A cryptocurrency wallet, in a nutshell, is a technology that allows you to communicate with a blockchain network. Crypto wallets are classified into three types: hardware wallets, software wallets, and paper wallets. Depending on their operational mechanics, they may also be referred to as hot or cold wallets.
The bulk of cryptocurrency wallet providers are software-based, making them more user-friendly than hardware wallets. Hardware wallets are the safest solution. Paper wallets, on the other hand, are composed of a “wallet” printed on a piece of paper, however their use is today regarded outdated and untrustworthy.
Crypto wallets, contrary to popular assumption, do not actually hold digital assets. They instead supply the tools needed to communicate with a blockchain. In other words, these wallets can create the information required to transfer and receive money through blockchain transactions. Such information includes, among other things, one or more pairs of public and private keys.
The wallet also contains an address, which is an alphanumeric identifier formed from the public and private keys. In essence, an address is a distinct “location” on the blockchain to which bitcoin can be moved. This implies that while you can share your address with others in order to receive payments, you should never reveal your private key with anyone.
Regardless of the wallet you use, the private key grants access to your bitcoins. As a result, even if your computer or smartphone is compromised, you may still access your funds on another device if you have the associated private key (or seed phrase). It is important to note that the coins are never completely removed from the blockchain; they are only transferred from one address to another.
Do I need a cryptocurrency wallet to trade cryptocurrencies?
The straightforward answer is yes. To store and trade cryptocurrency, you must have a wallet address, whether you are a frequent trader or a bitcoin HODLer. You can decide to use your crypto exchange’s hot wallet, a mobile wallet you put on your phone, a browser extension, a desktop wallet on your PC, or a hardware wallet. There are numerous options available. The following are some examples of different wallet types:
1. Hot wallet:Binance exchange.
3. Browser extension crypto wallets: MetaMask, MathWallet, Binance Chain Wallet.
4. Desktop crypto wallets: Electrum, Exodus.
Note: if you are using Binance Smart Chain (BSC), make sure to check The Best Crypto Wallets for Binance Smart Chain (BSC).
Hot vs. cold wallets
As previously stated, bitcoin wallets can be classified as “hot” or “cold” depending on how they operate.
A hot wallet is any wallet that is connected to the Internet in some way. When you open an account on Binance and send funds to your wallets, you are putting into Binance’s hot wallet.
These wallets are simple to set up and provide instant access to funds, making them ideal for traders and other regular users.
Cold wallets, on the other hand, have no Internet connection. Instead, they keep the keys offline on a physical medium, making them immune to online hacking efforts. As a result, cold wallets are a far safer alternative to “keeping” your coins. This approach, also known as cold storage, is ideal for long-term investors or “HODLers.”
Binance only keeps a limited number of coins in its hot wallets to protect users’ cash. The rest is stored in cold storage and is not linked to the Internet. It is worth noting that Binance DEX offers an alternative for those who choose not to put their cash in a centralized exchange. It’s a decentralized trading platform that gives you complete control over their private keys, as well as the ability to trade directly from their cold storage devices (hardware wallets).
There are many distinct types of software wallets, each with its own set of attributes. The majority of them are linked to the Internet in some way (hot wallets). The explanations that follow are of some of the most prevalent and relevant types: web, desktop, and mobile wallets.
Web wallets allow you to access blockchains via a browser interface without having to download or install anything. Both exchange wallets and other browser-based wallet providers are included. In most circumstances, you can establish a new wallet and secure it with a personal password. Some service providers, however, keep and manage your private keys on your behalf. While this may be more convenient for inexperienced users, it is a risky practice.
You’re entrusting your money to someone else if you don’t keep your private keys. To address this issue, several web wallets now let you to handle your keys entirely or via shared management (via multi-signatures).
As a result, it’s critical to examine each wallet’s technical approach before deciding on the best one for you.
When using bitcoin exchanges, you should think about using the various security tools.
Device management, multi-factor authentication, anti-phishing code, and withdrawal address control are among the security features available on the Binance Exchange.
A desktop wallet, as the name implies, is software that you download and run locally on your computer. Desktop wallets, as opposed to other web-based ones, provide you complete control over your keys and funds. When you create a new desktop wallet, a file named “wallet.dat” is created on your computer and saved locally. Because this file contains the private key information required to access your bitcoin addresses, it should be encrypted with a personal password.
If you encrypt your desktop wallet, you will be prompted for your password each time you run the app in order for it to read the wallet.dat file. You will most likely lose access to your funds if you lose this file or forget your password.
