Just like physical currency, Cryptocurrencies also need a wallet to be kept. The wallet provides easy access to your crypto assets and keeps them safe and accessible. However, many crypto wallets exist in the market and finding the best one has become a tough row to hoe.
Choosing the best crypto wallet requires a good understanding of all the available options. It also requires knowing how these wallets work and the criteria to look for while choosing the right one.
You will know all this in the blog below, but only if you read on till the end.
What is a Crypto Wallet?
A Crypto wallet is a means to store the private keys that are necessary to access your crypto assets. It can be an application or a physical device.
Unlike ordinary currency wallets that store the actual currency, a crypto wallet only keeps the keys to access your crypto stored in its blockchain. These keys are proof of your ownership over cryptocurrencies, and without them, you can not claim, buy or sell them. Hence, it is essential to store them securely, which can be done best through a Crypto wallet.
How does a Crypto wallet work?
The blockchains of cryptocurrencies store all the data of their transactions. It also stores information about the balance of that cryptocurrency contained in all the wallet addresses and their private keys.
The wallet software interacts with the balance information stored in the blockchain. It does not hold the actual cryptocurrency but only the access to move your owned cryptocurrency when you want to perform a transaction.
Let's understand this whole concept better through a simple example.
A Crypto wallet plays the same role for cryptocurrencies that a bank account plays for your fiat currency. Just like a bank account that acts as the foundational source for making and managing fiat transactions, Crypto wallets act the same for virtual currencies. The public key works on the same concept as the bank account number for cryptocurrencies. You can share this public key with others, like you share your bank account when anyone wants to send you money. However, having your bank account number or a public key does not allow others to withdraw money from your account. They would require the password in the case of a bank account, and a private key, in the case of a Crypto wallet. Therefore, the private key is stored securely in a crypto wallet so that only the real owner of that asset can access it.
Types of Crypto Wallet
Crypto Wallets can be primarily distinguished in two categories
-On the basis of Storage (Hot wallet and Cold Wallet)
-On the basis of Ownership (Custodial and Non-custodial wallet)
Hot and Cold Wallet
A Hot wallet is an internet-connected wallet that makes crypto transactions, cashing out your holding and managing your assets easy. You can access a hot wallet through a phone or computer. These wallets store users' private keys in the cloud storage, allowing them to fasten crypto transactions. Though Hot wallets are more convenient and quicker, they are susceptible to hacks and other online vulnerabilities because of their online availability.
Subtypes of Hot wallets are-
- Web-based wallets
- Mobile wallets
- Desktop wallets
Examples of Hot wallets are - MetaMask and Edge Wallet.
A Cold wallet is an offline wallet that comes in some physical form. It can be a paper wallet or a hardware wallet. The paper wallet is any paper on which your public and private keys are printed or written. And a hardware wallet is any device like a USB or Bluetooth device that stores your private keys inside it. All these kinds of Cold wallets require a physical possession to be taken over against your will and hence are more secure than Hot wallets. Moreover, highly secure, convenient, and trustable Cold wallets are available in the market today that you can buy to store your crypto assets.
People prefer to keep their assets in a cold wallet when they own a high amount of cryptocurrency or plan to hold it for the long term.
Examples of Cold wallets are Ledger Nano X and Trezor Model T.
Which one out of Hot and Cold wallets is better?
- A hot wallet is a suitable choice if you plan to perform crypto trading regularly.
- If you are a HODLer considering storing your crypto assets for the long term, a Cold wallet is an option for you.
Custodial and Non Custodial Wallets
As its name suggests, a custodial wallet is one where your crypto assets stay in the custody of a third party. This third party stores the private keys of your crypto assets on your behalf and provides you convenient usage and service in return. However, users need complete control over their assets in such wallets because they do not own their private keys. It is not bad, as third parties take many security measures to keep your funds safe and accessible. For example, many exchanges with a custodian wallet for their customers only complete transactions once the users meet all security measures and authentications. It also eliminates the chances of losing your private keys because the involved third party responsibly keeps them safe.
The cryptocurrency wallet provided by all centralized exchanges comes in Custodial wallets.
You hold complete control over your funds in a Non-custodial wallet because you own its private key. If you do not want to rely on any third party for the safety of your funds, Non-custodial wallets are an excellent fit for you. A non-custodial wallet asks for a 12-word recovery phrase to recover your private key if you lose or forget it.
Ledger Nano X and Trezor Model T are examples of Non-Custodial or Self custodial wallets.
Which one out of Custodial and Non-Custodial wallets is better?
- If you think you will forget your password or misplace your wallet, you should opt for a Custodial wallet, which will manage your private keys on your behalf. Hence, a Custodial wallet is better for beginners, forgetful, and clumsy people.
- If you are confident that you can keep your wallet and password safe, you can go with a Non-custodial wallet to have complete control over your funds.
Which Crypto wallet is the best out of all?
There is no absolute right or wrong when choosing the best crypto wallet. Ultimately, your choice and priorities decide which crypto wallet would be the best fit for you. If you are an experienced trader with a high amount of crypto investments, you should prioritize the security of your assets and use a self-custodial cold wallet. At the same time, if you are new to the crypto space and want to avoid burdening yourself with the task of keeping your funds safe, go for the custodial or hot wallets. You can also opt for hot wallets if you trade cryptocurrencies frequently because trading through hot wallets is comparatively quicker than cold wallets. Big crypto investors and firms store a small portion of their crypto assets in hot wallets and remain in Cold wallets to enjoy the best of both worlds.
Since crypto can not be folded like paper currency, different and advanced wallets are required to store it. Crypto wallets are used for this purpose that store private keys to your cryptocurrency. One needs to think thoroughly before choosing the right crypto wallet. The market has a wide variety of options in crypto wallets that you can choose according to your needs and will.