Types of Crypto Wallets Explained
Cryptocurrency is gaining popularity here in the United States at an unprecedented rate. After Donald Trump shared his intention to make America the ‘crypto capital of the planet’ and various States have already made a strategic crypto reserve, 28% of American adults currently own at least one form of digital asset. On top of this, a further 14% have suggested an intention to invest in the future. In fact. Crypto is becoming so popular that many see it to be the very future of finance itself.
With all this in mind and coupled with the fact that crypto has countless benefits for investors, including hightened security and the ability to increase in value over time, many individuals have become interested in investing in cryptocurrencies for the very first time. Purchasing crypto is all good and well, but the next step is knowing where to store it. In this article, we’ll take a deep dive into the various kinds of crypto wallets available to crypto investors.
Understanding Crypto Wallets
Crypto wallets work in much the same way as a regular wallet for cash, in the sense that they store your assets. You can get specific wallets for different kinds of cryptocurrency, like Bitcoin wallets and Cardano wallets. Many of these also offer several additional benefits to their users, including the ability to join crypto presales through the wallet itself. However, rather than storing actual currency, it stores passkeys that give the crypto user access to their funds.
Crypto investors use their wallets to send and receive crypto payments. It is simple to do so, and there are multiple ways it can be done. However, the most common way to send money is to enter the recipient’s wallet address, choose an amount to send, sign the transaction using their own private key, pay the transaction fee, and send it.
Types of Wallets
In general, there are two main types of wallets that can then be broken down into further categories and sub-categories.
Custodial Wallets
The first type of wallet we’ll explore is custodial wallets. Custodial wallets, often also referred to as online wallets) are provided to crypto investors by third-party institutions. These institutions store crypto assets for the investor.
Although this can have benefits for the investor, including extra layers of security and protection under a large organization, custodial wallets do go against the decentralized nature of crypto. On top of this, they can be more expensive.
Noncustodial Wallets
On the other hand, noncustodial wallets are not tethered to any kind of institution, and so it depends entirely on the individual investor to store and protect the keys that allow them access to their cryptocurrency. This is the most common type of crypto wallet used by investors.
It does align with the decentralized nature of crypto itself, and often comes with a lower cost than custodial wallets, but if the investor should fall to scams, hacks or data leaks, their assets will be less protected if they were not using a custodial wallet.
Hot Wallets
Hot wallets are a subcategory of the type of wallet, meaning you could have a custodial hot wallet or a noncustodial hot wallet. These wallets rely on a connection to the internet to function. This means that the investor can only access their digital assets through their wallet when online.
Although many transactions and organizing crypto funds are much quicker with a hot wallet than when compared to a cold one, its reliance on the internet does make it more susceptible to digital threats.
Cold Wallets
Like hot wallets, cold wallets are another subcategory of the wallet. This means an investor could either have a custodial cold wallet or a non-custodial cold wallet. Unlike hot wallets, however, cold wallets do not use the internet to store an investor's keys; instead, they are pieces of hardware, such as a USB drive, that give the investor access to their currency.
Although this creates a much slower process to send money, cold wallets are more secure than hot ones, and so these are recommended for crypto investors who are planning to store digital assets over a long period of time.
Hardware/Software Wallets
Usually, hot wallets are software wallets and cold wallets are hardware ones, but this is not always the case. However, a hardware wallet is, as the name would suggest, a crypto wallet that exists in the form of hardware, often resembling a USB drive, that is owned by the investor and is used to store their keys. These are the most common types of crypto wallets, and transactions can be made by inserting the hardware into a compatible device.
On the other hand, software wallets tend to come in the form of applications, either for the investor's desktop or mobile phone. By connecting to the internet, they allow crypto owners to access their cryptocurrency funds, make transactions, check their balance, and a whole lot more. Additionally, many of these wallets are also linked to other crypto services, such as exchanges, so their users can enjoy these platforms as well.
Paper Wallets
When crypto first emerged, with Bitcoin leading the charge in 2009, crypto wallets often came in paper form. This involved crypto owners writing down or typing their keys onto a piece of paper and keeping it secure. Although times have moved on since then, and QR codes, apps, and hardware have all emerged as effective alternative ways of storing crypto, there is nothing wrong with this traditional method.
In fact, many crypto investors prefer it as it keeps the safety of their wallet, and therefore their crypto assets entirely in their own hands. However, paper wallets must be secured properly, for example, in a safe or a deposit box. The investors should also check on it every now and then to ensure the paper hasn’t begun to deteriorate.
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