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What are cryptocurrency wallets and what are their types

If you are thinking of buying digital currencies such as cryptocurrencies, you may have come across suggestions to store them in crypto wallets. But how exactly do these wallets work? Do they actually “store” your currencies? Contrary to popular notion, crypto wallets do not actually “store” your assets. These wallets act like a gateway that help you interact with the relevant blockchain. During a transaction, the assets are never really taken off the blockchain, but are only transferred from one wallet address to another using public and private keys.

The private key to a wallet is the most important thing to safeguard as a holder as it is what gives you access to your holdings. On the other hand, the public key helps you transact with others. Further, there are many terms such as ‘cold wallet’, ‘hot wallet’ or ‘paper wallets’. What do these terms mean? Let us take a look:

Hot Wallets

A ‘hot wallet’ or a software wallet is any cryptocurrency wallet that is connected to the internet. Most cryptocurrency exchanges use ‘hot wallets’ for their users. This means that when you make an account on a crypto exchange and transfer any assets onto it, they go into that exchange’s hot wallet.

Alternatively you can set up your own ‘hot wallet’ using various platforms. These can be ‘web wallets’, ‘desktop wallets’ or ‘mobile wallets’. Among these three, ‘desktop wallets’ or ‘mobile wallets’ are likely to be safer. These kinds of wallets are convenient to use for traders as they are easily accessible.

Cold Wallets

There are two main types of ‘cold wallets’:

Hardware wallet: A ‘hardware wallet’ is an electronic device that uses a Random Number Generator (RNG) to generate keys which are stored in the device itself. These wallets are much safer compared to ‘hot wallets’ as they have no internet connectivity, making them nearly impossible to hack. This kind of ‘cold storage’ is extremely useful for investors with a long term mentality, but can be inconvenient to access for people who trade often. They can also be expensive to purchase and only make sense to buy if your holding amount is large.

Paper wallet: A ‘paper wallet’, as the name suggests, is a physical printout of the relevant blockchain address and private key. These are generally stored as ‘QR codes’. This type of storage is considered unsafe and inconvenient. One reason for this is that you cannot send partial funds through ‘paper wallets’. You only have the option to transfer the entire balance amount, causing many to lose all their funds.

Conclusion

As seen above, there is more than meets the eye when trying to store crypto. Hence, it is important to learn about these technologies first and understand the risks involved before making any investment decisions.

Disclaimer

This article is purely for educational purposes. It is not to be read as advice to invest into digital assets or cryptocurrencies. It is prudent to have your finances secured through more trusted and regulated instruments such as stocks, mutual funds, debt funds, fixed deposits, liquid funds, etc. It is also important to have necessary insurances and emergency funds in place. Click on this link to learn more. You can also click this link to open a demat account.