Cryptocurrencies, such as Bitcoin and Ethereum, have been increasing in value these days. This means more and more people are investing in digital currency. One of the most important things to learn in the crypto world is about cryptocurrency wallets. This topic can be a bit complicated, especially if you have just started this venture. If you want to know more about crypto wallets, you are just on the right page. In this article, we will be talking about the different types of crypto wallets and why use cryptocurrency wallets.
Let us first explain what a cryptocurrency wallet is. Typically, people use physical wallets to keep their money (fiat currency). Some store them in a piggy bank or even in a bank. In the crypto world, crypto wallets are used. Its purpose is not exactly the same as the physical wallet that we know. Crypto wallets are software programs installed on your desktop or smartphone or special hardware that store digital coins as well as user’s private and public keys. They are also used to send and receive digital coins and to monitor the owner’s balance.
To make it easier to understand, cryptocurrency wallets are like bank account numbers. We use bank account numbers when we deposit or withdraw money. It is also used when you want to send or receive money. Giving your bank account number to somebody else is not exactly harmful as it is needed to make transactions: it could be your boss who needs to send you your salary or a client who wants to send you payment. The same goes for cryptocurrency. If you want to transfer digital money to someone or vice versa, you will need the wallet address to complete the transaction.
So, why use cryptocurrency wallet? Here are the four main reasons:
- To send and receive digital assets – As mentioned earlier, a crypto trader cannot trade, send, or receive cryptocurrencies without a relevant crypto wallet. You will need to share the public key or address from the wallet with others to allow them to send you crypto coins and tokens. Users can either share the address as a string of data input on the sender’s wallet application or share the key or address as a QR code using a smartphone.
Crypto wallets also have private keys used to move users’ cryptos assigned to them on the blockchain. Private keys are like passwords or PIN codes of your credit cards – they are not supposed to be shared as anyone who can access them can also access and spend your money.
- To store crypto assets – One of the best things about cryptocurrency is that you have fun control of your digital money. That said, you can use your cryptocurrency wallet to hold and keep them for an extended period without the need for an intermediary. The only thing you need to do is to make sure that your private keys are securely protected.
- To receive and manage ICO tokens – Startups usually create tokens on blockchains and sell them to the public to raise capital. The process of raising capital is called ICO (initial coin offerings) or STO (security token offerings). Those who have tokens can sell them to others to gain profit, just like in traditional stock exchanges. A crypto wallet is necessary to buy, send, or spend those tokens.
- To hold gas for dApp applications – Decentralized applications or dApps are applications that run on top of the blockchain. People who launch or use dApps may need to pay a fee to the network that supports the blockchain used by the app. This fee is called “gas.” To supply “gas” for your blockchain’s activity, a cryptocurrency wallet is needed to hold it.
Types Of Cryptocurrency Wallets
Now that you understand what a crypto wallet is and learn why use cryptocurrency wallet, let us then explore the different types of cryptocurrency wallets. There are various types of digital wallets, and each type differs in purpose.
There are three major types of cryptocurrency wallets. They are hardware, software, and paper wallets. These three can still be further classified into two groups: cold wallet or hot wallet. Cold wallets are those that are kept offline, while hot wallets are the opposite as they are connected to the Internet. Read on below to further understand the three main types of digital wallets.
- Hardware Wallet – This type of wallet looks like a USB with an OLED screen and side buttons. This device individually handles public addresses and keys, does not need batteries, and can be connected to the computer and accessed by desktop apps. Hardware wallets are considered cold wallets, which means they are more secured than those that belong to the hot wallet category. The downside of this crypto wallet is that they are a little expensive and are a bit difficult to use, especially for beginners.
- Software Wallet – These are non-physical programs that are downloaded into the user’s computer or smart device. They are encrypted and require a password to access the digital coins and tokens stored in them. Software wallets are ideal and more accessible for those who always exchange and send currencies. However, the downside of this crypto wallet is that it is connected to the Internet, making it susceptible to hackers, malware, and viruses.
- Paper Wallet – This wallet uses a printed QR code to make transactions. Some paper wallets can generate new wallet addresses offline, making them safe against hackers and malware and ideal for cold storage. However, the flaw of paper wallets is that they cannot send partial funds. Learn more about cryptocurrency wallets here!
Now that you have learned what crypto wallets are and why use cryptocurrency wallets, it will be easier to choose the right one for you. If you still get confused about which wallet to use, it is best to consider your needs as a crypto user or trader. Also, remember always to keep your private keys safe and secured and to back up your wallet regularly.