What is a Cryptocurrency Wallet?

Cryptocurrency wallets are software or hardware devices that enable users to keep their crypto assets in a secure area and make it easy to send, receive and spend crypto-assets easily. These wallets are distinguished from each other by the Blockchain networks they support, the form they have, the encryption technologies they offer, or their centrality rates.

So, what technologies do crypto wallets deploy to provide users with all this? What place do smart contracts have in crypto wallets? What are the types of crypto wallets? We took care to answer all your questions in this detailed Cryptocurrency Wallets Beginner’s Guide!

KEY TAKEAWAYS

• A cryptocurrency wallet can be a mobile application, desktop application, or browser extension that allows users to access their crypto assets online, or it can be hardware where users store their assets in a way that cannot be accessed online.
• While cold wallets ensure that assets are stored in a way that cannot be accessed over the internet connection, hot wallets do the opposite. Each wallet type has advantages and disadvantages.
• Cryptocurrency wallets can be divided into custodial or non-custodial, depending on who owns the private key control.
• In custodial wallets, private key control belongs to the third party, while in non-custodial wallets, all control belongs to the user. In this case, only the user is responsible for key security.

The Definition of Cryptocurrency Wallets

A cryptocurrency wallet can be a mobile application, desktop application, or browser extension that allows users to access their crypto assets online, or it can be hardware where users store their assets in a way that cannot be accessed online.

Basically, cryptocurrency wallets are divided into two: hardware wallets and software wallets. You can think of a hardware wallet as a flash disk that contains your cryptocurrencies. It is not possible to access your assets on this disk or to send or receive them online unless you plug them into a computer and type the private key.

Type of Cryptocurrency Storages: Hot Wallets and Cold Wallets

When you think of how to store your crypto, you can think of 2 different types of wallets in the market: cold and hot ones. In particular, hot wallets can be divided into different sub-categories according to compatibility features they have. For example, some Blockchain hot wallet products can be built into your browser as an extension. In this case, they provide automatic filling of web forms when you are trading on different exchange platforms on your computer and save you time.

Let’s take an overview of each type of cryptocurrency wallet.

Hot Storage Cryptocurrency Wallets (Software Wallets)

Storage areas that allow you to access your cryptocurrencies online, which you can use without any downloading from a phone application, desktop software, or the web, are called hot storage crypto money wallets. It is called hot because you can access these wallets at any time and transfer your money instantly or use it for online shopping.

We will discuss the advantages and disadvantages of wallet types in more detail later. However, at first glance, we have to say that the fact that hot wallets make your money accessible over the internet may also make your money relatively more vulnerable to cybercrime. However, hot wallets are also for cryptocurrency holders.

Type of Hot Wallets

Let’s have a look at the subcategories of software cryptocurrency wallets:

HERE IS A PROMISING FACT
Due to its decentralized network nature, the cryptocurrency world was heavily mentioned in the news of fraud, theft, and cybercrime in the early stages. However, both cryptocurrency exchanges, wallet apps, and other DeFi service portals seem to know better than ever to raise the level of security. The most recent research says that in 2020, the incidence of cryptocurrency theft decreased by 57 percent compared to the past.

How to Increase Security of How Wallets?

You can follow certain practices to increase the security of your digital cryptocurrency wallet. It is important that you choose a software wallet that supports security measures such as 2FA so that you can keep your assets reliably enough. However, it will not be enough to content yourself with the security options offered by the wallet app alone. To increase your security, to ensure that your data cannot be accessed by anyone but you, and to minimize security vulnerabilities, the best practices are as follows:

