Cryptocurrency is becoming more and more a part of society, including through online purchases, receiving payments (commissions, passive income), playing cryptocurrency earning games (like crypto idle miner), or through various trading. However, to be able to handle and secure all the different types of digital currency, you will need a cryptocurrency wallet.
A cryptocurrency wallet is a secure storage facility that can receive, send and store your cryptocurrency. When a wallet is set up, it can be linked to bank accounts, trading platforms or other financial entities.
Before one can start trading any cryptocurrency (whether that be for a service, a speculative investment, or other function), they need to have a cryptocurrency wallet set up. However, there are many different ways of storing and accounting for cryptocurrency.
The different methods of storing and securing your cryptocurrencies depends on the type of trading you are doing, the level of security you want, and your personal preferences. This article will discuss the different ways of storing your cryptocurrency.
Why a Cryptocurrency Wallet is Needed
A cryptocurrency wallet of some type is needed for many reasons, including:
- to set up any trading accounts
- to send, receive or store cryptocurrency
The advantage of having a digital wallet is that it is a fast and easy way to make a transaction. Usually once Bitcoin or other digital coins have been sent from one wallet to another, its only a matter of minutes to receive the transfer. However, times vary based on coin type and mining rates (processing time) etc.
However, to guard against cyber attacks and other forms of hacking, it is very important to have a strong password security system in place. KeePass (one of our recommend open source software programs) is a great password manager that can come in lots of use here.
What is a Cryptocurrency Wallet
A cryptocurrency wallet, specifically is an app that allows cryptocurrency traders to receive, store, and later use their digital assets in one secure location. A cryptocurrency wallet functions in a similar way that a physical wallet does – it keeps your money in one convenient place. A great feature of a cryptocurrency wallet is that it can be used from your smartphone or some other mobile device.
How Does A Cryptocurrency Wallet Work
Cryptocurrency wallets are software programs that function like a bank account. The software stores public and private digital keys and can interact with trading platforms to enable traders to send and receive their cryptocurrencies. With the digital money stored in this way, the owner can monitor their currency balance.
Hot Wallets and Cold Wallets
There are generally two types of cryptocurrency wallets – online and offline,. These are often refereed to as hot and cold wallets. Hot wallets are online eWallet products connected to the Internet in the form of currency platforms and apps. Cold wallets are hardware electronic devices that are disconnected from the Internet and kept offline.
The advantage of a hot wallet is that it is easy to access and use for your trades and transactions. The advantage of a cold wallet is that it offers a much higher security for your currency.
A hot or online wallet is another way of referring to an eWallet or digital wallet. These secure digital platforms make it possible to make easy online transactions. There numerous types and brands of online wallets. Examples of online wallets include: Apple Pay, Coinbase, Luno, PayCloud, And Stripe.
A cold wallet is ideal for when you wish to store a cryptocurrency asset and do not need instant access to it. The two types of cold wallets are hardware products and a paper wallet. Hardware products include the Ledger Nano S and the Trezor One. Another cold wallet option is a cryptocurrency exchange, such as Liquid, that stores your currency for you.
A desktop cryptocurrency wallet is a program that is downloaded onto your computer’s hard drive to use for managing and storing your private key. Using a wallet like this is more secure than using mobile app wallets because your currency is not managed by a third party server. Using this type of wallet provides an easy to use way to access your cryptocurrency. Using an old computer that is not connected to the Internet as a wallet is a great cold storage option. However, if you are not careful with how you use your computer, you could compromise the security. Wallets for a desktop include, Armory, Exodus, and Bitcoin Core.
An excellent choice for the security of your cryptocurrency is a hardware wallet. The simple but effective innovation to a hardware wallet device is that it must be connected to your device before your currency can be accessed. In this simple way, a hardware wallet keeps your private keys secure by keeping it separate from a vulnerable Internet connection and keeping a hacker away from your coins. If your hardware wallet is lost or stolen, your currency is also secure with a PIN code, and your coins can be retrieved if you used a backup system. The disadvantage of a hardware wallet is that is is not as easy to use than a hot wallet, however, it is easier than a paper wallet. Some good budget friendly hardware cryptocurrency wallets include the Ledger Nano S (~50 USD) and the Trezor One (~40 USD).
As the name implies, a paper wallet is a printout of the user’s private key and public address. This cold storage method is an older type of wallet. It has the disadvantage of the user needing to type the information into the trading platform to access the cryptocurrency. A paper wallet could be used to store in a physical file, but has the disadvantage of being less secure if the paper is lost stolen or damaged.
Importance of Backups
It is important to back up your cryptocurrency data to guard against accidental loss of the information. For this reason, you should back up your secret codes. Secret codes are stored in your cryptocurrency wallet in the form of the stored information about your digital coins. A copy of this information ensures that your lost currency information can be retrieved. To backup your secret codes, you can have the information placed on an encrypted disk file, DVD, thumb drive, or written down on paper. Some types of wallets need to be backed up frequently, while others not as much, depending on the product you are using for a wallet and the kind of trading you are doing. Backing up your secret codes is another means of security from loss and theft, though care needs to be taken on where the backup is stored.
There are many different types of cryptocurrency wallets, that all serve a different purpose. Generally a person would keep the bulk of their cryptocurrency in an offline storage, such as the Ledger Nano, which provides an extremely secure way of storing the cryptocurrency. Other smaller amounts of digital coins will be stored in a hot wallet generally through the purchasing facility (i.e. Conbase, Binance etc). The cryptocurrency field is expanding so rapidly and new storage methods are coming out all of the time. The important thing is that if you do keep cryptocurrency (either online or offline), then make sure that you don’t loose your passwords, seed phrases or the actual offline storage device. If you do, it will be near impossible to recover anything.