A cryptocurrency wallet’s function is to give consumers access to the blockchain using software or specialized hardware. Wallets act as a middleman between a user and their blockchain based holdings. With a wallet, a user is able to view and manage their cryptocurrency, as well as make transactions. What all wallets have in common is keys, which are needed to access a user’s crypto assets. When a wallet is created, a pair of keys are generated, one public and one private. These lengthy alphanumeric sequences may appear similar but their functions are different.
Public keys can be shared with anyone who wants to send you cryptocurrency. On the other hand a private key should be carefully secured. That private key’s possession gives the holder total control over your cryptocurrency assets.
Wallets
There are many cryptocurrency wallets but the essential distinction between them is whether they are cold or hot wallets. The main difference between hot wallets and cold wallets is that a hot wallet is connected to the internet and can be accessed at any time whereas a cold wallet is not connected to the internet and allows you to store your funds offline. You can still receive funds at any time, but no one can transfer them out.
Differences between the two type of wallets:
HOT WALLET COLD WALLET
| Connected to the internet | Not connected to the internet |
| Receive & send crypto | Cannot receive & send crypto |
| Stores private keys on server | Store private keys offline |
| Less secure | More secure (offline) |
| Easy for hackers to target | Not vulnerable |
| Convenient, access from anywhere with internet | Requires to physically be next to the device stored on |
| You lose access to your crypto coins if you lose your private keys | You can still recover them from the backup |
| Normally hot wallets are free | Cold wallets have high fees |
Security
Digital wallets are hosted by third-party services that also provide additional security measures. These measures include two-factor authentication, multisignature accounts, and offline storage of private keys. When it comes to security, it is important to note that no one can guarantee 100% protection against the theft of cryptocurrencies. Unfortunately, there are cases where hackers succeed in stealing funds from online exchanges and crypto wallets despite their efforts. Therefore, be careful when using cryptocurrency exchanges or digital wallets so as not to fall into such deception.
A list of security measures and best practices to secure your crypto
- Use a combination of wallets
- Use a well known wallet provider
- Keep your software up to date
- Use a strong password
- Be aware of phishing sites
- Enable two-factor authentication
- Use a secure wi-fi connection
Exposure to exchanges
Safely storing your crypto-assets is important to ensure that you have access to your funds when you need them. However, keeping your coins on an exchange can be risky. If the exchange gets hacked and is forced to liquidate your coins, you could lose all of them at once. If a hacker gains access to an exchange’s hot wallet private keys, they could steal all of the funds at once. We recommend keeping only your trading balance on exchanges, the remainder should be kept in cold storage.
In general, it’s safer to keep your money in a wallet than it is to keep it on an exchange. Exchanges are great for trading, but not so great for storing funds.
If you want to store your crypto long-term, the best place to do so is on a hardware wallet. These devices store private keys and can be used to send and receive cryptocurrency just like any other wallet. They’re also very secure, they’re not connected to the internet, so they can’t be hacked or accessed remotely.
If you want to trade frequently, then exchanges are a better option than holding onto your coins in a hardware wallet.