1. Installing from the official website – Make sure to download your hot wallet from the official website of the respective company. This warning may sound ridiculous at first, but internet scammers can direct users to download malicious software with domains that are quite similar in name to official websites. Phishing, a popular fraud method in the crypto world, is based on redirecting users to fake websites via SERP pages or mail inboxes and giving their personal information to websites with malicious software.
2. Use private connection – Avoid choosing public Wi-Fi when transacting over hot wallets. It may make sense to use a VPN from time to time while trading and ensure that you are untrackable.
3. Protect your device – Make sure that you also protect your hardware device using the hot wallet with strong enough passwords. This warning might sound ridiculous too, but you don’t want to know how many people have been scammed just because of this error.
4. Use the latest software – Make sure your computer, phone, or Mac is updated with the latest software. The most up-to-date software is usually related to the operating system and virus protection programs. Security vulnerabilities may be exposed on your device using outdated software.
5. Employ 2FA – A password-only login confirmation is never enough. Make sure to activate the 2FA confirmation through the Wallet application and ensure that verification is requested from both your e-mail address and phone number when logging in or transferring significant amounts of money. It can be tiring while you do the process, but it’s a really good security measure for you. In addition, some exchange platforms and wallets help you to make sure that you do not face the phishing threat by sending e-mails containing a secret key which is an encrypted word that you specify. For example, Binance sends you verification e-mails with the code you specify in the Anti-Phishing messages.
6. Back up your digital wallet – Back up your hot wallet regularly. For this, you need to save your seed phrase in a safe place. But since everything is already available online, we recommend that you keep this “back-up” security measure in an offline area. A notebook can be a good place to keep an agenda seed phrase that you’re sure not to lose. Make sure every word is spelled correctly as you take your note. Otherwise, you will prove your access to your own assets. Some users prefer to write each of their 12-word private keys on a separate piece of paper and hide them in different parts of the house. Precaution won’t hurt, right?

Best Cold Storage Cryptocurrency Wallets (Hardware Wallets) 2022

Hardware wallets, which allow your cryptocurrencies to be stored completely offline, and make them not accessible online, can be considered more secure in protecting your assets from malicious software or viruses that you may encounter through the internet network. However, these features of the devices cause them to prevent you from making instant transfers using your money, that is, you have to connect the hardware to your computer every time you make a payment, transfer your assets, etc. In short, while they’re fine for “money to set aside and forget about,” they can be a real torture for money that’s constantly in the flow.

We wanted to share with you a few different cold wallet options that crypto experts recommend most in terms of security options, price-performance ratio, and shapes and sizes. Check out:

Ledger Nano X

• Connects to devices with USB connectivity.
• Provides in-built trading support with the Synched app.
• Provides crypto management support.
• The price is approximately 60 USD.

This cold wallet, which you can buy for about 120 dollars and looks like a standard USB memory from the outside, can be used for 1,800 currencies and tokens. The device can be connected to your computer or mobile device with both a USB cable and Bluetooth technology. In particular, the ability to connect to mobile devices via Bluetooth is a feature that distinguishes the device from others and makes it easier to use. However, it should not be forgotten that any wireless connection can also pose a risk of security vulnerabilities.

Trezor Model T

• Android users can access the wallet with the app.
• It does not offer support for the IoS operating system.
• You can connect your wallet to Chrome or Firefox using Trezor Bridge.
• It offers crypto trading support with Synched app.
• Provides crypto management support.
• Its price is about 160 USD.

The Trezor Model T, which you can buy for approximately 160 dollars, makes it possible for users to reach third-party exchanges and transfer from them, unlike simple cold wallet options. The device also has a touch screen.

Trezor Model T is one of the first choices of those looking for an extra advanced model in terms of security. Because the device’s MicroSD card port technology allows you to additionally encrypt your PIN and protect the device against any cyber-attacks.

CoolWallet Pro

• Supports Tron (TRX), Cosmos (ATOM), PolkaDot (DOT), BEP20 token- BNB, BEP20 official and customized tokens, TRC20 Tokens, and more.
• Has an integration with DeFi apps like Rarible and Opensea. You can easily trade.
• Uses Secure Element (SE) with high CC EAL6+ rating to protect your assets.
• Very easy to carry as it is 0.8 mm thick, you can place it in your wallet like any credit card.

CoolWallet Pro, one of the first choices of cryptocurrency holders who frequently make use of DeFi technologies, is an alternative you can buy for around $150. The most important feature of the device is that it resembles a simple credit card or hotel room lock card. You can easily put it in your wallet and carry it with you, you don’t need a separate storage area.

