risk involved in storing in the computer as long the system is virus free or any other third party has access to the system.  The desktop wallet also needs an internet connection and sometimes needs more space and faster internet connectivity. 

How To Secure Hot Wallets?

Because these wallets store their private keys in the internet servers or devices, these wallets can easily come under cyber attacks and security threats which makes them prone to malware attacks. To make them more secure there are several things you can do

1. Using a strong password is the basic thing to do to encrypt any type of important data. Keep it safe and try to memorize the password in case it’s been misplaced.
2. To protect the data it is important to encrypt the wallet.
3. Keeping the software up to date with the current version will limit the chance of any attack against the wallets.
4. It is preferable to put a limited amount of cryptocurrency in the Hot wallet, as it is prone to more attacks, the other huge amount should be put in a stronger physical space in the Cold wallet.
5. Frequent backups are always a good way to secure the wallet data and private keys in case of any loss of these devices or data.

Cold Wallets

These wallets do not require any internet connection which does not have any connection with any software or programs and are completely free of any cyber attacks. These are divided into two categories:

• Hardware Wallets: these are physical objects that also consist of biometric security verification. With this extra security feature, it will make sure the crypto is safe and secure. Because they are not connected to the internet they need to plug into a device for transactions so the transactions are not so easy when compared to the other wallets. The major drawback of hardware is the quality of their product, any misplaced and fake hardware can cause the destruction of the crypto and the wallets which will be nearly impossible to recover.

• Physical Media: these are papers like the QR code which are linked to the user’s public and private keys, which need hot wallets to scan and store the crypto. They are free from all the cyber crimes but there is a chance for damage to the paper which leads to the loss of the crypto. 

How To Secure Cold Wallets?

• Using additional biometric authentication systems to protect the devices will ensure more security.
• Setting up of seed phrases for cold wallets which act as a backup option in case any damage happens to the device.

By looking at all these different crypto wallets it is sure that nothing is perfect everything has its drawbacks and positives. There is also a classification of the wallets based on custody. There are two sub-classifications for this which are Custodial and Non-Custodial wallets. The Custodial wallets are controlled by third-party platforms which come with a lot of limitations for the user, and it’s not very ideal to place your private and public keys in the hands of another entity. 

The other type is the non-custodial wallet, in which everything is controlled by the user itself. These are better for those who want more security. It also means that if something happens it will all come into the responsibility of the user itself. In the thought of security and control, Non-Custodial wallets are better in a major sense.

Conclusion

Different types of wallets are mentioned in the article which are not perfect replacements for one another. It all has advantages and disadvantages. It is always advisable to do the research before selecting one specific wallet. If the user is in the beginning stage of storing cryptos, it is recommended to choose a mobile wallet or web wallet. Hardware wallets are used to store large amounts of crypto for a very long period. It is necessary to take more time to research before storing in any of these wallets. With all the above wallets and understanding their qualities, it’s always better to choose a wallet with the control on yourself rather than any third-party handlers to have the overall control.