A cryptocurrency wallet is where traders store their digital codes used to interact with blockchain technology. They don’t actively store your cryptocurrencies, which can seem misleading.
To be able to locate the crypto assets associated with an address, a crypto wallet need to interact with the blockchain. Crypto wallets are also ledgers. They function as an owner’s identity and account on a cryptocurrency network and provide access to their crypto transaction history.
Which Type of Wallet Do You Need?
There are many kinds of crypto wallets, but they can be divided into three categories: hosted wallets, non-custodial wallets (also called “cold storage”), and hardware wallets.
Choose your digital wallet based on what you want from your crypto based on how frequently you trade crypto and what kind of safety net you prefer.
A hosted wallet, also known as a non-custodial wallet, is the easiest way to set up a crypto wallet. When you use an exchange, you hold onto your cryptocurrency in a hosted wallet. It’s known as “hosted” because a third party keeps its cryptocurrency for you, similar to the way a bank keeps your money safe in a checking or savings account. You may have heard about people losing their keys or wallets, but with a hosted wallet, you don’t have to worry about any lost keys or wallets.
Crypto users who hold their own private keys and make outgoing transactions using non-custodial wallets become their own banks. It is similar to a bank account, but the main difference is it is controlled by a key that only you control.
Self custody wallets put you in complete control of all your cryptocurrency. A custodial wallet requires a third party to keep your crypto safe, whereas non-custodial ones don’t. You’re responsible for keeping track of your passwords and making sure no one else has access to them. If you lose or misplace your private key (often called a “seed phrase“), there’s no easy way to recover your cryptocurrency. If someone else finds your private key, they’ll be able to access your assets.
A hardware wallet is an electronic device that stores the private keys for your cryptocurrencies offline. Most people don’t use hardware wallets because of the increased complexity and cost. However, they do have some benefits – for example, they can protect your crypto even if your computer is attacked. On the other hand, these advanced security features make them inconvenient to use compared with a hardware wallet, and they can cost up to $100 to buy.
What is the Difference Between Hot and Cold Wallets?
Hot wallets and cold wallets can be broadly classified as either digital or physical. The main difference is that hot wallets are always connected online, while cold wallets are kept completely offline. An online wallet or hot storage wallet is usually considered less secure than an offline wallet (cold storage). Some crypto wallet users might eventually want to upgrade to a cold storage wallet.