Crypto wallets - A simple explanation

Crypto wallet

By Anycoin Direct

A crypto wallet comes in many varieties. We will review the different variants in this lesson so that you can make an informed choice about how you want 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 spend coins that are yours. Each wallet can connect to the actual place where all crypto coins of a particular network are stored: the blockchain.

Storage with crypto wallets

When you think of a cryptocurrency wallet, you quickly think of a hardware wallet like the Ledger Nano S or a Trezor. Yet there are quite a few crypto wallet variants that you would not think of so quickly. First, let us 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. Someone who can get through your security measures can steal your coins from a hot wallet. So always turn on 2FA if possible, because there is only one of your mobile phone. Hot wallets are most 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 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 crew, people who hold their cryptocurrencies for a long time and hardly ever trade.

Preparing crypto storage

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 set up a seed phrase and password. This consists of a series of words to be written down in a certain order that will allow you to access your funds if, for example, you lose your computer or laptop, or it crashes.

Security 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 in one place. If someone hacks your computer, the hacker will have all your seed phrases and passwords together in one file. Very handy if you are 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 the information is to access a large sum of money when something has gone wrong, or you are asked for it.

For the sake of 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 so 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 some questions. For example, the fee per trade is important for people who trade a lot. For others, security of your coins is important and then you quickly think of very large exchanges, because they invest heavily in security (and have the money for it). Language can also be a barrier.

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

Ownership of crypto

An added consideration here is that these coins are not technically yours. 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 is 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 larger the site, the more likely they have the money to handle this decently.

Decentralized exchanges

A decentralized exchange (DEX) requires connecting to 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. Fees are quite high, especially on a DEX running on Ethereum.

Security on a DEX

They are also often like jungles, which you must rake through with your machete. They get counterfeited quickly, so the original site should be in your favorites. You must 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 can 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, then you do not want thousands of dollars involved. Lose a tenner then you will get over that.

Shitcoins and hitcoins

The most common reason to trade on a DEX is to gamble on coins that are not yet available on the major exchanges. Shitcoins like Floki or Shiba Inu once started here. Had you put a tenner in both 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 few software crypto wallets available, and many are available for 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 are 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 vigilant about security with this form, because if you have access from anywhere, so do hackers if they get through your security.

Desktop wallet

As the name suggests, 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 is very convenient to trade with your phone. You always have that thing with you when you are under 50! However, it does have some snags. A PC today is enormously well protected against viruses, trojans and other unsavory creatures. We cannot say the same for cell phones. They are working on it, for sure, but let us face it: cryptocurrency often involves large sums of money. Do you want an 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 one that is made of paper. I guess that is why they named it that way. Since paper is always offline, it is a very safe 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 most secure way to store your cryptocurrencies. Coins are stored offline on a piece of hardware that can withstand all sorts 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 need to pay close attention. Always write down the seed phrase or back up phrase immediately upon first use and make sure you do not 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 on 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 cannot 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 access your cryptocurrencies that were on your old hardware wallet again. 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 about crypto wallets, you can make an informed decision about where to store your cryptocurrencies.

Big investments and long-term investments

A few things are important in this. If you have a very large amount of money invested, it is probably smart to purchase a hardware wallet, as these are the most secure. These are not the most convenient when 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 when investing long term.

Day trading

If you are a day trader and you trade a lot, it might be handy to store your coins on an exchange, so you can use the advantages of exchanges, such as setting up 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, though, so do this on the large and secure exchanges.

Other considerations

If you always want to have access to your crypto coins, a web wallet is worth considering. The lack of security is then compensated for by having access to your coins anywhere anytime. If you want to gamble on weird coins, shitcoins, new coins or simply 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 do not like computers, you can consider a paper wallet. Strange that you see something in cryptocurrency then, 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