What is a Cryptocurrency Wallet? | Hot vs Cold Storage

For those that are new to this space or have dabbled in the area a bit, there is an important part of this sector that is keen on your survival. What is it exactly? Crypto Wallets! Just like you carry around your wallet with your national currency, cryptocurrency users do the same thing except digital! However, unlike picking out your favorite design for your physical wallet, crypto wallets must be chosen based on their security and ease of access. Just below we are going to break down the two major types of cryptocurrency wallets, hot or cold!

What is a Crypto Wallet?

When you hear the word “wallet” your are probably thinking of that worn-out leather one, that holds some coupons, gift cards, and old receipts. But in today’s time when the younger generation people are talking about “wallets”, they are probably talking about cryptocurrency wallets. But what is a crypto wallet exactly? A cryptocurrency wallet is a software program that stores private and public keys and interacts with various blockchains to enable the user to transact with digital currency. In the same fashion that you need a bank account to wire money. Or a Paypal account to send money. You will need a cryptocurrency wallet in order to transact with other users.

Does One Size Fit All?

When it comes to cryptocurrency wallets, one size does not fit all. Due to the fact that wallets are actually software systems that hold transactional records and not physical coins or currency. The wallet software is embedded with commands that allow the user to transact with a wide variety of cryptocurrencies. However, each cryptocurrency has a specific address that is unique to it. To make a connection, it is like having multiple bank accounts with the same bank, but each account holds a different national currency. The reason for this is the software that is utilized by the wallet in order to interact appropriately with each blockchain. What does this mean exactly? To break it down into basic terms. Major cryptocurrencies such as Ethereum or Bitcoin have separate blockchains that function differently. This means it takes a different set of computer commands in order to interact appropriately. Thus, when you do transact your wallet will know how to execute the commands properly by using the private key tied to that cryptocurrency.

Getting Hot or Cold?

When it comes to choosing the type of cryptocurrency wallet there are essentially two types. Hot wallet and Cold wallet.

Hot Wallet

A Hot Wallet is online software that enables users to transact with cryptocurrencies from a single device. This software holds onto your private and public keys in storage. However, the reason these wallets are called “hot” is that they are connected to the internet. Making them and your funds susceptible to cyber-attacks or theft.

Cold Wallet

A Cold Wallet is a much more secure offline wallet device. That enables users to hold a significant amount of currencies on one device, with the highest amount of security. These devices typically have a plethora of features that increase overall security, to keep users minds at ease. These wallets are called “cold” because they do not require to be connected to the internet in order to store cryptocurrencies. It is only when the user wants to transact with those currencies that the wallet needs to be connected to the internet.

Types of Cryptocurrency Wallets

There are several different types of wallets that users can utilize in this space. Wallets vary based on ease of access and security. Just below we have broken them down so that you can figure out which is best for you.

Desktop (Hot Wallet)

Desktop wallets are software that you download to your computer to store your private key on your hard drive. In order to ensure that your cryptos are safe, ensure that your computer is malware-free! This is vitally important, if your computer is compromised it could lead to the loss of your funds. Desktop Wallets are still considered to be a hot wallet because they have access to the internet. Top Desktop Wallet Choices:

1. Electrum
2. Exodus
3. Copay

Mobile Wallet (Hot Wallet)

A mobile wallet is by far the most convenient wallet to have. It allows for easily accessible funds that enable bitcoin to integrate into society smoothly. However, just like you wouldn’t carry around your life savings in your wallet, the same mentality should be applied here. When it comes to mobile wallets, security is overshadowed by the ease of access. But don’t let the lack of security downplay these wallets, simply allocate enough funds onto your mobile wallet to have reasonable spending money. Top Mobile Wallet Choices:

1. Blockchain
2. Coinbase Mobile
3. Bread

Online Wallets (Hot Wallet)

Online wallets utilize the cloud in order to make accessing your funds from any device simple. However, the problem with Online Wallets is that they are controlled by a third party. The third party actually stores your private key on their server making your funds more vulnerable to attack or theft. Top Online Wallet Choices:

1. MyEtherWallet
2. UpHold
3. Coinpayments

Hardware Wallets (Cold Wallet)

This is by far one of the most secure types of wallet in the space. Hardware wallets are offline devices that store your cryptocurrencies. Depending on which one you get most hardware wallets to come with increased security aside from being an offline device. Some hardware wallets come with features such as pin code access, 28-word seed phrase, and much more. To access funds, the user simply plugs the device into their computer and starts transacting. It’s that easy! Hardware wallets should hold the bulk of your cryptocurrencies, due to their high level of security. Top Hardware Wallet Choices:

1. Ledger Nano S
2. Trezor
3. KeepKey

Wrap Up

In conclusion, both types of wallets, hot or cold, are very useful. However, which one you choose should depend on the purpose of the currency it will be holding. For example, in everyday situations, the mobile wallet allows for easily accessible funds to use throughout the day. For example, sending funds to your friends for buying you that movie ticket, or purchasing a latte at your local coffee shop. Although less secure the ability to use the funds to make everyday purchases triumphs over security. In, addition if the mobile wallet ever runs out of funds, the online wallet which is more secure can deliver funds to the mobile wallet address. Just like a bank account dispensing money at an ATM. This allows for quick but more secure access to your funds. To go further, a significant amount of wealth is held on the most secure wallet, the Hardware Wallet. So no one wallet is really best for every person. The wallet you choose should depend on the functionality, security or availability of your cryptocurrencies. For myself personally, I use almost every type of wallet just to ensure the security and availability of my cryptocurrencies. I utilize coinbase mobile wallet, myetherwallet, and the ledger nano S.