What is a crypto wallet
Blockchain technology has created digital currencies. They support the operation of the network. Also coins and tokens have become a new tool for investments.
However, they need storage, so many special programs and devices (wallets) have been created. They allow you to manage private keys to access digital assets, which are tied to specific addresses in blockchains. What is a cryptocurrency wallet and how do I use it? This question is not difficult to understand.
- How a cryptocurrency wallet works
- Types of cryptocurrency wallets
- Hot
- Desktop
- Mobile
- Browser
- Cold
- Hardware
- How to choose a trustworthy cryptocurrency wallet
- Multicurrency
- Asset value
- Transaction Frequency
- Wallet fees
- Fees
- Security
- Risks of using cryptocurrencies
- Summary
How a cryptocurrency wallet works
Blockchain is a decentralized registry technology for storing information. It consists of a sequential chain that contains records of all transactions within the network. Blockchains have also developed address systems. Users use them to send cryptocurrency, and information about it is stored in the networks. A private key attached to a particular address gives access to it.
Cryptocurrency wallets do not physically store digital currencies. They reside in blockchains and never leave them. A cryptocurrency wallet is a program or mobile app for working with a private key and sending requests to the network. Vaults display the balance of coins and tokens, allow the transfer of assets, use smart contracts, and connect to decentralized platforms.
Types of cryptocurrency wallets
Since the advent of the first Bitcoin blockchain network, many programs, applications, and individual devices have been developed to handle digital assets. In May 2022, there were 259 cryptocurrency wallets.
They have different functions and levels of security. Wallets are also divided by the way the private key is stored:
- Custodial. Contains a private key on the servers.
- Non-castodial. Stores it on the user’s devices.
Hot
These vaults for digital currencies work only with the Internet connected. They can be software (desktop, mobile) and browser-based. The former need to be installed on a computer or smartphone, while the latter work through a web interface.
Desktop
Such cryptocurrencies are loaded on the computer and refer to the software. They are most often installed on Windows, macOS, and Linux operating systems. But a small fraction of them also support others (e.g., ChromeOS). Most desktop cryptocurrency stores are non-custodial. That is, the private key is contained on users’ devices. This makes them safe in cases when developers’ servers are hacked.
It is the responsibility of the user to protect the key. When using desktop wallets, the principles of cyber literacy must be followed.
After creating the crypto store, the wallet.dat file appears. It contains a private key, so it must be protected with a password. If an intruder gains access, it will lead to loss of funds. You should also make a backup copy of this file. It will allow you to use the cryptocurrency wallet on another device in case of a computer crash.
Desktop vaults are more secure than browser vaults. However, when installing them, you need to make sure there are no computer viruses on your device. Some popular desktop wallets include:
Mobile
They are cryptocurrency wallets for Android and iOS phones and tablets. They allow remote handling of digital assets when connected to a network. Most of them are non-custodial (the user is responsible for private key security). Mobile storage, like desktop storage, is vulnerable to viruses and spyware. Therefore, you should check your device before installing them. Mobile applications for cryptocurrency storage:
- TrustWallet
- ZenGo
- Crypterium
Browser-based
They are popular because of their convenience. These wallets run in a browser (some of them are web extensions). Most of these services are custodial – the private key is stored on project servers. This makes them convenient for novice users, but they are considered less secure. Hacking into their servers would lead to mass theft of client funds.
Browser-based cryptocurrencies are divided into:
Exchange
Work on trading platforms Binance, Coinbase, Kraken and others.
Service
Located on separate sites – for example, MyEtherWallet and Blockchain.com.
Extensions
Installed in Chrome, Firefox, Brave and Edge browsers. TokenPocket, MetaMask, RoninWallet are among them.
Cold crypto wallets
This type of cryptocurrency wallets differs from hot wallets in that they are not connected to the Internet. They are less convenient, but reliable storages. They are virtually impossible to hack without being connected to the network.
Hardware
Another type of crypto storage, which is a separate device. More often they resemble a flash drive, keychain or plastic card. The user’s private key is stored in the device’s memory without an Internet connection. Therefore, they are considered secure when dealing with digital currency, but cost money. Popular among hardware wallets are:
Ledger Nano S and Nano X
Trezor One and Model T
KeepKey
The main criterion for choosing a hardware cryptocurrency wallet is the security of funds. Users buy these devices specifically to store digital assets. Therefore, manufacturers make them resistant to failures and hacking.
How to choose a reliable cryptocurrency wallet
You can’t call one storage facility good and another bad. The choice depends on the task at hand. A web wallet is convenient for frequent transactions. Hardware-based crypto vaults are used for long-term investments. However, there are still certain criteria for choosing a wallet.
