As a new digital currency that can be transacted online using blockchain technology, cryptocurrencies have arisen as a convenient alternative to traditional wallets and physical storage.
Alongside the debut of cryptocurrencies, a number of technical advancements were made possible that enhanced their functionality and made decentralised platform operations easier. Virtual crypto wallets are essential to this ecosystem, where you store your digital money and interact with different blockchains.
However, there are several types that serve different purposes and utilise distinct technologies. So, how to choose a crypto wallet that suits your needs and how to use them? We will answer these questions in the following.
Understanding Crypto Wallets
Crypto wallets are decentralised tools where you can store your digital assets and cryptocurrencies, and using which, you send money to other users powered by peer-to-peer transactions. When you sign up for a wallet, you receive a systematically generated address, which you can share to receive payments.
A crypto wallet address consists of 26-60 characters, between letters and numbers, which makes memorising them challenging for users and hackers. Especially for crypto hackers who use algorithms to guess your credentials, having a 60-digit wallet address makes their job almost impossible.
To initiate a crypto payment, enter the receiver’s wallet address and insert the amount you want to transfer. Some wallets utilise a QR code that carries the address, which you can scan to select the amount and send the money quickly.
In fact, when you own cryptos in your wallet, in most cases, you do not own the wallet, but you are granted access to interact with your virtual money using the wallet provider platform.
Therefore, when you send payments, you use a private key that authenticates your ownership and allows you to conduct operations on the wallet, such as payments and other activities.
Once a user initiates a crypto transaction, the private key encrypts the payment in a message and gets passed to the blockchain. Once the validating nodes approve the transaction, the receiver’s wallet decrypts the message and releases the funds.
Types of Crypto Wallets
The fundamentals of these wallets are pretty straightforward. However, recent crypto wallet developments saw various types that work differently, which we will discuss below.
Hot Wallets
Hot wallets are online storage where your coins and tokens are located, and you can access them using a crypto wallet provider. Software wallets are the most commonly used to store, transfer and interact with the blockchain and issue crypto payments.
Beginners and those who conduct regular decentralised transactions prefer using an online hot wallet because it is easier to get around and can be accessed within seconds. However, storing your digital assets online makes them vulnerable to hacks and crypto attacks.
Therefore, online decentralised crypto wallets incorporate cutting-edge security measures to safeguard your funds and protect the users' wallets. These wallets are secured by private and public keys integrated into the provider’s structure and are deployed whenever a user initiates a transfer from their wallet.
Cold Wallets
Crypto assets can also be accumulated in physical storage or tangible proof of ownership, such as papers and hardware called cold wallets. A paper crypto wallet is a piece of paper, like a certificate or card, that carries the private and public keys to your digital belongings.
As we mentioned before, owning cryptos in wallets means owning the encryption keys that grant you access to your crypto and NFTs. Thus, encryption keys are printed on paper wallets with a scannable QR code used for quick transactions.
This type of cold storage is considered the safest because all you need to do is keep the paper wallet in a safe place where crypto hackers cannot physically reach it.
The other type is a hardware device, like a USB flash drive, that can be plugged into your computer. These gadgets carry the private keys that encrypt your cryptos and are only deployed by a push of a button on the hardware wallets, making it impossible for hackers to access your wallet.
Using the best cold storage crypto wallets can almost guarantee 100% protection from cyber attacks and hackers because they are handheld and are not available on the internet, away from everyone else’s hands.
However, even the best crypto wallet with the most robust security system faces hacking threats and the chance of exposing funds and wallets to fraudulent bots. Therefore, the best practice is to use a mix between cold and hot wallets and avoid having substantial amounts in a single wallet.
How is a Cryptocurrency Exchange Different from a Cryptocurrency Wallet?
There are clear distinctions between cryptocurrency wallets and exchanges in terms of the services they provide. Cryptocurrency assets like as coins, tokens, and NFTs are stored in decentralised digital wallets. Each wallet has a unique address that may be used to initiate transactions.
Conversely, decentralised marketplaces known as cryptocurrency exchanges facilitate the purchase and sale of various digital currencies and tokens. After linking their wallets, users may swap many assets listed on these sites. Exchanges may be classified as either centralised or decentralised, depending on how private keys are controlled and how activities are managed.
Centralised exchanges, like Binance and Coinbase, handle transactions by putting private keys on the network and acting as a middleman. Peer-to-peer transactions powered by decentralised exchanges, such as Uniswap and Pancakeswap, eliminate the need to give up control of your wallet's private key.
Factors to Consider When Creating a Crypto Wallet
Users have various choices because several wallet providers offer similar services. Therefore, some criteria are crucial to know how to open a crypto wallet.
Security
Wallet security is the biggest priority when choosing your decentralised wallet because all your digital assets and money are accumulated there, and you do not want your storage to be vulnerable to attacks or cyber fraud.
