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When Bitcoin, the first big name in cryptocurrency, was unleashed upon the world thanks to Satoshi Nakamoto, there was no such thing as a crypto wallet. It was Nakamoto himself who engineered the first desktop storage tool, which the community used for years.
While the term “wallet” may seem self-explanatory, a crypto wallet is actually a whole lot more than simply a place to store your cryptocurrency of choice.
Today we’re taking a closer look at how crypto wallets work, what they are exactly, and the different types of crypto wallets available today.
What is a Crypto Wallet?
A crypto wallet is an app that allows users to store and retrieve assets of a digital nature. Like traditional currency, you don’t need to have a wallet to spend your assets. Still, it helps considerably to store it all in one place.
Unlike that wallet full of cash that you carry around every day, crypto wallets don’t hold any physical cryptocurrency.
That’s because cryptocurrency isn’t a physical thing at all. There is no physical coin to speak of. Cryptocurrency is, at its core, a decentralized ledger of transactions and balances recorded to and authenticated by the blockchain. The information stored in your wallet serves as a pointer to your assets’ location on the blockchain.
In the end, what your digital wallet stores are the public and private keys required to initiate and receive these transactions and to track balances. Without your keys, as some unfortunate traders have found out, you lose access to your funds.
How Crypto Wallets Work
In simple terms, crypto wallets are comparable to your bank account. There are unique codes — called keys and addresses — used to identify the wallet. Crypto wallets utilize both a public address and a private key.
Whenever a user acquires cryptocurrency like bitcoin, their balance is recorded and stored by a crypto wallet. Likewise, transactions are initiated from the crypto wallet to send currency to others.
When you acquire cryptocurrency, either through a currency exchange or as a gift, the sender will direct the funds to the unique public key issued by your wallet.
You can spend assets from your wallet for just about any purpose. You can even pay for retail transactions by scanning a retailer’s QR code or sending some specific amount of crypto coins to a retailer’s public address.
Comparing Hot vs. Cold Wallets
Now, not all crypto wallets are created equal. There are two basic categories under which all wallets fall; however: hot wallets and cold wallets. There’s a pretty significant difference between hot and cold wallets, and the difference has absolutely nothing to do with temperature.
Hot wallets are simply cryptocurrency wallets that are connected to the Internet. In contrast, cold wallets exist in a physical form and are not connected to the Internet.
Whichever you choose — and we’ll break down the pros and cons of each below — both are equally capable of storing the data needed to send and receive cryptocurrencies inside of them.
Hot Wallets
If one of these two could be considered the most popular, it would likely be hot wallets, thanks to the many options out there with a slick, user-friendly UI. Hot wallets have been around ever since cryptocurrency — namely bitcoin — emerged as an asset.
Most mainstream cryptocurrencies such as XRP, Ethereum, and Bitcoin have various digital wallets available for use. Each one offers different features and customizations to choose from.
Hot wallets are available in both online and desktop applications. There are mobile wallets available as well, and while they are considered digital, just like hot wallets, they are generally classified as a “hybrid” wallet because of their mobility.
Cold Wallets
Cold wallets, as we mentioned above, are not connected to the Internet. They offer a highly secure, physical way to store a user’s private and public keys, and thus, their cryptocurrency assets. They’re often touted as the most secure option available and are a great solution for users who want to access their keys regardless of their connectivity.
Cold wallets come in various forms, from paper to hardware, as we’ll explore below. Each offers its unique pros and cons.
The Types of Crypto Wallets in Use
There are several different types of crypto wallets in use among cryptocurrency owners. The one you choose will depend mainly on your personal preferences, your security needs, and the built-in features of each type of wallet. For Carnomaly members, having an ERC-20 compatible wallet ensures you can receive and store CARR Tokens to improve your membership status and potential for rewards.
Below, you’ll find a description of most of the popular types of crypto wallets in use today, as well as the potential advantages or drawbacks of each.
1. Hardware Wallets
Hardware wallets are one of the safest options available, as well as one of the most convenient methods for storing your cryptocurrency. Hardware wallets store public and private keys in a physical device that is highly secure, thanks to its lack of internet connectivity. Any cryptocurrencies stored in a wallet will be offline, which means they are unlikely to be hacked.