It is possible to say that the device, which uses technologies such as EAL6+ secure element (SE) for security, supports sign-in operation with different algorithms. For those who are worried about the physical safety of the device, we have good news: The device is completely tamper-free and water-resistant.

Trezor Model One

• Especially recommended for those who want to store more than one type of cryptocurrency.
• Can work with Android, OSX, Windows, and Linux operating systems.
• You can customize various features of the device through the website.
• Can integrate with other third-party wallets.
• Uses EAL5+ security protocol to protect your assets against cyber attacks.

Trezor allows you to easily personalize and control your wallet through its interactive website. Those who use the Trezor Model One get a wallet that follows the standards created by the recovery seed SatoshiLabs. This means a hardware wallet that can integrate with many third-party secure wallets.

See more cold wallets that are considered bests!

Did you know that you can extend your recovery phase up to 24 words on all the Trezor crypto hardware wallets? Yeap, that is right.

So, what’s the difference between the Trezor Model T and Trezer One we just talked about? Let’s say right away: PIN entry, passphrase entry and device recovery operations for security protection can be performed by connecting your Trezor One to the device. The Trezor Model T can do this without connecting to any device. Moreover, Trezor Model T has FIDO2 authentication and microSD card support. Trezor One doesn’t have them.

We can say that both wallets are extremely sufficient as the main advantage and level of security offered to users. Of course, the Trezor Model T comes with extra features.

Discover more of the best crypto hardware wallets.

What to Consider While Choosing A Cold Wallet?

Before buying a cold wallet that is safe, convenient, and easily portable enough for your cryptocurrencies, do not forget to review the following factors in market research:

How to Increase Security of Cold Wallets?

Hardware wallets, unlike hot wallets, do not store your coins accessible with an internet connection, increasing the level of security. But that doesn’t mean “zero risk”. Of course, the worst-case scenario is that you lose your PIN and lose access to your coins forever after using both wrong attempts.

While it may seem intimidating, there are several ways to use your cold wallets that will be more reliable for you as well. Check out these:

1. Back-up your PIN – Back up your wallet information. We recommend making this backup in an offline environment. In this way, you will have a safer backup in all respects. If you want to save in the computer environment or if you want to use real paper and pen, do not store the entire sentence in one place. Instead, save the words that make up your seed phrase in different fields and leave notes to remind yourself of the word order.
2. Protect your devices – Although cold wallets use hardware, you need to connect them to the technological device to access your coins. This comes with the responsibility of protecting your device. To be careful not to open virus-laden links sent to the target device via e-mail, SMS, or notification, you should always keep your eyes open.
3. Check the distributor & manuıfacturer – Make sure you buy cold wallets from an authorized and official distributor or manufacturer.

Comparison of Hot and Cold Wallets:  What are The Pros & Cons?

We have prepared a quick comparison table to give you the clearest information in your research, where you are looking for a way to store your crypto assets in the most secure way. Here you will have the chance to see the advantages and disadvantages of each wallet type. Take a look!

Non-Custodial Wallets vs Custodial Wallets & What is Custody in Crypto?

Different players in the cryptocurrency world may choose to offer different storage solutions. In this way, users can turn to non-custody wallets where losing passwords can be considered a relatively less scary scenario, as well as wallets in which all asset controls are completely theirs. Let’s take a look at the meaning of these concepts in the cryptocurrency world.

Self- custody (Non-Custodial) Wallets in Crypto World

When you choose wallets that offer services with self- custody technology, all the access rights to your assets is solely yours and you have full control over them with your unpredictable personal private key. Both software wallets or hardware wallets may offer self-custody working principle. If you are accessing your assets directly via your own private key, not through a third-party company, this indicates self- custody.

So, are there any downsides to this perfect secrecy? Of course, there is. Namely, when you use such services, you take full responsibility for keeping your private key. Entering your storage password incorrectly twice can cause you to lose your coins, never to be recovered. If you prove your identity by guiding you, you have to take this responsibility as there is no third party that will return your account to you.

