Let's find out what kinds of wallets there are and what a cryptoinvestor should pay attention to

How to choose a cryptocurrency wallet

Modern cryptocurrency wallets have opened up access to the blockchain for everyone. Previously, sending digital assets was done manually and required entering long keys. Today, most of this work is done by software. It is known that the first wallet belonged to bitcoin developer Satoshi Nakamoto and the second, to programmer Hal Finney. In early 2009, Nakamoto sent him 10 BTC as a test, which was followed by a massive cryptocurrency craze.

What is a cryptocurrency wallet

A cryptocurrency wallet is a program, application, physical device or service that stores user keys and financial transaction data. They contain the public key (wallet address) and the private keys of the clients necessary to confirm transactions. It is important to note that a wallet does not store real cryptocurrency. Digital assets are stored in a blockchain, a digital list that serves as the basis for many decentralized cryptocurrencies. A cryptocurrency wallet can be used to store a variety of digital assets. Anyone who has access to a private key can control the cryptocurrencies associated with that address. Note that if a user loses access to a cryptocurrency wallet's private key, the funds in it disappear from general circulation forever.

There are several varieties of wallets, each with different features and security levels. Despite some differences, most of them function in the same way, storing pairs of addresses and private keys that allow the wallet to be synchronized across multiple devices to send and receive cryptocurrency.

Custodial and non-custodial wallets

There are two main types of wallets: custodial and non-custodial.

Custodial wallets are placed directly on cryptocurrency exchanges, so they are sometimes called exchange wallets. Platforms such as Binance and Coinbase provide them to clients. The disadvantages of these wallets include the involvement of third parties in users' digital assets - custodians are regulated by government agencies. This means that at the request of the regulator, platform representatives are obliged to provide data on users and, if necessary, to block their accounts. In addition, crypto platforms are subject to hacker attacks, which can result in customers losing their funds. On the plus side, a user can recover a forgotten password, since the exchange has access to clients' keys.

Non-custodial wallets are controlled only by the user, which implies that the owner is fully responsible for his or her cryptoassets. To create such a wallet, there is no need to go through an identification procedure, just create an address. Non-custodial wallets are sometimes referred to as applications that can be downloaded to a computer, phone, or browser.

Crypto investors usually use both types of wallets: custodial - for trading on cryptocurrency platforms, non-custodial - for long-term storage of assets or staking cryptocurrencies.

Hot and cold wallets

Non-custodial wallets are divided into hot and cold wallets.

Hot (software) wallets are ideal for a beginner because they can be installed on any device. Among them, the most popular are MetaMask and Trust Wallet. Note that hot wallets can be vulnerable to hacking due to their constant connection to the internet, so they are usually used for quick transactions of small amounts.

Cold (hardware) wallets look like a USB flash drive. You can use such a device regardless of the availability of the Internet. In addition, they are considered more secure than hot wallets because digital assets are stored offline. The best known cold wallets are Ledger and Trezor. Some modern hardware wallets have the ability to connect to a device via Bluetooth. However, because Bluetooth is a wireless signal that can be accessed by unwanted parties when it is turned on, use such devices with caution. If you lose access to the private key and the seed phrase, assets on the crypto wallet will be lost forever.

Security of cryptocurrency wallets

Cryptocurrency wallets typically use two types of keys: public and private.

Public keys are just like a bank account number. A public key is a long string of random letters and numbers that can be transferred to a third party, such as a cryptocurrency exchange, without compromising the wallet's security. Such a key allows you to conduct transactions.

Private keys should always be kept secret. A private key allows access to the real cryptocurrency in the blockchain. Therefore, if someone gains access to such keys, it would be equivalent to accessing the cryptocurrency in the wallet.

A seed phrase is a key secret phrase needed to regain access to a cryptocurrency wallet. It is usually generated automatically when creating a wallet and contains 12, 18, or 24 words.

What to consider when choosing a cryptocurrency wallet

Choosing the best crypto wallet depends on the user's level of experience and previous activity with cryptocurrencies. The main requirements to consider when choosing a wallet include:

  • Security. Traditional banking applications offer a number of security measures to protect funds. Cryptocurrency wallets have slightly different mechanisms, so you should check them carefully before entrusting personal funds.
  • Fees. Transaction fees can be charged in different ways. They can be set automatically to make transactions faster, but to cut costs, some cryptocurrency wallets allow you to customize each fee. It should be understood that this can slow down transaction times.
  • Cryptocurrencies. Some cryptocurrency wallets offer a wide selection of cryptocurrencies, while others offer a limited selection.
  • Customer support. Some companies offer 24/7 support as part of their services.
  • Access. If the user regularly uses a computer, hardware wallets are worth considering. For those who need to be more mobile, smartphone apps and browser-based wallets may be appropriate.

As with any banking service, finding the right cryptocurrency wallet for your personal needs is important, so you need to consider all aspects to find the right one.

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