A cryptocurrency wallet is the first step to getting hands-on with cryptocurrencies and blockchain technology. Digital coins cannot be temporarily put in a pocket or left on a table. Therefore, first we create a wallet, and only then we get coins, but not vice versa.
Do you personally need your own storage right now? At first, rather not, the storage of small amounts of cryptocurrency and all operations with assets can be fearlessly entrusted to the cryptocurrency exchange. When registering an account, each user receives a multi-currency wallet. It does not have to be used for active trading. You can accumulate coins in it and at any time immediately exchange 0.28 ETH to USD and withdraw, for example, to a bank card.
However, each of us has a limit on the amount that is not scary to entrust to a third party. And when you accumulate such a significant amount, there is a desire or need for a safer place to store it than an exchange wallet.
What is a crypto wallet
The analogy of a cryptocurrency storage with a wallet is rather arbitrary. Your coins never leave the blockchain, and a crypto wallet is nothing more than a special program that confirms your right to specific coins and provides the ability to manage them at your discretion.
In essence, your vault is a pair of keys: private and public. The public key is the address of your wallet in the blockchain, it is visible to all members of the community. The private key is your password to access assets. It is needed to confirm transactions and must be kept secret.
When creating and setting up a cryptocurrency wallet, a seed phrase of 12-24 words is generated, which must be written down and stored in a safe place. It is needed in case of possible loss of the private key. Using this phrase, you can restore the key, with it – and access to the coins. If the phrase is also lost, your coins will forever remain dead weight in the blockchain.
Cold and hot wallets
Cold stores are those that are not connected to the Internet. These include hardware devices and paper wallets. They are invulnerable in cyberspace, but you need to take care of their physical safety. This asset storage option is suitable for holders, long-term investors who store coins for years.
Hot storage is located either on a device that is constantly connected to the Internet, or on a special service. This type includes all intra-exchange wallets without exception. Using this storage method, you can very quickly carry out any operations with cryptocurrency: exchange 0.36 ЕTH to USD, buy some XRP, stake several pillboxes, etc. The risk of hacking such a vault is much higher compared to a cold one, and it is better not to store large amounts in them.
Custodial and non-custodial wallets
All hardware and most software crypto wallets for desktop and mobile devices are non-custodial. You are in full control of your coins, but at the same time, you are personally responsible for their safety. You keep your private keys yourself, but if they are lost, you lose access to your coins. Therefore, it is important to have backup copies of the keys or the wallet as a whole, just in case, if possible.
If you entrust the storage of coins to a third party, such as a cryptocurrency exchange, then you are using a custodial wallet. The service is responsible for the safety of your private key, and if it is reliable enough, you definitely have one less headache. However, the use of custodial storage virtually eliminates the possibility of saving incognito.
How to choose a crypto wallet
When choosing a wallet becomes relevant for you, consider what is more important to you:
- Hot or cold? Maximum security or transaction speed?
- Custodial or non-custodial? Are you ready to leave the private key in the hands of a third party (service) or would you prefer to keep them under your control?
- What coins does the wallet support?
- How much will it cost to buy a device or maintain your account?
- How clear is the wallet interface for you and is it translated into your native language?
Choose the storage method that you consider the most appropriate for yourself at the time of selection. Moreover, the number of wallets for one user is not limited in any way. There may be several of them for different coins and purposes.