Crypto wallets - A simple explanation

Crypto wallets a simple explanation

By Anycoin Direct

A crypto wallet is a physical or virtual storage medium to store your cryptocurrency using private and public keys. A crypto wallet comes in many varieties. We will review the different variants in this lesson so that you can make an informed choice on how to store your cryptocurrency.

Crypto wallet

A crypto wallet is a physical or virtual storage medium to store your cryptocurrency. When you store your crypto coins in a wallet you get a public key and a private key. By using your public key you can receive coins, with your private key you can issue coins that are yours. Each wallet can connect to the actual place where all the crypto coins of a particular network are located: the blockchain.

Storage at crypto wallets

When you think of a cryptocurrency wallet, you quickly think of a hardware wallet like the Ledger Nano S or a Trezor. Still, there are a good number of crypto wallet variants you wouldn't think of so quickly. First, let's list the storage:

  1. Hot wallet.

  2. Cold wallet.

With temperature, hopefully this has little to do.

Hot wallet

A hot wallet means that the coins you store in it are connected to the Internet. So we mean hot storage. So someone who can get through your security measures can also steal your coins from a hot wallet. So always enable 2FA if possible, because there is only one of your phone. Hot wallets are most commonly used by people who trade a lot.

Cold wallet

Coins held on cold wallets are very secure. People do not have any access to your cryptocurrency because they are nowhere to be found on the Internet. They are safely stored in a place that only you have access to. This is called cold storage or also called offline storage. The only time you are at risk is when you start trading your cryptocurrency on the Internet. The cold wallet is the favorite of HODL'ers, people who hold their cryptocurrencies for a long time and hardly trade at all.

Preparation storage of crypto

If you decide to store your coins anywhere you will need to keep pen and paper handy. Everywhere, except perhaps with a paper wallet, you will need to have a seed phrase and set a password. This consists of a series of words to be written down in a certain order that allows you to access your funds if, for example, you lose your computer or laptop or it crashes.

Safety first

If you write down this seed phrase do it on paper and not in a file online. If you save all your information in one file you have everything together in one place. If someone hacks your computer, the hacker will have all your seed phrases and passwords together in one file. Very handy when you're on the bandwagon! Buy a notebook and put all your important information in that notebook so you know where your login codes, seed phrases and other important information is when you create an account somewhere. Nothing more annoying than scouring the entire house for where you also have access to a large sum of money when something has gone wrong or is asked for it.

For form, we will also point out the difference between custodial wallets and non-custodial wallets. With the former, the private keys of your coins are owned by the wallet owner and with the latter, you own them, making you, in effect, the owner of the crypto as well.

Choosing a type of crypto wallet

Before you start storing cryptocurrency you will also have to ask yourself which crypto wallets you will do that on. The following list consists of the ways you can do that:

  • Exchange wallet

  • Software wallet

  • Web wallet

  • Desktop wallet

  • Mobile Wallet

  • Paper wallet

  • Hardware wallet

Exchange wallet

If you are going to store cryptocurrency on an exchange you will need to ask yourself a number of questions. For example, the fee per trade is important for people who trade a lot. For others, the security of your coins is important and then you quickly think of very large exchanges, because they invest heavily in security (and also have the money for it). Language can also be a barrier.

So once you've made all the considerations and chosen to hold your coins on an exchange, the first thing you need to do is start writing down your seed phrase. Sometimes you can also write other things in the security section. One thing you should always do is turn on two factor authentication. There's only one phone in the world that always shows the correct code in Google Authenticator or Authy and that's your phone. Take advantage of that.

Ownership of crypto

One consideration that comes with this is that technically these coins do not belong to you. The private keys are owned by the exchange and you do not notice much of that, except if the exchange goes bankrupt or there is a hack. Then your funds might be gone, which can never happen with coins whose private keys you own. "Not your keys, not your coins" is a well-known saying in the crypto world and means exactly this.

What if?

Most exchanges keep most of their cryptocurrency in cold storage so no one can get their hands on these funds. Still, it's a good idea on a rainy day to check with the exchange where you keep your coins to see how they handle theft, hacking and other unsavory issues. Do they pass the handling on to their customers or are they insured for this? The bigger the site, the more likely they have the money to handle this decently.

Decentralized exchanges

A decentralized exchange (DEX) requires contacting crypto wallets such as MetaMask, Binance Smart Chain Wallet or Trust Wallet. These wallets exist as extensions in your browser that connect to the exchange. For this reason, they are also known as DeFi wallets. If you store your coins here, they are virtually unprotected against theft. Anyone who knows your password can access your funds. Since they are impersonal exchanges with no support team: you are on your own here. However, you are in possession of the private keys. Therefore, your password must be very strong here. The fees are quite high, especially on a DEX running on Ethereum.

Safety on a DEX

They are also often like jungles, which you have to rake through with your machete. They are quickly copied, so the original site should be in your favorites. You have to work with contracts of coins (it goes too far to explain all this here), you have to know the right network, you can work with bridges, you may have to deal with fake coins, in short, this is a dangerous place to trade unless you know exactly what you are doing.

If you are going to trade here start with small trades. We all make mistakes, especially on a DEX, you don't want it to be thousands of dollars. If you lose a tenner you'll get over that.

Shitcoins and hitcoins

The most common reason to trade on a DEX is gambling on coins not yet available on the major exchanges. Shitcoins like Floki or Shiba Inu once started here. Had you put a tenner in both of these coins when they were listed you would probably be rich now. If you are careful and pick the right ones, you can make good money with these. In terms of crypto wallets, they are dangerous places to have a lot of money on.

