If you're new to cryptocurrencies, you'll need to know how to store and manage your digital assets securely. A crypto wallet holds your digital assets, much like a physical wallet does with your cash and cards. In this guide, we will look at the different types of cryptocurrency wallets, their practical applications, and how to keep them secure.

1. What Is a Crypto Wallet?

A crypto wallet is hardware or software you use to interact with blockchains and store, send, and receive digital assets like Bitcoin, Ethereum and other altcoins. The wallet holds your private and public keys, allowing you to access and manage your crypto funds on the blockchain where they are stored.

Crypto wallets are a digital version of a regular wallet, storing your cryptocurrency instead of cash. It comes with a public key (like a bank account number) to receive crypto and a private key (a secret password) to unlock and spend it.

Crypto wallets keep the passwords that give you access to your cryptocurrencies (called private keys) secure and easily accessible. With a cryptocurrency wallet, you can monitor your real-time transactions, manage your digital assets, send and receive crypto, and keep your digital currency safe.

2. How Do Crypto Wallets Work?

You need a crypto wallet to buy, own, or sell cryptocurrencies and NFTs. The wallet interacts with different blockchains to allow you to send and receive digital assets.

When you send cryptocurrency, the wallet uses your private key to sign the transaction, proving that you have ownership of the funds and granting permission to transfer them. This signed transaction is then added to the blockchain.

Each crypto wallet has a public address, a public key and a private key. These components serve different functions:

Public Address: A unique identifier used to receive cryptocurrency. It is public and can be shared with anyone. It fulfils the role of the destination address for your digital assets. When receiving crypto, the sender uses your public address to send it to you. When buying crypto, the seller will send a record of ownership to your public address.

Public Key: Similar to a bank account number, it’s a long string of letters and numbers that verifies you’re the owner of a public address that can send and receive cryptocurrency. Public keys encrypt messages that are sent to your public address, so only the intended recipient can read them. They’re matched to the private key within the crypto wallet. However, unlike traditional banking details, these keys don’t reveal any personal information about the owner of the crypto wallet.

Private Key: Like a PIN or password, a private key functions as a secret code that allows you to access and transfer cryptocurrency from your wallet. The private and public keys are linked, and you need a private key to verify any transactions on the blockchain. The private key is essential for security — you should never share or give this key to anyone. As a general rule, create strong passwords, back up wallet data regularly, enable two-factor authentication and store your private keys in a secure location.

Remember: If you lose access to your private key, you lose access to your funds permanently.

3. Types of Crypto Wallets

There are two main types of crypto wallets: hot wallets, which are always online and easy to access but less secure, and cold wallets, which are offline and safer but a bit harder to use. People often use both for a balance of convenience and security, with a little in a hot wallet for quick access and the rest safely stored in a cold wallet.

Both Hot Wallets and Cold Wallets have advantages and drawbacks and are suitable for different strategies and use cases. Let’s explore further:

Hot Wallets

Hot wallets are connected to the internet, making them easily accessible for frequent transactions but more vulnerable to hacking and theft. Examples include mobile apps, web-based wallets, and desktop wallets.

• Mobile Wallets: Apps installed on smartphones or as browser add-ons, like Trust Wallet or MetaMask.
• Web Wallets: Wallets accessed via a web browser, such as those provided by crypto exchanges.
• Desktop Wallets: Software installed on a computer, like Electrum or Exodus.

Cold Wallets

Cold wallets are offline physical tools similar to an external USB drive, making them more secure. They’re ideal for long-term storage of cryptocurrency.

• Hardware Wallets: Physical devices like Ledger or Trezor that store your private keys offline.
• Paper Wallets: Physical pieces of paper with printed keys or QR codes.

Cold wallets are an essential tool for long-term crypto holders who prioritize security. While they require a bit more responsibility and understanding to master, the peace of mind they offer in protecting against exchange hacks makes them worthwhile. Remember the cardinal rule in crypto - not your keys, not your coins.

