Understanding Cryptocurrency Wallets: Types and Choices

Cryptowallets are a key part of the cryptocurrency world. Regardless of which wallet you use, it is designed not only for storing your funds but also for unlocking a multitude of possibilities: using them in dApps, purchasing NFTs, goods and services, or trading on exchanges.

Wallets are divided into two types: cold and hot

What is a cold wallet?

A cold wallet, also known as an offline wallet, stores your digital assets without an internet connection. Unlike hot wallets, which are always online and more vulnerable to hacks, cold wallets provide increased security by keeping private keys offline and significantly reducing the risk of theft.

• Key generation.

Every crypto wallet has two keys: a public key for receiving funds and a private key for signing transactions and accessing crypto. A cold wallet generates these keys randomly to maximize the protection of your assets.

• Offline.

The main feature of a cold wallet is its disconnection from the internet. This physically protects your assets from hackers and viruses.

• Transfers.

To store assets in a cold wallet, simply send them to the public address. This requires only the public key, making the process secure.

• Accessing funds.

When you need to spend or transfer crypto from a cold wallet, sign the transaction with the private key. For this, connect the device to a computer or use specialized software. After signing, you can disconnect the device again and keep the keys secure.

• Device protection.

A cold wallet is a physical gadget that must be protected from theft, water, and fire. Many devices have additional protection, such as PIN codes or biometric scanners.

• Encryption.

Most cold wallets encrypt the private key. Even if the device is stolen, without the correct key to decrypt, the data remains inaccessible.

Ultimately, the main task of a cold wallet is to keep your private key offline and protected from any threats. It is an essential tool for any crypto investor who values the security of their investments.

Types of cold wallets

Setting up a cold wallet is quite simple but depends on its type and model. Here's what you need to do:

1. Choose the type of cold wallet (hardware or paper).
2. Buy or create the wallet.
3. Generate a pair of private and public keys.
4. Safely store the private key (usually in the form of a seed phrase).
5. Transfer cryptocurrency to the public address of your cold wallet.

There are several types of offline wallets: hardware, paper, and sound. Each has its pros and cons, so choose what suits you best.

Hardware wallets

Hardware wallets are physical devices that store your private keys offline. They often look like USB sticks and are designed for secure cryptocurrency storage.

Pros:

• High security: Private keys are stored offline, protecting against hackers.
• Convenience: Easy to use, with user-friendly interfaces and apps.
• Support for multiple cryptocurrencies: Ideal for diverse portfolios.

Cons:

• Cost: They can range from $50 to $200 and up.
• Physical vulnerability: Can be lost or damaged.

Paper wallets

Paper wallets are printouts of your public and private keys, often in the form of QR codes. They are simple and inexpensive.

Pros:

• Cheap: You only need to print on paper.
• Security: Private key on paper, if stored securely.

Cons:

• Limited support: Usually only support one cryptocurrency.
• Inconvenience: Need to import keys into a software wallet to access funds.

Sound wallets

Sound wallets use audio technologies to store crypto. Private keys are converted into sound files that can be stored on vinyl, CDs, or other audio media.

Pros:

• Innovative security: A new form of protection.
• Combined protection: Physical storage and digital data.

Cons:

• Complexity: Requires technologies for encoding and decoding sound files.
• Accessibility: Requires audio equipment and knowledge to access funds.

Can a cold wallet be hacked?

Yes, it can. Although cold wallets are considered super secure, they are not impregnable. The main risk is physical access. If someone gets to your wallet and guesses the PIN code, they can steal your funds.

Remote hacking of a cold wallet is almost impossible since it is not connected to the internet. The main vulnerabilities are user errors: using an infected computer, improper storage of the seed phrase, or phishing.

To reduce risks, update the firmware of the wallet, use complex PIN codes, and never give your seed phrase to anyone.

What to do if I lost my hardware wallet?

Don't panic. Your crypto is stored not in the wallet, but on the blockchain. A hardware wallet contains only private keys. If you have the seed phrase, you can restore access on a new device. This is a key feature of most hardware wallets, ensuring their security and recovery.

These wallets do not support custodial services, so the responsibility for storing the seed phrase lies with you. Store it in a secure place, separate from the device. Remember, whoever owns your seed phrase, owns your crypto assets. Treat it like a credit card or other important information.

What is a hot wallet?

A hot wallet is a crypto wallet that is connected to the internet and always ready for use. Unlike cold wallets, which operate offline and are more secure but less convenient, hot wallets offer instant access to your crypto funds. They are ideal for active trading, everyday operations, and quick access to your finances.

Hot wallets can be used through web platforms, mobile apps, or computer programs. Each wallet generates a unique digital address that you use to send and receive cryptocurrency. Private keys, necessary for access and confirmation of transactions, are stored inside the wallet.

Hot wallets are the true sprinters in the crypto world: they are fast and convenient, making them ideal for those who actively trade or need immediate access to crypto. However, due to their constant connection to the network, they are more vulnerable to hacking attacks and viruses. Therefore, it is important to use security measures and adhere to best practices to protect your funds.

Types of hot wallets

Software wallets - always online and operate as mobile apps or through websites. Private keys are stored encrypted on your device - phone or computer.

Mobile wallets - these are apps on your phone. Your crypto assets and private keys are stored directly on it.

Web wallets - these are browser extensions. They are one of the easiest ways to interact with the blockchain.

Custodial and non-custodial hot wallets

There are two large groups of hot wallets - custodial and non-custodial. The difference is who controls the private keys.

Custodial wallets. You put crypto in such a wallet, and from that moment, your funds and keys are controlled by a third party, for example, an exchange. These wallets provide convenient access to your balance and simplify trading. If something happens to your funds, they can be restored. But the custodian can freeze or withhold funds if they suspect something is amiss.

Non-custodial wallets. Here, you control everything yourself. Full access to crypto assets and keys is only yours. You can directly work with the blockchain and trade on DEXs, such as Uniswap. But if you lose the keys, no one can help.

Here are some security tips:

• Private keys and seed phrases. When creating a wallet, your private keys are generated. A seed phrase is a unique sequence of words that can be used to restore access to the wallet.
• Two-factor authentication (2FA). This method is familiar to many. Two forms of verification are used: a private key and a second factor - a code, biometrics, or other options.
• Multi-signature wallets. Require at least two private keys to complete a transaction. Usually used for storing large amounts, and multiple users have access to such a repository. A transaction is possible only with the signatures of all key owners.

Pros and cons of hot wallets

Pros:

• Great for beginners.
• User-friendly interface.
• Support for various networks and cryptocurrencies.

Cons:

• No internet - no access to the wallet.
• Vulnerability to attacks.
• Risk of losing funds.
• Funds are controlled by the custodian.

The world of crypto wallets is so diverse that choosing the right one is an art. When choosing between a hot wallet for daily operations and a cold wallet for long-term storage, remember your goals. Regardless of the choice, the key is to protect your digital assets. After all, as they say, better safe than sorry.