Multicurrency
The wallet must support the crypto-assets that the user is going to work with. Up to a certain point, there were a small number of digital currencies. That’s why most programs were created monocurrency (for example, for BTC, ETH, DASH, ZEC and other coins).
But in May 2022, there were 8,277 different crypto-assets (according to the Crypto.ru service). Their number continues to grow steadily. Because of this, users of digital assets have developed a need for multi-currency vaults. Now most of the issued wallets support multiple coins and tokens at the same time.
The value of assets
If a large amount of money is invested in cryptocurrencies, the reliability of their storage becomes the first condition for choosing a wallet. The most secure ones are hardware ones. Because they are not connected to the Internet, it is almost impossible to hack them. However, hardware vaults cost money.
As of July 2022, there have been no reported thefts of assets on Ledger, Trezor or Keepkey devices caused by the companies.
Transaction frequency
A hardware cryptocurrency wallet requires connection to a computer or mobile device to access assets. Therefore, it is not suitable for users who need to make frequent transactions. It is more convenient to use software or browser-based storage. The main thing is to remember about security:
- Download the program from the official website
- First, study the reviews of the wallet
- Do not store large sums
- Check your device for viruses before installation
- Set a strong password
Cost of the wallet
More often than not, crypto wallets are distributed for free. But if security of digital assets is a priority, it is better to buy a hardware wallet. One popular device is the Ledger Nano S. On the website, its price is $49. Otherwise, you can use any free vault, but with caution. The table below shows the prices of popular hardware cryptocurrency wallets (as of early July 2022).
| Ledger Nano S | $49 |
| Ledger Nano X | $149 |
| Trezor One | €69 |
| Trezor Model T | €249 |
| KeepKey | $49 |
Commissions
Some cryptocurrency wallets give users additional functions (exchange of digital currencies, buying and selling them for fiat money, and others). They often charge a fee for their use. When choosing a cryptocurrency wallet, you should consider this criterion. Some of them may charge high fees. For example, Ethereum Wallet charges 8% to 10% for deposits via bank card.
Security
The reliability of a cryptocurrency wallet is the main condition for choosing one. Their creators work on security. Some projects offer rewards for finding vulnerabilities in software code. Also, customers often take advantage of additional features to increase security:
- Two-factor authentication (2FA). It connects the second level of authorization security. After entering your password, you will need to enter a code (more often 6 digits) from the app on your mobile device. It is generated repeatedly every 30 seconds.
- PIN code. Used to log into an account or confirm transactions. More often PIN-code of 4-9 digits is set.
- PIN for all transactions. Some cryptocurrencies allow you to set it to confirm transactions. An intruder will not send digital assets without knowing the password set by the owner.
- E-mail confirmation. Allows to complicate the procedure of transactions. They will have to be confirmed in an email.
According to analyst firm Chainalisys, a total of $7.8 billion worth of coins and tokens were stolen in 2021.
These are basic security features. But often wallet developers add their own options. For example, the Trezor T hardware vault offers the PassPhrase feature. It lets you set a password that must be added along with a mnemonic phrase. If an attacker logs into the device without it, the balance will show zero. This will save the digital currency in case the mnemonic phrase is stolen.
Risks when using cryptocurrencies
All digital asset marketers use vaults for coins and tokens. However, there are risks when using them. For example:
- Cryptocurrencies are banned in certain countries (Nepal, Pakistan, Algeria, Vietnam, Macedonia). Law enforcement authorities can prosecute for using software tools to save it.
- Theft of mnemonics. This is highly likely to lead to the loss of the user’s funds. That is why a seed-phrase must be kept in a safe place.
- Viruses. Visiting unsafe sites, downloading files from unknown resources, and opening emails can infect your device. Through a virus, an attacker is able to collect enough data to hack a crypto-purse.
- Public networks. It is not recommended to connect to free Wi Fi when working with cryptocurrency. These networks are considered vulnerable to hacking.
- Device failure. Often cryptocurrency storage programs give you the option to back up your cryptocurrency wallet. The user needs it for authorization on another computer or cell phone.
Summary
Digital currencies are stored in blockchains in which they circulate. And the cryptocurrency wallet works with private keys to access the coins. It also sends requests to the network to process user transactions. As of early July 2022, most vaults supported multiple cryptocurrencies simultaneously. This means they are capable of handling different blockchains and smart token contracts.
The choice of cryptocurrency vault depends on the task at hand. Keeping a small amount of digital currencies for frequent transactions can be done in any hot wallet. Otherwise, it is recommended to buy a hardware device. Also, when choosing a vault, you need to keep in mind the level of reliability and availability of security features.
