What are Crypto Wallets?
Crypto wallets store the public and private keys required to buy crypto and provide digital signatures that authorize each transaction.
The term “wallet” in the context of crypto can be misleading as a crypto wallet doesn’t hold your assets like a physical wallet would hold your cash. You are using your private keys that are stored on the wallet to sign a transaction that is broadcast on the blockchain network. The crypto wallet is also used to read the public ledger to confirm your crypto balances.
As the name suggests, a public key is public and open to anyone and is used to allow you to receive crypto. Your private key proves ownership of your respected public key and must always be stored securely.
Why do you need a crypto wallet?
It is possible to store your crypto on an exchange, however this approach is not advisable unless it is for small amounts of crypto (such as trading) or for short periods of time.
Whilst your crypto is stored on an exchange, if that organization was to file for bankruptcy like what has happened with FTX for example, you have then lost your crypto as you handed ownership of your private keys to the exchange.
Hot Wallets
Hot wallets are connected to the internet with examples of hot wallets including web-based, mobile and desktop wallets.
Private keys are stored on the app itself, which increases the risk of a hack or malware due to the hot wallet being online.
Cold Wallets
Cold wallets are kept entirely offline, and whilst they might not be as convenient as hot wallets as they are offline, they are more secure.
A paper wallet could be used to store the keys, which keeps them offline, but they then become at risk of being lost or destroyed, resulting in irrecoverable crypto assets.
A hardware wallet is an external device, using a USB or Bluetooth device that stores your keys. It is only possible to sign a transaction by interacting with your physical device.
Using a cold wallet, means that you are entirely responsible for securing your assets.
Ledger is an example of a hardware wallet. When purchasing a hardware wallet, we would always recommend buying directly from the manufacturer’s website and not from third-party sites such as Amazon. This is to avoid purchasing a device that has been tampered with and that could be running malicious software.
Conclusion
There are advantages and disadvantages to both hot and cold wallets and it really depends on personal preference and your intended use case.
Factors for consideration include:
User-friendliness
Supported assets
Security
Backup capabilities
Reputation
Fees
Considering scams and exchange related issues, we personally view security of your assets as the most important factor.