4. Pros and Cons of Each Wallet Type

People who trade or invest in crypto typically use both wallet types for different purposes. Choosing one or the other depends on a variety of factors, including:

• How often you trade. If you trade every day, you'll need a wallet that can process transfers quickly and doesn't charge a lot of fees. A hot wallet is better because it lets you make trades right away and access your money quickly. People who are not active traders often opt for cold wallets instead.
• The assets you want to trade. Different wallets support different cryptocurrencies, so it's important to pick one that can handle the assets you want to trade. If you want to buy and sell less well-known cryptocurrencies, you'll need a wallet that can support them like a multi-currency wallet.
• Your peace of mind. If you are worried about hackers, the best and most secure thing to do is to keep your digital assets in a cold wallet. You can then store the device in a safe or safety box for extra security.
• How much it costs. Some hot wallets are free while others charge a subscription fee. Most cold wallets cost a one-time fee to purchase and set up. However, you should pay attention to hidden fees as they vary by provider.
• What it can do. Even though all crypto wallets offer the same basic functionality, some have extra features that make them stand out. Hot wallets come with a lot of different features, such as the ability to stake, trade, and access DeFi. If you are an active trader who wants to try out DeFi or stake your assets, you will need a crypto wallet with advanced functionality.

Pros and Cons of Hot Wallets

Pros:

• Convenient and easy to use for daily transactions.
• Accessible from anywhere with an internet connection.
• Often feature-rich, with built-in access to exchanges and DeFi services.

Cons:

• More vulnerable to cyber attacks, hacking, and phishing scams.
• If the device or platform gets compromised, you could lose your funds.
• Security depends heavily on the precautions you take.

Pros and Cons of Cold Wallets Pros:

• Highly secure, as they are not connected to the internet.
• Ideal for long-term storage of significant amounts of cryptocurrency.
• Resistant to malware and hacking attempts.

Cons:

• Less convenient for frequent transactions.
• Physical damage, loss, or theft of the hardware device or paper can result in losing access “unless you set up a recovery key”.

• Hardware wallets can be costly and difficult to set up, especially for new users.

5. Best Practices for Securing Your Crypto

Crypto wallets make it easier to keep your digital assets safe, but it is important to follow some rules to maintain the security and safety of your wallet.

Follow these best practices to ensure your crypto remains safe and strengthen your protection:

• Use a Hardware Wallet: For storing large amounts of crypto, invest in a reliable hardware wallet like Ledger or Trezor. Always buy your hardware wallet from the official store or website of the manufacturer. Do not import your seed phrase from a hot wallet but create one on the new hardware wallet. </li>
• Enable Two-Factor Authentication (2FA): If available, always enable 2FA on your wallets and exchange accounts for an added layer of security. </li>
• Keep Private Keys Private: Never share your private keys with anyone. Avoid storing them in places that are easily accessible or online.
• Create Backups: Back up your wallet recovery phrases and store them in a safe, offline location. Consider using a fireproof and waterproof safe for added protection.
• Be Aware of Phishing Scams: Be cautious of phishing emails, fake websites, and malicious links. Double-check URLs and never enter your private keys on suspicious platforms.
• Regularly Update Software: Update the software of your wallet to benefit from the latest security enhancements and stay protected from evolving threats.

6. Custodial vs. Non-Custodial Wallets

From a point of view of who is in charge of a crypto wallet's private keys, we can distinguish two wallet types: custodial and non-custodial. Whoever controls the private keys controls access to the digital assets.

A custodial wallet is managed by a third party, usually a crypto exchange. As the service provider, the exchange is responsible for safeguarding users' private keys and funds. This option is convenient for people who prefer not to manage private keys or find it too complicated. Trusted custodial wallets have to comply with regulatory standards and may even offer insurance against theft or misuse, providing added peace of mind.

With a non-custodial wallet, the user is in full control of their private keys and digital assets. There is no third party involved and the user takes on the responsibility of securely storing their private keys. Losing the private keys means losing access to your assets forever. This type of wallet is better suited for experienced users who value independence and know how to manage their private keys.

7. Conclusion

Understanding crypto wallets and securing your digital assets is essential for safe and successful crypto trading. The right crypto wallet is essential for safely managing your digital assets both for long-term holding and everyday transactions.

At Freedx, we encourage our users to prioritize security and stay informed. By choosing the right wallet and implementing the best practices mentioned above, you can trade and invest with greater peace of mind.

Ready to start trading or need more guidance? Check out our other guides and resources on the Freedx blog.