Handy, practical, suitable for every pocket and ideally theft-proof: what wallets need to offer for everyday use. The same also applies to the digital age. Anyone trading in cryptocurrencies needs a crypto wallet in order to send and receive Bitcoin and other cryptocurrencies. But just like in the analogue world, customers must face the tyranny of choice. When it comes to crypto wallets, there are countless solutions. The use of digital wallets worldwide is also increasing exponentially. According to data from Bitcoin-On-Chain, there are now more than one billion wallet addresses in existence. And that's only for this specific currency. To find out what you need to be aware of when choosing your wallet, which types of digital wallets are available and how they differ from one another, read here:
The tool for the blockchain – crypto wallets
Crypto wallets are a must if you want to use the blockchain. That's because they are the interface to a blockchain and help you interact with it and trade in a cryptocurrency in the first place. To ensure that cryptocurrencies can be sent and received, every digital wallet has an address consisting of a random sequence of numbers and letters. This address is variable: for every transaction, a new address is generated as a link that is ideally only used once.
Unlike physical wallets that contain money, the currencies are not kept in the wallet itself. Instead, the wallet is more like a pocket used to store public and private keys. These keys are the actual means of accessing digital currencies. If you own the private key, you are automatically the owner of the respective cryptocurrency stored at the address of your wallet. Since both keys are generated by the digital wallet, it is important to carefully select the corresponding wallet.
Hot and cold: an initial distinction between wallet types
A basic distinction is made between the two types of wallets. Like other storage systems, a distinction is made between 'cold' and 'hot'. A cold wallet is stored offline and is not connected to the internet. 'Cold' storage is less suitable for active trading. This type of storage is ideal for investments and larger sums because cyber criminals have no way of accessing the wallet.
On the other hand, solutions referred to as 'hot wallets' are more suitable for active traders. In this scenario, the wallet is stored on a computer connected to the internet. The software – often in the form of an app – can therefore be installed on a mobile terminal, a cloud server or a laptop. This type of electronic wallet is particularly suitable for beginners but is also a popular storage method among investors who trade on crypto exchanges. The downside? Since it is connected to the internet, this type of storage is more vulnerable to cybercriminals – as demonstrated by the hack of the KuCoin crypto exchange in 2020 when hackers managed to steal cryptocurrencies valued at USD 285 million.
There are also other subtypes of hot and cold wallets.
Cold as ice: hardware and paper wallets
The hardware wallet is probably the most common cold-storage medium for storing access keys. And as the name already implies: the user has a physical terminal unit that is usually the size of a USB stick. This is extremely practical because most users want portable yet durable devices.
A 'physical' crypto wallet's biggest advantage is its security. After all, this type of wallet only connects to the internet via the manufacturer's web portal. This presents a very small target or back door for cybercriminals to exploit.
A paper wallet is a special form of cold wallet. These were extremely popular when Bitcoin first emerged. The name 'wallet' is slightly misleading in this case because it does not explicitly refer to storage per se but rather to the generation of a wallet address and printing the private key as a QR code on paper. However, experts advise against using this type of storage because the technology is considered obsolete and risky. For instance, accumulated coins will be irretrievably lost if the QR code is damaged or lost.
Practical and flexible: online, mobile and desktop wallets
This crypto wallet is an online application to send and receive digital currencies. The key is stored online and hosted with the respective crypto exchange. These electronic wallets are very handy and are often recommended as a way to get started in trading cryptocurrencies since the barrier to entry is low. They are also suitable for people with a low level of technical expertise. Nevertheless, these wallets have one significant disadvantage. Since the keys are stored online, they are popular targets for cybercriminals. That's because virtual wallets can be compromised not only with stolen login data but also with ransomware.
Two other forms of online wallets are mobile wallets and desktop wallets. Technologically speaking, they are almost identical to standard web-based wallets. The difference? You can easily trade with the corresponding cryptocurrency using an app on your smartphone. Desktop wallets are also software-based. However, they are stored as a program file on your desktop computer, so caution is also advised. Hackers can use remote access trojans (or RATs), for example, to infiltrate your smartphone and steal your login data and bypass additional authentication steps. Therefore, the fundamental principle is that wallets are only as secure as the terminal on which they are installed.
Especially if you use digital wallets that fall into the 'hot' category, it is important to maximise their protection against cyberattacks. With two-factor authentication, you can protect your private keys with two independent access components and stop hackers in their tracks.