Cryptocurrency wallets are digital wallets with which digital currencies can be sent, received, and stored. It is technically a virtual wallet. Most coins or exchanges have an official wallet or refer users to third-party wallets. Cryptocurrency wallets are different from cryptocurrency exchanges. If exchanges go bankrupt, just like a real bank, you cannot access your money. However, if you store your Bitcoin or other cryptocoins in a wallet, you can go about your normal transactions with the value you own irrespective of what happens to the exchange.
Public and Private Keys
A public key is an ambiguous alphanumeric value that is used to encrypt data. In nontechnical terms, it is known as a wallet address. This key is software-generated and is published so that the user can send or receive secure data. It is used to encrypt data for the receiver. A private key (password) is a tiny bit of code that triggers algorithms for data encryption and decryption when paired with a public key. It is created as part of public key cryptography through asymmetric key encryption, and it is used to decrypt as well as transform a message (data) to a readable format with a matching public key.
Every cryptocurrency is represented by an entry in the blockchain, which is associated with a public key. Public key cryptography is an encryption system that is based on pairs of public and private keys, which in turn uses them to encrypt and decrypt data. These keys are simply large numbers that have been paired together but are not identical. The encryption strength is linked directly to the key size. Hence, doubling the key length delivers a significant increase in strength, even though it does impair performance a little bit. Public key cryptography depends on algorithms to generate public/private key pairs, so that it is computationally impracticable to determine a private key from a public key.
In order to move your cryptocurrency—whether to exchange it or to convert it to another currency—you will require your private key to unlock it. Your private key is found in your cryptocurrency wallet, and, as the name implies, it should be kept private.
It is worth noting that your private key is the only way you can access your funds, and if you lose it, all of your cryptocurrency is lost. Some private keys are kept offline to prevent them from getting hacked, so you should prioritize research and make informed decisions with regards to where you wish to store your key when you choose your wallet.
Knowing what kind of cryptocurrency wallet to choose can be quite daunting. This article aims at giving you a clear perspective as well as enlightening you on the various categories and types of wallets.
Categories of Cryptocurrency Wallets
There are four major categories of cryptocurrency wallets:
1. Multisig wallets
Multi-signature wallets or “multisig wallets” require more than one signature in order to complete a transaction. It is considered to be an added security measure, so one would not be able to access the account without the permission of the other users of the account.
2. Multicurrency wallets
Multicurrency wallets allow you to hold different digital assets at a time in one location. If you deal in several coins, it saves you the hassle of having multiple wallets. There are two types of multicurrency wallets available: hardware and online multicurrency wallets. Examples include Ledger Nano S (hardware) and coinbase (online). Multicurrency wallets have different features based on the manufacturer. For instance, Exodus has a customizable user interface while others are loaded with features that allow you to convert one form of cryptocurrency to another.
3 & 4. Hot and cold wallets
Hot or cold wallets simply refer to whether the wallet is connected to the internet. Hot wallets are connected to the internet and are often exposed to breaches from hackers and fraudsters. As a result, they are seen to be less secure, even though they are usually user-friendly.
Cold wallets, on the other hand, are offline wallets. They have lower risk and are technically more secure. Cold wallets are best compared to a vault or safe in a bank. They are best for long-term holdings—hot wallets can be used for day-to-day transactions without hassles, but cold wallets require too much protocol for day-to-day transactions.
Types of Cryptocurrency Wallets
1. Online wallets
Online wallets or web wallets are accessible solely through web browsers and belong to the hot-wallet category. However, they should not be referred to as a hot wallet in its entirety because hot wallets do not refer to all other wallets that are online; hot wallets can also refer to mobile and desktop wallets, which you access via an internet connection. Web wallets should not be used to store large amounts of cryptocurrency because virtually everything online can be hacked.
2. Desktop wallets
Desktop wallets are among the most secure types of cryptocurrency wallets. Whether this is the right wallet for you depends on how committed you are to keeping and being up to date with the latest online security measures. Desktop wallets are probably the most used type of wallet. A desktop wallet is just what the name implies—a piece of software or an app that is installed on a computer that is then linked to the cryptocurrency client itself. They can be the “official” wallet provided or recommended by a project that stores its cryptocoin exclusively, or it can be a multi-coin wallet like Jaxx that supports multiple currencies. Examples of desktop wallets include Exodus, Jaxx, Armory, and MultiBit.
3. Mobile wallets
Mobile wallets can be used on the go. One of the good things is that some of them provide more features and, in some cases, more security than other wallets. It does not mean that they are risk-free, however. Examples of mobile wallets include Blockchain, coinbase, Mycelium, and Coinomi. They are available in Google Play Store and iOS App Store.
4. Paper wallets
Paper wallets used to be very popular for cold storage. A paper wallet is simply a document that contains all of the necessary data needed to generate Bitcoin private keys. Your private key and public key can be printed onto a normal piece of paper with a normal printer and comes with a QR code. This allows you to exchange virtual currency as with any of the digital wallet options. The document can store a number of different keys while allowing you to keep a physical document containing very sensitive information.
5. Hardware wallets
Hardware wallets are dedicated hardware that has been built specifically to hold cryptocurrency and keep it secure. Hardware wallets usually come in a number of forms, and they get sold out very quickly, so it is paramount to carry out research with regards to your chosen hardware wallet prior to placing money there. They have stronger security than all other wallets, for the most part. They are usually cumbersome for beginners, although it is an absolute necessity if you want to store large quantities of cryptocurrencies.
The rationale behind cryptocurrency wallets is to create an avenue for seamless and safe digital currency transactions and storage. Safety will be determined by the type of wallet you use, and how it is being handled. Most cryptocurrency wallets have added security features such as two-factor authentication. It is advisable to embrace such features and benefit from the extra layer of security it provides. Also, as a general rule of thumb, never keep larger quantities of cryptocurrencies than you need at a time in a single wallet.