As a result, it’s critical to back up your wallet. Keep the dat file somewhere secure. You can also export the appropriate private key or seed phrase. You will be able to access your funds on other devices if your computer fails or becomes inoperable in some way.
In general, desktop wallets are considered safer than most web versions, however it is critical to ensure that your computer is virus and malware free before installing and using a cryptocurrency wallet.
Mobile wallets function similarly to desktop wallets, but are developed primarily for smartphone applications. These are really helpful because they allow you to transfer and receive bitcoins via QR codes.
As a result, mobile wallets are especially well-suited for daily transactions and payments, making them a feasible choice for spending Bitcoin, BNB, and other cryptocurrencies in the real world. Trust Wallet is a well-known example of a mobile cryptocurrency wallet.
Mobile devices, like desktops, are subject to rogue programs and malware infiltration. As a result, it is recommended that you password-protect your mobile wallet and backup your private keys (or seed phrase) in case your smartphone is stolen or damaged.
Hardware wallets are physical, electronic devices that produce public and private keys using a random number generator (RNG). The keys are then saved on the device, which is not linked to the Internet. As such, hardware storage is a sort of cold wallet and is regarded as one of the most secure options.
While digital wallets provide greater protection against internet attacks, they may pose hazards if the firmware is not properly implemented. Furthermore, when compared to hot wallets, hardware wallets are less user-friendly, and money are more difficult to access.
To circumvent this limitation, you can utilize Binance DEX to connect your device directly to the trading platform. Because the private keys never leave your device, this is a secure method of accessing your assets. Some web wallet service providers provide a comparable functionality, allowing hardware wallets to be connected to their browser interface.
If you intend to keep your bitcoin for an extended period of time or if you have a substantial amount of cryptocurrency, you should consider using a hardware wallet. Most hardware wallets currently let you to set up a PIN number to protect your device, as well as a recovery phrase — which can be used if your wallet is misplaced.
A paper wallet is a piece of paper on which a crypto address and associated private key are physically printed as QR codes. These codes can then be scanned in order to carry out cryptocurrency transactions.
Some paper wallet websites allow you to download their code and use it to generate fresh addresses and keys while offline. As a result, these wallets are very resistant to online hacking attacks and can be used in place of cold storage.
However, because of the various problems, the usage of paper wallets is currently deemed unsafe and should be discouraged. If you still wish to use it, you must be aware of the hazards. Paper wallets have a severe problem in that they are only ideal for sending their entire balance at once.
For example, suppose you created a paper wallet and sent multiple transactions totaling 10 BTC to fund it. If you want to spend 2 BTC, you should first send all ten coins to another sort of wallet (for example, a desktop wallet), and then only spend a portion of the cash (2 BTC). You can return the 8 BTC to a fresh paper wallet later, though a hardware or software wallet would be a better option.
Technically, if you import your paper wallet private key into a desktop wallet and spend only a portion of the cash, the remaining coins will be transmitted to a “change address” that the Bitcoin protocol generates automatically. You will most likely lose your funds if you do not manually set the change address to one that you control.
Most software wallets nowadays will handle the change for you, delivering the remaining coins to a wallet-specific address. But keep in mind that your paper wallet will be empty after sending its first transaction – regardless of the amount. As a result, don’t anticipate to reuse it in the future.
The importance of backups
The cost of losing access to your cryptocurrency wallets might be pretty high. As a result, it is critical to back them up on a frequent basis. This is often accomplished by simply backing up wallet.dat files or seed phrases. A seed phrase functions similarly to a root key in that it produces and grants access to all keys and addresses in a crypto wallet. Also, if you chose password encryption, make a backup of your password.
What crypto wallet should I use?
There is no definitive answer to the question of which crypto wallet you should use. If you are a frequent trader, a web wallet allows you to easily access your funds and trade. Assuming you’ve taken extra precautions to secure your account with two-factor authentication (2FA) procedures, your cryptocurrency is generally secure. However, if you intend to HODL a big amount of cryptocurrency that you do not intend to sell in the near future, cold wallets are preferable because they are not connected to the Internet, making them more safe and immune to internet phishing assaults or frauds.
Crypto wallets are required for the use of Bitcoin and other cryptocurrencies. They are one of the fundamental pieces of infrastructure that allow funds to be sent and received over blockchain networks. Each form of wallet has advantages and downsides, so it’s critical to understand how they function before transferring funds.