What is a crypto wallet ?
A Crypto Wallet is an application that allows you to store and manage your cryptocurrencies. You can install this app on a computer or smartphone, but it's not the only option. Alternatively, you can opt for a specialized physical device designed to function as a wallet.
Initially, cryptocurrency wallets were specific to each currency; for instance, Bitcoin required a BTC wallet, and Ethereum required an ETH wallet. Transferring funds between different wallets was risky and could lead to the loss of your cryptocurrencies if sent to an incorrect address. Nowadays, wallets have evolved to support multiple types of cryptocurrencies.
A crypto wallet functions by utilizing a unique cryptographic address provided by the wallet for the acquisition of cryptocurrency assets. Whether you're earning cryptocurrency through business, receiving it as a gift, or buying it on an exchange like CEX.IO, the procedure remains consistent.
To comprehend a crypto transaction via your wallet, one might liken it to files on a USB drive. Yet, this comparison isn't entirely precise, as the data in your wallet merely indicates the location of your assets on the blockchain.
Essentially, your assets are stored on the blockchain, and access is granted through the use of your wallet's private key. The keys of your wallet, both private and public, authenticate your ownership of the digital funds and facilitate transactions. Consequently, misplacing your private key results in the irreversible loss of access to your wallet and its contents.
A crypto wallet is made up of two sets of keys: the public and the private keys.
A public key is generated from a private key and serves as the address for sending crypto assets to the wallet. It's important to understand that a crypto wallet can possess several public keys, which enables the distribution of various public addresses, all of which can be used to receive cryptocurrency into the same wallet.
Conversely, the private key is the most crucial component of a crypto wallet and often the cause of much confusion for newcomers to cryptocurrency. Comparable to a key to a safety deposit box, anyone who has access to the private key has the ability to manage the assets stored in the wallet.
HOT WALLET
The easiest way to distinguish between hot and cold wallets is by their connection to the internet. Cold wallets function offline, whereas hot wallets maintain a constant internet connection. As a result, hot wallets provide greater accessibility to the funds they contain but also have a higher susceptibility to cyber attacks. Examples of hot wallets include desktop, mobile, and web-based wallets.
Hot wallets remain online, storing encrypted private keys within the wallet application. Therefore, it is generally advised against holding large sums of cryptocurrency in a hot wallet due to security concerns. Nonetheless, the risk can be somewhat reduced by opting for a wallet with stronger encryption features.
COLD WALLET
In contrast to their online counterparts, cold wallets operate completely offline. The compromise in utilizing these wallets is enhanced security at the expense of convenience. Cold wallets, which can be as simple as a piece of paper or as durable as an engraved piece of metal for physical storage, generally encompass paper and hardware wallets.
HOT or COLD WALLET?
The frequency with which you access your crypto assets and their intended use should guide your decision. Hot wallets are ideal if you plan to trade your crypto assets frequently, as they offer greater accessibility. Conversely, cold wallets are better suited for those who prioritize security above ease of access and wish to store large amounts of cryptocurrency securely.
Custodial Vs. Non-Custodial Crypto Wallets
Custodial wallets are commonly found on cryptocurrency exchanges, such as CEX.IO, CRYPTO.COM, BINANCE.COM, BYBIT.COM etc and most web-based wallets fall into this category. They are favored by both seasoned day traders and newcomers to cryptocurrency for their user-friendliness and convenience.
In using these wallets, the control over your tokens is not in your hands; instead, the exchange manages the private keys required for transaction signatures. Therefore, employing a custodial wallet necessitates a significant trust level between the user and the service provider, as it is the exchange's responsibility to enforce stringent security protocols to safeguard against unauthorized access and ensure secure token storage.
Non-custodial wallets are types of cryptocurrency wallets where users maintain the private keys, granting them full control over their digital assets.
Initiating the use of a non-custodial wallet can be more intricate than its custodial counterpart. It generally involves recording a sequence of 12 randomly generated words, known as a mnemonic, seed, or recovery phrase. This sequence is crucial for generating your private and public keys. In the event that you lose access to your device, this phrase acts as a backup for recovery.
It's critical to understand that anyone who obtains your mnemonic phrase can fully access and control your cryptocurrency. Consequently, losing this phrase means losing your funds, emphasizing the necessity of not digitally storing it or keeping it in an unsecured location. It's advised against photographing the phrase with your phone or printing it using a communal printer.
Deciding between a custodial or non-custodial wallet is akin to choosing between a hot and cold crypto wallet; it ultimately depends on the type of crypto user you are. If you desire complete control over your crypto assets, a non-custodial wallet may be the right choice for you.
Conversely, if you tend to lose or forget passwords and devices, a custodial wallet, such as CEX.IO, would be more suitable. Custodial wallets often offer better backup options and security measures, which is why they are favored by those new to cryptocurrency. Additionally, the transaction fees for custodial wallets can be quite reasonable, and sometimes even free, making them an attractive option.
