What is a Crypto Wallet, and Which is the Best
There are several cryptocurrency wallets to choose from right now. Each with its unique features to attract users. Learn all the wallet types in this lesson.
I for one still look over my shoulders whenever I am typing in my private keys, despite knowing fully well that I am alone. This feeling of insecurity as regards storing cryptos stems from numerous reports of crypto exchanges, with supposedly some of the best security systems in place, getting hacked.
Although some of these exchanges pulled a fast one on the well-learned crypto community. That's beside the point though, people are wiser now and will probably not store huge amounts of coin on a yet to be proven exchange platform. Also, other safer means of storage are now readily available and the good news is that unlike before, they don't require you to have a degree in engineering or computer science before you can use them. Even my 78 years old uncle owns and operates about three different hardware wallets.
Before we drive deep into the subject of keeping your wallet safe, we need to understand what a wallet is and also talk about the different types of wallets available on the market right now.
What Is A Crypto Wallet
Just like your normal leather wallet, which you use to store cash, and some other information documentation, a crypto wallet is basically a software application developed to store your coins as well as perform some other duties like receiving and sending the coins, balance checking, connects to the mainnet, etc. Basically, a crypto wallet helps to manage and secure your crypto assets.
Types of Crypto Wallets
There are several cryptocurrency wallets to choose from right now. Each with its own unique features to attract users. However, in the true sense of things, there are only two types of crypto wallets, namely — Cold wallets and Hot wallets.
A hot wallet is accessible as long as there is the internet. It is also known as an online wallet. Wallet found in this category is all crypto exchanges, mobile app wallets, desktop software wallets, and online cloud wallets.
Custodial And Noncustodial Wallets
Hot wallets can be further broken down into two— custodial and noncustodial wallets.
Custodial wallets are wallets that don't give users full access to their crypto assets. They have access to each user's private key. So practically, your assets are stored on their platform and you are technically at their mercy. Examples of such wallets are Exodus, Binance Chain Wallet, Coinbase wallet, Xapo, etc.
Noncustodial hot wallets, on the other hand, give you full control of your private keys. They do not have access to these keys, so if you lose them you are likely not going to get them back. Unlike custodial wallets where you just need to fill a form and have your private keys sent to you. Examples of noncustodial hot wallets are Luno, Blockchain.com, Electrum, BTC.com, MyEtherWallet, etc.
Advantages of Hot Wallets
1. You have access to your asset across multiple devices
2. Most of them are available at no cost. You just need to sign up for an account to get one
3. They are usually backed up by large corporations with heavy security protocols
4. Some of them offer insurance on the coins stored up on the platform.
5. They are beginner-friendly
Cons of Hot Wallets
1. Their connection to the Internet makes them susceptible to hacking attacks. So no matter how strong the security used in protecting them is, one day some hacker somewhere will surely find a way to outsmart them.
2. They defeat the main purpose of the blockchain, decentralization. Most of them are centralized
3. Some of them don't give access to private keys, while some share your private key information with other apps and software.
A cold wallet, on the other hand, is not connected to the internet. Your funds are stored offline in this type of wallet. Wallets found in this category are the paper wallet, USD wallet, and other data storage devices used to store crypto.
When it comes to ensuring the absolute safety of your crypto asset, the best bet is to keep them in a hardware wallet and nothing comes close.
With a hardware wallet, the safety of your coin is in your hands and no one else's. If your coin gets stolen, it is most likely due to your carelessness and not others. Since they are offline, the only way for your coins to be stolen is for the device to be physically obtained. So I wouldn't say it is not possible to lose your crypto asset stored on a hardware wallet, just that it is extra hard. Some people even go as far as storing the already secured wallet in a bank's vault. This helps to add an extra layer of security.
Pros of Hardware wallets
1. Heightened security compared to other types of wallets.
2. You are in control of how your assets are stored and where they are stored.
3. A hardware wallet is perfect for holding a huge amount of assets.
Cons of Hardware wallets
1. If you lose your private keys, there is no way to retrieve them.
2. They are not free.
3. Using them requires some level of technical know-how.
4. They can be misplaced or stolen easily. So you need to be extra careful at all times.
5. Some cold wallet doesn't provide users with the opportunity to recover assets in case of damage or theft.
Which Should You Use?
Depending on what your plan is for your coins, your choice of the wallet will vary a lot. If you are the type who makes online transactions regularly you will be needing a hot wallet mostly. If your plan is to store up your coin for a long time then your best bet is a hardware wallet.
For some traders, they prefer to have both options. This makes it easy to switch based on their use-cases. I personally have a limit on the number of assets I have stored up on exchanges. Once profit comes in and I notice that I have crossed this threshold, I send coins to my hardware wallet.
For exchanges as big as Binance to get hacked, one thing is quite clear, hacking an online crypto wallet is basically a waiting game, you just have to wait for them to make a wrong move and that's all. So I will strongly advise that you have both options available.