Software wallets

A software wallet is a program on your computer where you can store crypto and exchange crypto. Again, you are in possession of the private keys. There are now quite a number of software crypto wallets already available and many are free, such as Exodus Wallet or Jaxx Liberty. With any luck, you can also turn on 2FA on them. In any case, you will have to write down your seed phrase and password offline. If you're afraid of fire, you can even store your important information on a titanium plate. These plates can withstand more than 1,500 degrees Celsius, so if you have a lot on them this might be a very good protection.

Web wallet

By a web wallet, you can think of online crypto wallets offered by large parties such as Coinbase or Binance. A web wallet can be used from any location connected to the Internet. This is very convenient if you are at the train station waiting for a train and just want to make that trade on your cell phone or from your laptop at work. You will always have access to your cryptocurrency. You will have to be extra careful about security with this form, because if you have access from anywhere, so will hackers if they get through your security.

Desktop wallet

The name says it all, these are crypto wallets made for the PC. The usual security measures apply and you are in possession of the private keys. One disadvantage of this is if your computer is hacked. Therefore, always make sure you have a good back up, especially of your seed phrase and password.

Mobile Wallet

Of course, it's very convenient to trade pot with your phone. You always have that thing with you when you're under 50! However, it does have some snags. A PC today is enormously well protected against viruses, trojans and other unsavory creatures. We can't say the same for cell phones. They're working on it, for sure, but let's face it: cryptocurrency often involves large sums of money. Do you want a fairly unsafe device to vouch for your assets? We therefore advise against using mobile wallets when trading cryptocurrencies, unless it involves small amounts or if they can guarantee security on your mobile.

Paper wallets

A paper wallet is a wallet made of paper. I guess that's why they named it that way. Since paper is always offline, it is a very vellish way to store your private keys. However, we do have some comments on this. Paper is very fragile. It is susceptible to both fire and water, in addition to simply wear and tear. Perhaps you can get around many problems already by plasticizing it, but it is still inconvenient. Theft is also a very real option. Our verdict: darned inconvenient, unless you know exactly how to handle paper wallets.

Hardware wallets

This is the velligest way to store your cryptocurrencies. Coins are stored offline on a piece of hardware that can withstand all kinds of unsafe conditions. Always buy a new hardware wallet, as a second-hand one may be unsafe due to the seed phrase, allowing the previous owner to empty your wallet. The price for a hardware wallet is between 50 and 150 euros.

Operation of hardware wallets

When setting up, you must take great care. Always write down the seed phrase or back up phrase immediately upon first use and make sure you don't lose it under any circumstances. A hardware wallet, like the Trezor or the Ledger Nano S, is a kind of USB stick, where you can store your crypto and connect via a USB port on a device like a PC or laptop. When you launch such a thing, it asks you for your login information, such as your PIN. Some hardware wallets hide your PIN from hackers by generating different characters on the device you connect to (such as your PC) than on your hardware wallet. You can also turn on two factor authentication for security. Once you have satisfied it, you can connect to your existing coins or add a new coin, such as a Bitcoin wallet.

Transactions on hardware wallets

Be careful to send cryptocurrencies to the right addresses when trading with hardware wallets. If large amounts are involved, it is helpful if you look carefully at the addresses and at least check the first and last characters. If you do small transactions first and it works, it should work with higher amounts as well. Also turn on your 2FA (this is called U2F on hardware wallets) so you can't be hacked.

Loss of your hardware wallet

Should you lose your hardware crypto wallet or it has become unusable, you can buy a new one and configure it as an existing wallet (from your previous one) with your back up phrase, allowing you to again access your cryptocurrencies that were on your old hardware wallet. Great system, in other words. There is also a nice trick on such a thing. You can work with two pin codes. One PIN is for use by someone who forces you to give them your PIN, then they get access to your account where you only have small amounts of money. The other PIN is for the millions you also have on it, but hidden under another PIN.

Choosing a crypto wallet

Now that you know just about everything there is to know about crypto wallets, you can make an informed decision about where to store your cryptocurrencies.

Large investments and long term investments

A few things are important in this. If you have a lot of money invested, it is probably smart to purchase a hardware wallet, as these are definitely the skinniest. These are not the most convenient for trading, but if you use them often enough you will get comfortable with them. Since nothing can happen to your coins you can sleep peacefully. A hardware wallet is also very safe for long term investments.

Day trading

If you are a day trader and you trade a lot, it might be useful to store your coins on an exchange so that you can use the advantages of exchanges, such as setting a stop loss or an OCO trade. Setting up a new trade is then a matter of a minute. You are then at the mercy of the security of the exchange itself, so do this with the large and secure exchanges.

Other considerations

If you want to be able to access your crypto coins at all times, then a web wallet is worth considering. The lack of security is then compensated for by having access to your coins from anywhere so you can trade. Want to start gambling on weird coins, memecoins, new coins or simply going to farm or provide liquidity on a DEX then you probably won't escape browser extensions like MetaMask or Trust Wallet. Some expertise and reading up is necessary. If you are from the old guard and have nothing to do with computers, you can consider a paper wallet. Strange that you see something in cryptocurrency, but well, who are we to judge!

Test your knowledge

Question: 1/5What is meant by a hot wallet?
AA wallet that you must keep refrigerated
BA wallet that contains stolen coins
CA wallet that is connected to the internet
DA wallet containing coins that have risen a lot