• Self-custody crypto wallet examples: Metamask, Exodus, Zengo, Wasabi, Trezor One, Ledger Nano X, Electrum

Custodial Wallets in Crypto World (Or Third-Party Digital Asset Custody)

If you want to secure your digital assets through a prestigious and proven third party, you can choose these wallet options. Companies such as Coinbase, Gemini, and Kraken store your private keys and offer you a chance of recovery even if you forget the 12 words.

However, there are some security risks to accessing your account with a simpler PIN by keeping the private key under the control of the exchange platform. First of all, especially if you haven’t activated 2FA, it’s easier for hackers to get your money now. Because what needs to be broken now is not a seed phrase, but only a log-in password. Moreover, you are also responsible for the protection of your own PIN and transaction security. Still, when you choose a good enough stock exchange platform, you can protect your account more easily with special encrypted warning mail or 2FA security systems that they will offer you.

• Custodial wallet examples: Binance, BitMex, BitGo, FreeWallet, Blockchain.com, Coinbase, Gemini

DID YOU KNOW – Centralized exchanges that hold custody themselves often share their official wallet IDs and the number of assets they hold in the cold wallet to show that the amount of cryptocurrencies traded by users is really there. Do you know why? In crypto exchange platforms holding custody, fraud is usually done with the Ponzi system. Simply put, when user A buys an Ether on a Ponzi exchange, the platform does not buy new Ether. Actually, they do nothing until the person who buys Ether wants to transfer his asset to a different platform or convert it to cash and send it to his account. When he wants that, the trader is paid with the money of the user who sells Ether. The Ponzi system reveals itself in a short time. Because, especially in periods when the market is in a downward trend and many people turn to cash, the platform does not have enough money to give leaving users.

What is Crypto Partial Custodity for Wallets?

Not all cryptocurrency wallets have to be black or white, there are some wallet technologies that are in the gray zone. Partial custody is a system that allows you to rely on third parties for certain issues while securing your assets, but to a significant extent, to take control of your wallet, which is self-managed and uses technologies such as 2FA or multi-signature for protection.

Differences Between Custodial and Non-Custodial Wallets: Which One To Choose?

To check your assets, if you want to compare wallets according to whether they are custodial or not, you should examine them in terms of security, offline accessibility, backup and recovery possibility, transaction type, and custodian of the private key. That’s why we wanted to present you a clear table:

How Do Blockchain Wallets Work?

Before we get to the end of the content, it may be helpful to have an overview of how Blockchain wallets work from a technological standpoint. Crypto wallets, which can transfer Bitcoin or other cryptocurrencies to a third party, and in some cases, enable you to transact with advanced technologies such as QR codes, are the technology of the future.

When users want to transfer an asset to their wallet, the wallet works as follows:

1. First, the wallet generates a unique address. The user can share this unique address with third parties. On mobile devices, this address can be converted to a QR code, thus providing ease of use. Think of wallet ID or unique address as the IBAN number.
2. This unique address is recreated from scratch at each request of the user. Similarly, money is sent to crypto money addresses that different users recreate each time.
3. The processes of sending or receiving money with cryptocurrency wallets are quite similar to traditional methods. Consider that only Bitcoin or Ether is used during the transaction instead of the Dollar or Yen.
4. Users may want to swap their crypto assets into different cryptocurrencies using their wallets. In this case, the wallet shows users the amounts they will sell and receive depending on the current exchange rate, and when the user approves, the transaction takes place on the Blockchain network.
5. In order for transactions to be completed, each currency in the transaction is chained to the Blockchain. So it may take a while to complete.
6. The number of coins that can be swapped may also vary depending on the cryptocurrency available. For example, when you want to swap on a Blockchain wallet, you can trade between the following cryptocurrencies: Bitcoin, Ethereum, Bitcoin Cash, Stellar Lumens, Tether, USD Digital, Wrapped-DGLD.9.