Types of wallets

What is a crypto wallet?

A crypto wallet (or simply wallet) is a device, program, online service or physical medium that stores the public and private keys necessary to carry out cryptocurrency transactions. Unlike a traditional wallet that stores money, cryptocurrencies are not stored in the wallet itself but in the corresponding blockchain. The keys stored in the wallet are necessary to have access to these funds. Therefore, the wallet works as a bridge between users and the blockchain networks.

The wallet works by generating a sufficiently random number to be converted into the private key. Then the public key is derived from it through cryptographic operations. The public key can be shared freely because it functions as an address where others can send cryptocurrency. However, the private key should only be known to the owner because it grants access to the cryptocurrencies.

Hot wallets

Crypto wallets can be divided into two large groups: hot wallets and cold wallets.

Hot wallets are connected to the internet and accessible from electronic devices such as computers, smartphones or tablets.

Advantages

• They offer greater accessibility because they are connected to the internet as well as ease of use because they have easy-to-navigate interfaces.
• It can usually be obtained for free, and some wallets even offer interest on stored cryptocurrencies.

Disadvantages

• Because these wallets are connected to the internet, they are vulnerable to being hacked.

Types of hot wallets

• Software wallets: These are applications that can be installed on a computer (desktop wallets) or a mobile device such as a smartphone or tablet (mobile wallets). They are useful for daily payments.
• Online wallets: These are online services that grant access to funds from any electronic device with an internet connection.

Cold wallets

Cold wallets are not connected to the internet, so they store public and private keys offline. Unlike hot wallets, cold wallets have a physical form and are tangible.

Advantages

• Because cold wallets are disconnected from the internet, they offer a higher level of security against cyberattacks.
• They are convenient for users who wish to store cryptocurrencies for the long term.

Disadvantages

• Hardware-based wallets may be costly.
• Because keys are stored offline, customers need to complete an additional step to make transactions.
• They are susceptible to physical damage, so it is necessary to take preventive measures to avoid data loss.

Types of cold wallets

• Hardware wallets: These are physical devices, usually in the form of USB, that store keys offline, reducing the risk of hacking. They can work with several blockchains at the same time, which allows managing different cryptocurrencies.
• Paper wallets: These are physical documents containing the user's keys. Using free tools dedicated to creating paper wallets, these keys are generated and then printed on a document. The printed paper should be kept in a safe place to prevent theft or deterioration.

Combining wallet types

In finance, diversification of an investment portfolio reduces risk. Similarly, a combination of different types of wallets can be used to avoid exposing all funds to cyber-attacks, damage or theft. In this scenario, it would be optimal to use a hot wallet for regular transactions, and a cold wallet for storing larger amounts of cryptocurrencies over the long term. Because the needs of someone who trades and someone who saves for the long term are different, it is important to make an assessment of which type of wallet is most suitable.