Wallets for cryptocurrencies : introduction
We have already explained how the cryptocurrency market works and we have also provided you some tips to choose the best exchange to buy your digital assets. In this opportunity, we are going to talk about wallets, that is, where to store your digital currency.
When you buy cryptocurrencies in an exchange company, you are offered the option to keep your coins in your account within the platform or to place them in your own wallet. In this article, we are going to explain why and how to choose the wallet that best meets your needs.
Why to keep your cryptocurrencies in a wallet?
Many people may ask: why not keeping the purchased cryptocurrencies within the platform you have bought them? And the answer is because it is not safe.
There are two reasons why storing your digital money in an exchange can put your holdings at risk.
First, as any online company, exchanges may be subjected to cyberattacks. To make matters worse, exchanges are even more targeted since they deal with a high number of transactions daily.
That is, a hacker obtains a higher sum by attacking an exchange than targeting your private wallet.
Even if you make extensive research about the platforms before choosing one to keep your money, the company can not guarantee 100% security and your investment would still be in jeopardy.
Secondly, as the concept already implies, your money is virtual, that is, you do not have physical access to your coins. In fact, cryptocurrencies never leave the blockchain in which they were created.
When you obtain a wallet, therefore, you are obtaining a key that works as a “location” of your coins on the blockchain.
Without a wallet, the exchange is in charge of the key to the location of your cryptocurrencies, which can subject your investment to several risks.
How does a cryptocurrency wallet work?
As previously said, your wallet does not actually store your assets but the key that gives you access to them. When you choose to use a wallet, you receive two keys: a public key and a private key.
The public key is an alphanumeric identifier used so others can send coins to you. This identifier indicates the location of your coins on the blockchain, thus, you can provide the public key to anyone without endangering your balance.
On the other hand, the private key is used so you and only you can make transactions with your cryptocurrencies. It should be kept safe as well as your seed-phrases.
Seed-phrases are phrases created with the private key with the objective to help you to remember the latter in case you forget it. Is important to note that if you forget or lose your private key and seed-phrases you will no longer be able to access the cryptocurrencies you have in your wallet.
Choosing a wallet for your cryptocurrencies: what you should take into account
There are two types of wallets for keeping your cryptocurrencies: cold or hardware wallets and hot or software wallets
- Cold or Hardware wallets: this type does not have internet connection, it is offline. As the name implies, it requires a physical appliance (a hardware) to save your keys. This hardware is similar to an USB flash drive, which you have to purchase.
- Hot or Software wallets: is a wallet with an internet connection. It is a computer software that you access from your device to control your assets.
There are some basic aspects that you have to consider when looking at the options. The first of them is security.
A wallet without an internet connection (a cold wallet) is usually chosen because it is a safer way to save your assets. That is explained because any device with internet connection can be subject to attacks – and so, by choosing a physical medium you reduce the chances of putting your money at risk.
The second aspect is the expenses. A cold wallet may be safer but for it you will have to pay a quite high price, so this option is actually worth it for those having high investments in cryptocurrency.
The third aspect is convenience. Hot wallets are easier to set up and to access, which makes them ideal when frequent cryptocurrency transactions are required. That is because it offers access from wherever you are, even if you do not have the device in hands.
Whether ending up choosing a hot or a cold wallet, it is worth researching a lot before. There are different companies offering wallets on the market. Remember to research which currencies they accept, what their security level is (when the case is a hot wallet) and if they have extra features that can make your life easier.
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