What is a crypto wallet?
In short, a crypto wallet is a tool that you can use to interact with a blockchain network. There are various crypto wallet types which can be divided into three groups: software, hardware, and paper wallets. Depending on their working mechanisms, they may also be referred to as hot or cold wallets.
The majority of crypto wallet providers are based on software, which makes their use more convenient than hardware wallets. However, hardware wallets tend to be the most secure alternative. Paper wallets, on the other hand, consist of a "wallet" printed out on a piece of paper, but their use is now deemed as obsolete and unreliable.
Hot vs. Cold wallets
Cryptocurrency wallets may also be defined as "hot" or "cold," according to the way they operate.
A hot wallet is any wallet that is connected somehow to the Internet. These wallets are quite easy to set up, and the funds are quickly accessible, making them convenient for traders and other frequent users.
Cold wallets, on the other hand, have no connection to the Internet. Instead, they use a physical medium to store the keys offline, making them resistant to online hacking attempts.
Software wallets
Software wallets come in many different types, each with its own unique characteristics. Most of them are somehow connected to the Internet (hot wallets). Following are descriptions of some of the most common and important types: web, desktop, and mobile wallets.
Web wallets
You can use web wallets to access blockchains through a browser interface without having to download or install anything. This includes both exchange wallets and other browser-based wallet providers.
In most cases, you can create a new wallet and set a personal password to access it. However, some service providers hold and manage the private keys on your behalf. Although this may be more convenient for inexperienced users, it's a dangerous practice. If you don't hold your private keys, you're trusting your money to someone else. To address this problem, many web wallets now allow you to manage their keys, either entirely or through shared control (via multi-signatures). So it's important to check the technical approach of each wallet before choosing the most suitable for you.
Desktop wallets
As the name implies, a desktop wallet is a software you download and execute locally on your computer. Unlike some web-based versions, desktop wallets give you full control over your keys and funds. When you generate a new desktop wallet, a file called "wallet.dat" will be stored locally on your computer. This file contains the private key information used to access your cryptocurrency addresses so you should encrypt it with a personal password.
If you encrypt your desktop wallet, you will be required to provide your password every time you run the software so that it can read the wallet.dat file. If you lose this file or forget your password, you will most likely lose the access to your funds.
Therefore, it's crucial to backup your wallet.dat file and keep it somewhere safe. Alternatively, you can export the corresponding private key or seed phrase. By doing so, you will be able to access your funds on other devices, in case your computer stops working or becomes inaccessible somehow.
In general, desktop wallets may be considered safer than most web versions, but it's crucial to make sure your computer is clean of viruses and malware before setting up and using a cryptocurrency wallet.
Mobile wallets
Mobile wallets function much like their desktop counterparts but designed specifically as smartphone applications. These are quite convenient as they allow you to send and receive cryptocurrencies through the use of QR codes.
Just as computers, however, mobile devices are vulnerable to malicious apps and malware infection. So it's recommended that you encrypt your mobile wallet with a password, and backup your private keys (or seed phrase) in case your smartphone gets lost or broken.
Hardware wallets
Hardware wallets are physical, electronic devices that use a random number generator (RNG) to generate public and private keys. The keys are then stored in the device itself, which isn't connected to the Internet. As such, hardware storage constitutes a type of cold wallet and is deemed as one of the most secure alternatives.
You should consider using a hardware wallet if you plan to hold your crypto for a long time or if you're holding large amounts of cryptocurrency. Currently, most hardware wallets allow you to set up a PIN code to protect your device, as well as a recovery phrase - which can be used in case your wallet is lost.
Paper wallets
A paper wallet is a piece of paper on which a crypto address and its private key are physically printed out in the form of QR codes. These codes can then be scanned to execute cryptocurrency transactions.
Some paper wallet websites allow you to download their code to generate new addresses and keys while being offline. As such, these wallets are highly resistant to online hacking attacks and may be considered an alternative to cold storage.
Owing to the numerous flaws, however, the use of paper wallets is now considered dangerous and should be discouraged. If you still want to use it, it's essential to understand the risks. A major flaw of paper wallets is that they aren't suitable for sending funds partially, but only its entire balance at once.
Conclusion
Crypto wallets are an integral part of using cryptocurrencies. They are one of the basic pieces of infrastructure that make it possible to send and receive funds through blockchain networks. Each wallet type has its advantages and disadvantages, so it's crucial to understand how they work before moving your funds.