What is Cryptocurrency wallet? Types of wallets
Do terms like hot wallet, cold storage, multi-sig cryptocurrency wallets confuse you? Do you want to understand the difference between online and desktop cryptocurrency wallet? Do you want to know how secure are these paper wallets in comparison to hardware wallets? What about the services and software that are used to run these cryptocurrency wallets? In this article, we are going to explore all.
What is a Cryptocurrency wallet?
Before you can start to receive or send cryptocurrency coins, you need a “container” for holding your coins. Like how a normal wallet holds money between various transactions, a cryptocurrency wallet “holds” coins digitally for safe-keeping and later transactions.
Essentially, a digital cryptocurrency wallet is a pair of Public and Private keys. The public key is used to receive coins into the wallet. The private key is used to send coins to any other wallet. If someone gets hold of your wallet’s private keys, they can transfer all the coins into any other wallet. The public and private keys are together called a keypair.
Before we can look at the types of wallets that are available, we have to define and understand a few keys terms that are used in association with wallets.
Hot Wallet vs Cold Wallet in Cryptocurrency
The key difference between hot and cold wallet is that of Internet Connection.
In a Hot Wallet, the wallet (or the software used to access) the wallet is connected to the internet.
A cold wallet (or cold storage or offline storage), however, is never connected to the internet. It can be thought of as a safe, or a vault for keeping very important papers, precious metals, and money.
A cold storage is definitely more secure. Since it is never connected to the internet, the risk of a hacker stealing the private key of the wallet is almost none. The only way a hacker can steal the keys is by gaining physical access to the device.
What is Multi-signature Wallet (aka multisig)
As the name suggests, a multi-signature wallet requires co-operation of multiple parties for a single transaction to occur. It means that the wallet is owned by more than one person, and until and unless all the members agree to a transaction, and enter their respective pins, the transaction is not going to happen.
It can be thought of as joint account in banks. Unless both(or all) the parties approve of a transaction, the transaction does not proceed.
What is Multi-Currency Wallet in Cryptocurrency?
As evident by the name, a multi-currency wallet can store(or hold) a more than one type of cryptocurrency coins.
Some multi-currency wallets allow inter-conversion of currencies that are present in the wallet. For example, if your multi-currency wallet has 10 BTCs and 20 ETHs, you can withdraw more than 20 ETHs by converting your BTCs to ETHs inside the wallet itself.
What are the different types of wallets?
Depending on the level of security and ease of access, there are many categories of wallets. We are going to understand each type of wallet and see their advantages and disadvantages. We are going to see a few examples of each of the wallets too.
What is Online Wallet ( aka Web Wallet)
This is the hottest wallet out there. It is hot because you are literally storing your wallet keys on a different computer and you are using a web browser to access the said keys. Crypto exchanges such as Coinbase, Binance are one of the many forms of web wallets. It is advisable to never have large amount coins in these types of wallets.
These wallets are at the lowest end of the security spectrum. The only redeeming feature they have is that they are accessible from any system connected to the internet.
- They are accessible from any connected device.
- Ideal for holding small amount
- Low lag between transactions
- They are the least secure way of holding your coins
- The users are susceptible to phishing attacks
What is Mobile Wallet in Cryptocurrency?
Mobile wallets provide access to your cryptocurrencies wherever you are with your mobile device. They are tightly integrated with your mobile and provide extra security features such as fingerprint scanning, if available.
- More practical and easier to use than other wallets, great to accept or send payments on the fly
- Additional features above and beyond both online and hardware wallets like QR code scanning
- If you lose your phone, retrieving the access to your wallet can be difficult.
- The phones are prone to keylogger, malware, and viruses.
- The phone can be used by a third-party to do the unauthorized transaction.
What is a Desktop Wallet in Cryptocurrency?
A desktop wallet sits on the edge of hot and cold storage. It is a desktop software that is able to generate and store wallet keys. It doesn’t need the internet connection. However, if your desktop is connected to the internet, this is not better than a mobile or online wallet.
- The keys are not stored on a third-party server
- If the desktop is never connected to the internet, it provides good security measure
- It is more user-friendly
- If your computer is corrupted, then the wallet is lost
- Your computer is open to malware, keyloggers, and viruses
What is Paper Wallet in Cryptocurrency?
Paper wallets get their name by the fact that the private keys and public keys are printed on a paper and stored. The keys can be generated offline. Hence, this is one of the forms of cold storage. Unless you use your paper, your wallet is secure.
If you want to keep your coins for the long term, and do not want to invest in a hardware wallet, this is the best option.
Watch this video for a step by step guide to creating ethereum paper wallet or read this article
- Offers more security than Online and Mobile wallets
- Not stored on a computer
- To do a transaction, you need to keep the paper with you.
- If the paper is lost, or soiled, the wallet will be effectively lost.
- More technical to create and understand paper wallets
What is Hardware Wallet in Crypto?
They are pen-drive shaped USB sticks. They are more secure than paper wallets, and the best form of cold storage. The public and private keys of the wallet is stored in the USB stick. Some require batteries, some don’t. Some have screens which mean you don’t need an insecure computer to back up your private keys, some don’t.
- If it has a screen, it’s the most secure way to store crypto long-term
- Stronger security than all other wallets, for the most part
- Requires initial investment (around $ 60)
- Cumbersome for some beginners to use, but an absolute must for large quantities of cryptocurrencies
- If the USB stick is corrupted, your coins are lost forever.