Hardware wallets look a bit like a typical USB device with an OLED screen and buttons. Users access the data via native desktop applications.
PROS
- Safe and convenient during usage
- Good for storing keys in a secure physical device
- Ensures that your wallet is offline and unreachable by hackers
CONS
- Subject to improper manufacture or compromise during shipping
- Can be lost, stolen, or broken
- Should only be purchased from trusted manufacturers
- Can be costly
2. Software Wallets
Software wallets are available in a variety of different forms, all of which have their own unique features. Most are connected to the Internet and are considered hot wallets.
Like most software, your choice of a wallet will depend on your operating system as well as the currencies you own.
The three primary formats of software wallets are desktop, online, and mobile.
3. Desktop Wallets
Desktop wallets store your address and key on your own computer via a software download. This means that sensitive information is stored locally on your computer, so it is unavailable to anyone other than the user. Provided your computer isn’t connected to the Internet, that is. Desktops, like web-based applications, can also fall victim to malware and viruses.
Ultimately, without proper encryption and backups, it is still possible to lose access to your funds should anything go wrong.
PROS
- Convenient for trading cryptocurrencies from your computer
- Private keys are never stored on a third-party computer
- They can be very safe, especially when not connected to the Internet
CONS
- More difficult to use crypto assets on the fly
- Is less secure when connected to the Internet
- If you don't have a recent backup and your computer crashes, you'll lose access to your keys and funds.
4. Mobile Wallets
Mobile wallets use a smartphone application to store and manage your private information. They are easily accessible and great for use on-the-go since the user will almost always have their phone with them.
They have an added layer of convenience as well. You’ll be able to use your mobile wallet to pay for goods in any store where cryptocurrency is accepted. They are a great solution for daily transactions and for sending funds via QR codes.
As convenient as they are, mobile wallets are not the most secure option available. They are vulnerable to malware infection and other malicious applications.
PROS
- They can be safer than online wallets
- They're easy to use on the go
- Some provide additional features such as QR code scanning
CONS
- If your phone gets lost, you could lose your cryptocurrencies
- Vulnerable to malware and viruses
5. Online Wallets
Also called web wallets, online wallets allow you to access your public address and private key through your web browser.
Although these are probably the least secure of all crypto wallets, they still offer some advantages that make them appealing to users. Having access to your assets via the web is one of those advantages, making it easy to carry out all kinds of cryptocurrency transactions.
It’s important to research the types of web wallets available and the security features of each. Some, for instance, will hold your private keys on your behalf. This is risky, as you’re trusting a third party with the literal key to your assets.
PROS
- Allows for fast, convenient transactions
- Has the potential to manage multiple cryptocurrencies
- Allows you to be a more active trader
CONS
- Subject to online hacks and scams
- Cryptocurrency is stored by a third party, rather than yourself
- Risk of computer viruses
6. Paper Wallets
When it comes to crypto wallets, it doesn’t get much colder than paper wallets. You might even call them super cold, since they are about as far from being connected to the Internet as a thing can be.
They are, as the name suggests, simply a piece of paper with the data needed to send and receive cryptocurrency printed on it in QR code form.
Funds can be sent by transferring currency to the wallet’s public address. Assets can be withdrawn by scanning the QR code on your paper wallet or entering your private keys.
PROS
- Highly secure. Paper wallets are virtually hacker-proof
CONS
- Can be stolen, misplaced, or destroyed
Which Wallet Will You Choose?
If you’re planning to invest in cryptocurrencies, you will undoubtedly decide that a crypto wallet is a necessity. And when becoming a Carnomaly member, a wallet is your key to proving your CARR Token ownership and earning valuable rewards.
Besides giving you a wide selection of convenient and secure ways to store the public address and private key needed to conduct transactions, you’ll also be able to monitor your balance. Many investors choose to store their crypto assets in a variety of wallets to avoid putting their proverbial eggs into a single basket.
Whichever wallet you choose, remember to keep that private key safe. It is, quite literally, the key to every coin you’ve invested in.