A cryptocurrency wallet is no different from the physical wallet you use on a day to day basis. Similar to the main function of a wallet, which is used to hold cash, cryptocurrency wallet is used to hold cryptocurrency.
Before you understand what a Crypto Wallet is, let’s learn about private keys – the most important secret to never tell anyone else in your life!
Private key explained
Private keys are a secret number or string of words and phrases that act as a password for your wallets. This key is also used to sign transactions and prove ownership of your wallet and its respective address. Anyone who has the private key has access to the wallet – thus, it is key for you to never share this with anyone! Pun intended.
Now, let’s learn about wallets! Cryptocurrency wallets can be categorised into two main types: hot and cold wallets. It is essential to understand your needs and choose the right type of wallet!
Hot wallets explained
A hot wallet is a form of software wallet that is connected to the Internet. It can come in many forms from web-based wallets to mobile wallets. The best thing of all is that hot wallets are free!
In the event that you want to venture out and explore what decentralised finance (DeFi) has to offer, the most convenient way to interact with decentralized applications (dApps) is via a hot wallet.
Funds on hot wallets are also easily accessible and there is no need to transition between offline and online to make a transaction. As hot wallets require a connection to the internet, they are more vulnerable to digital attacks.
Cold wallets, on the other hand, would require users to transfer the funds into a hot wallet before they are able to make a transaction.
Cold wallets explained
Cold wallets or cold storage is a physical hardware device that allows the user to store cryptocurrencies completely offline. Many come in the form of a USB stick and can range from US$30 to over US$200.
Because the device is able to store crypto offline, it can protect the stored investment from online hacks and digital attacks.
There is a trade-off between accessibility and security as cold wallets are less convenient because the device must be connected to the Internet before any transaction can be made.
Most established Centralised Exchanges will use a combination of hot and cold wallets. They will store the majority of their funds in a cold wallet and only just enough liquidity in a hot wallet to service withdrawal transactions. This will ensure that majority of the funds are kept safe and sound in a cold wallet.
Bonus Tip: Only buy cold wallets directly or from an authorised dealer as second-hand devices might be tampered with and your security might have been compromised.
Interested to learn more? Find out more on the differences between Hot and Cold wallets!
This educational course is created in collaboration with Luno Discover – your beginner-friendly cryptocurrency education portal. For more bite-sized learning and webinar invitations, join Luno’s Telegram Channel.