Decentralised finance and online wallets have been the target of crypto hackers for many years, and such activities have stolen millions of dollars. Therefore, it is important to check out the wallet's security features, the structure of smart contracts, and the interaction with blockchain.
Checking the history of breaches and hacks on the wallet is also useful to know whether the software crypto wallet is reliable. Also, you check if the wallet is custodial or non-custodial, determining where your coins are stored.
Usability
Crypto wallets can complicated for new users and beginners, and their interface can be overwhelming. Therefore, go for a software wallet with a user-friendly interface and crystal clear layout and features.
Also, check if a wallet app is available. Apps make it easier to read storage details and initiate transactions without changing windows and tabs.
Having an easy-to-use wallet is important to understand the flow of transactions without inserting the wrong input. Using a hardware wallet can be classified as easier than an online one because it involves minimum interactions and interference by the user.
Compatibility
Besides having the most secure wallet, it is crucial to have a useful wallet with various integrations and listings. Check if the wallet supports the cryptos you are interested in and how many coins you can store. Different wallets interact differently with blockchains, determining the gas fees and the ease of conducting transactions.
Check if you can integrate your wallet with different exchanges, decentralised Web 3.0 platforms and crypto games, which allows you to use your digital money smoothly and interact in the decentralised ecosystem.
Private keys
Private keys are the way to your wallet and crypto money. Therefore, keeping them in a safe place, whether using a cold or hot wallet, is vital. Securing your private keys using a cold wallet is easier because you can physically store the USB device or paper certificate in a secure place like a safebox or somewhere you can reach.
On the other hand, using online wallets is riskier because your information and keys are stored on web wallets and platforms. Therefore, go for wallets that incorporate two-factor authentication and other security measures that do not facilitate access to your private keys.
Fee structure
Different wallets interact differently with the blockchain and have various fee structures. The best crypto wallets power cross-chain interactions, which scan several blockchains and networks to accommodate the lowest fees possible at high speed.
Some wallets have preset fee structures for different transaction speeds. For example, if you want to speed up your transfer, you must pay more, while you can choose lower gas fees, but the transaction will take longer to settle.
How to Choose a Crypto Wallet
Selecting a crypto wallet is a crucial step because you need to consider a lot of criteria and measures to safeguard your virtual assets and money. Therefore, here is how you can set up a crypto wallet.
Set Your Expectations
Understand how crypto wallets work and determine the goals of owning one. Choose the use of the wallet, whether you want it for personal or business use, what crypto coins you want to store and how much you want to store. These factors help predetermine your requirements when searching for the right crypto wallet.
Check Out Compatibility Issues
Find out if the wallet has a mobile application and is compatible with your device(s). Check out the transaction process and learn how to initiate transactions without hassle or switching between windows and apps.
Review The Wallet
Look through the reviews and feedback on the wallet, which can give you an idea of what you can expect and the provider’s service level. You can also review if the wallet system has a history of breaches or online hacks.
Review Security Features
Check if the wallet powers various security measures like 2FA, seed phrases, fingerprint access, one-time password, and other steps that secure your crypto belongings.
How to Set Up a Crypto Wallet
Once you have learned enough about decentralised wallets and how they work, creating one becomes easier. Although, the steps may differ based on your need from the wallet.
- Find a crypto wallet provider like B2BinPay, Coinbase, or Binance, which offers the best and most secure environment to store, transfer and pay with cryptos. Register your account and set up your profile on the provider’s website or platform.
- Save the seed phrases generated by the wallet. Upon first-time registration, the crypto wallet will present you a unique secret phrase, “seed phrase,” that consists of 12-24 words. You will need to re-enter these words and save them in a safe place. Securing these words is crucial because they grant you access to your wallet, and compromising them can cause you to lose access to your funds.
- Set up security access to your wallet, such as two-factor authentication, face ID, or fingerprint access on the mobile app. These measures are crucial to safeguard your cryptos.
- Connect your wallet with exchanges and decentralised platforms if you want to start transacting and sending blockchain payments. You can connect to DEXes to purchase cryptos or explore play-to-earn platforms where you can play games and earn tokens.
Multi-Sig Wallets
Multi-signature wallets are common for corporate uses when more than one person needs to operate and transact on the same wallet. These software wallets may include more than one user, where transactions are only approved if the consensus is reached and the majority confirms the operation.
Each user on the multi-sig wallet may have different configurations and access to the stored funds, and the admin can add or remove users. This promotes the safety of funds and ensures that no one misuses the wallet or the money stored.
Conclusion
Decentralised crypto wallets are tools to store your virtual money. These tools offer online and offline wallets to receive, pay, and transact with cryptos on different platforms and websites.
There are several wallets and types with distinct features. You can find cold wallets that use physical devices to store your money or hot wallets that store your digital money online on various platforms and providers.
It is crucial to set criteria on how to choose a crypto wallet based on your needs and evaluate the security measures before you create an account. Choosing the right wallet helps you store large amounts of cryptos in a safe environment away from hackers, which you can safely use to interact with other users or grow your crypto business.
