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Modern cryptocurrency wallets have opened up access to the blockchain for everyone. Previously, the sending of digital assets was done manually and required the input of long keys. Today, much of that work is done by software. It is known that the first wallet belonged to the bitcoin developer Satoshi Nakamoto, the second to the programmer Hal Finney. In early 2009, Nakamoto sent him 10 BTC as a test, which was followed by a massive fascination with cryptocurrencies.
What is a crypto wallet
A cryptocurrency wallet is a program, application, physical device or service that stores user keys and data on financial transactions. They contain the public key (wallet address) and the private keys of customers necessary to confirm transactions. It is important to note that the wallet does not store real cryptocurrency. Digital assets are stored in the blockchain – a digital list that serves as the basis for the operation of many decentralized cryptocurrencies. With the help of a crypto wallet, you can store different digital assets. Anyone who has access to the private key can control the cryptocurrencies associated with that address. It should be noted that if the user loses access to the private key from the crypto wallet, the funds on it disappear from the general circulation forever.
There are several varieties of wallets, each of which has its own characteristics and levels of security. Despite some differences, most of them function the same way, storing pairs of addresses and private keys that allow the wallet to be synchronized across multiple devices to send and receive cryptocurrency.
Custodial and non-custodial wallets
There are two main types of wallets: custodial and non-castodial.
Custodial wallets are placed directly on cryptocurrency exchanges, so sometimes they are called exchange wallets. They are provided to customers by platforms such as Binance and Coinbase. The disadvantages of these wallets include the involvement of third parties in the digital assets of users – custodians (custodians) are regulated by state bodies. This means that at the request of the regulator, representatives of the platform are obliged to provide data about users, and, if necessary, block their accounts. In addition, crypto platforms are subject to hacker attacks, as a result of which customers may lose funds. The plus is that the user can recover the forgotten password, since the exchange owns access to the keys of customers.
Non-custodial wallets are controlled only by the user, which implies the full responsibility of the owner for his crypto assets. To create such a wallet, you do not need to go through the identification procedure, just create an address. Non-custodial wallets are sometimes called applications that can be downloaded to a computer, phone, or browser.
Crypto investors usually use both types of wallets: custodial – for trading transactions on cryptolatings, non-castodial – for long-term storage of assets or cryptocurrency staking.
Hot and cold wallets
Non-castodial wallets are divided into hot and cold.
Hot (software) wallets ideal for a beginner, because they can be installed on any device. Among them, the most popular are MetaMask and Trust Wallet. It should be noted that due to the constant connection to the network, hot wallets can be susceptible to hacking, so they are usually used to make fast transactions with small amounts.
Cold (hardware) wallets looks like a USB flash drive. You can use such a device regardless of the availability of the Internet. In addition, they are considered more reliable than hot ones, since digital assets are stored offline. The most famous cold wallets are Ledger and Trezor. Some modern hardware wallets have the ability to connect to the device via Bluetooth. However, since Bluetooth is a wireless signal that can be accessed by unwanted parties when it is turned on, you should use such devices with caution. In case of loss of access to the private key and seed-phrase, the assets on the crypto wallet will be lost forever.
Security of cryptocurrency wallets
Crypto wallets are commonly used Two types of keys: open and closed.
Public keys act in the same way as a bank account number. A public key is a long string of random letters and numbers that can be passed on to a third party, such as a cryptocurrency exchange, without damage to the security of the wallet. This key allows you to conduct transactions.
Private keys should always be kept secret. A private key allows you to access real cryptocurrency on the blockchain. Therefore, if someone gets access to such keys, it will be tantamount to access to the cryptocurrency in the wallet.
A seed phrase is a key secret phrase needed to regain access to a cryptocurrency wallet. It is usually generated automatically when you create a wallet and contains 12, 18, or 24 words.
What to consider when choosing a crypto wallet
The choice of the best crypto wallet depends on the level of experience of the user and his previous activity with cryptocurrencies. The main requirements to consider when choosing a wallet include:
- Security. Traditional banking applications offer a number of security measures to protect funds. Crypto wallets have slightly different mechanisms, so you should carefully check them before trusting personal funds.
- Commission. Transaction fees may be charged in different ways. They can be set automatically to make transactions faster, but to reduce costs, some crypto wallets allow you to set up each fee. It is necessary to understand that this can slow down the time of transactions.
- Cryptocurrencies. Some crypto wallets offer a wide selection of cryptocurrencies, while others offer a limited one.
- Customer support. Some companies offer round-the-clock support as part of their services.
- Access. If the user regularly uses the computer, it is worth paying attention to hardware wallets. For those who need to be more mobile-friendly, smartphone apps and browser-based wallets may be a good fit.
As is the case with any banking service, finding the right crypto wallet for personal needs is very important, so you need to consider all aspects to find a suitable one.
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