Everything You Need to Know About Cryptocurrency Wallets
For new cryptocurrency traders, storage is one of the first and most important issues to address. Allowing you to serve as your own bank is one of the key benefits of digital assets. Yet, in order to do so, you need to have a safe and secure place for your virtual currency. That is why finding the right cryptocurrency wallet is so critical. However, doing so isn’t always easy. Though the idea behind a digital wallet is simple, the reality of it can be somewhat complex. There are thousands of digital assets available today, and many of them require their own dedicated wallet. Additionally, there are several different types of wallets that digital asset holders can use.
To help provide you with greater clarity, let’s take a closer look at the basics of cryptocurrency wallets, and the different options from which traders may choose.
Cryptocurrency Wallets Explained
For the uninitiated, a cryptocurrency wallet is a software program that stores your digital assets and allows you to transfer them back and forth to and from other wallets. These wallets typically store your private and public keys and interface with the blockchains of the coins and tokens you’re holding, allowing you to monitor your balances and send and receive funds. The private key of your wallet acts as your password to send cryptocurrencies and the public key of your wallet acts as your address so that others can send cryptocurrencies to you.
It’s important to understand that these wallets don’t actually store coins or tokens; when you send or receive Bitcoin, for example, the transaction is recorded on the Bitcoin blockchain. Your wallet interfaces with the blockchain to receive this information and then reflects your updated balance.
Types of Wallets
As digital assets have grown and matured, the number and types of available wallets has expanded. Let’s take a quick look at some of the most popular wallet varieties:
- Hardware wallets. These are considered to be the most secure form of storage, as they keep your private keys in cold storage (which means they are offline and theoretically inaccessible to bad actors). These wallets typically look like USB devices with small screens and can be connected to computers and mobile devices. In case you lose your hardware wallet, these wallets typically include a backup seed key that you can use to restore your cryptocurrencies on another hardware wallet. You should be aware that not all coins and tokens are supported by hardware wallets at this time. This level of security comes with a price: if you lose your keys and backup seed key, it’s possible to lose your digital assets permanently.
- Paper wallets. Like hardware wallets, paper wallets are considered highly secure because they keep your assets offline. Paper wallets get their name from the process of creating one: you simply write down your private and public keys on a sheet of paper and hide it somewhere for safe storage. Anytime you need to move assets, you use this piece of paper to retrieve your keys. This method is not usually recommended for newer users, as losing the paper or incorrectly copying your (rather lengthy) cryptographic keys can mean you’ll lose your assets forever.
- Desktop wallets. These are software programs designed to work with all the major desktop operating systems. Traders can download and install these wallets and track their digital holdings through a visual interface. Desktop wallets vary in terms of functionality; some work with only one dedicated currency, while others are designed to work with a large number of currencies. It’s advisable to use anti-malware/anti-virus software and a firewall with desktop wallets.
- Mobile wallets. Because of their ease of use and the popularity of smartphones, mobile wallets have become very popular in the digital asset space. These work much like desktop wallets, but may have more limited functionality, though they offer strong speed and accessibility.
- Online wallets. This option is convenient but less secure. Online wallets are cloud-based and therefore easily accessible from almost any device. However, a third party controls your keys and stores them in the cloud, resulting in greater exposure. Traders with significant holdings may wish to consider a wallet with more robust security and control.
When choosing a wallet, it’s important to consider your specific needs. If you are an active trader seeking to exploit fast-developing market opportunities, a hardware wallet may be too slow in terms of transferring cryptocurrency to exchanges. If you are a long-term holder, however, a hardware wallet is usually a good investment, as it offers the highest level of security.
Many cryptocurrency users tend to use a mix of wallets. For example, a trader might choose to keep the bulk of their cryptocurrency holdings within a hardware wallet, while keeping a smaller number of coins and tokens in desktop or mobile wallets for faster access. Or, that same trader may use a dedicated desktop or mobile wallet to store a specific coin or token that is not compatible with their hardware wallet.
Eventually, the cryptocurrency space will likely see universal wallets that combine the best attributes of all of these options. Until that day arrives, however, it’s a good idea to choose the wallet (or wallets) offering the right blend of security and functionality for your needs.
Bitvo takes security seriously, using a mix of hot and cold wallet storage. Bitvo utilizes hot wallet storage to allow for trading liquidity, storing all cryptocurrency holdings in excess of what is required for daily trading liquidity in cold wallet storage.
Bitvo is one of Canada’s fastest-growing cryptocurrency exchanges. Why? Because of our commitment to low fees and great customer service. If you’re looking for a better exchange experience, please visit Bitvo today.