Cryptocurrency wallets are an important part of your crypto investment and trading journey. Once you buy a cryptocurrency, you’ll need a wallet to store your currencies on a wallet.
Yes, there are wallets available on the platform from which you can buy your cryptocurrency. But those aren’t as efficient as having your own private wallet. However, what’s the difference between your private wallet and a platform-hosted wallet?
Which one is more expensive or more secure? Wait, here’s a better question for a beginner – how does a cryptocurrency wallet work?
If you have all those questions, read the following article to get answers to your queries about crypto wallets.
How Do Cryptocurrency Wallets Work?
If you’re new to cryptocurrency investments, understanding the wallets is important – especially understanding how they work is essential.
What Does a Crypto Wallet Do?
For starters, these wallets come in two different forms, and they are nowhere similar to the wallets with which you carry your cash. These wallets are either software solutions or hardware wallets. Both types serve the same purpose – keeping your cryptocurrency safe.
What Doesn’t It Do?
One more factor to remember: the cryptocurrency wallets don’t hold the actual cryptocurrencies. The cryptocurrencies remain in the blockchain, the ledger that facilitates and stores cryptocurrencies.
Here’s How They Work?
So why do you need these wallets, then? Well, these wallets help you safeguard your public or private keys. Think of these as your passwords for carrying out cryptocurrency transactions.
3 Types of Cryptocurrency Wallets
When it comes to understanding cryptocurrency wallets, we divide them into two common categories.
Hard wallets
Cold wallets.
However, there’s a more diverse categorization if we look into more personalized purposes of different wallets.
Check out the following types of cryptocurrency wallets we’ve described for your understanding.
1. Hosted Wallets
Hosted wallets are the ones hosted by a third party. These are easy to set up and are the most popular and commonly used type of wallet. Users often refer to these wallets as exchange wallets. The main reason behind this is that they are hosted by an exchange platform.
The Pros of This Include –
For example, if you’re buying a cryptocurrency on a platform like Coinbase, Gemini, or Kraken, you can store and hold it on the wallet hosted on the platform itself.
However, know that the hosted wallets hold the private key/public key to your cryptocurrency on the platform itself. They are managing it for you and storing it online.
The Cons of This Include –
When the wallet stores your private key online, it becomes vulnerable to hackers and theft. So, there’s a security issue to worry about.
In addition, sometimes, there are limited cases of hosted wallets being used. For example, with hosted wallets, you may not be able to buy NFTs.
But, on the positive side, you don’t have to worry about losing your password. The exchange platform has a way to help you retrieve your wallet password. And the hosted wallets help you quickly put your crypto up for sale.
2. Non-Custodial Wallets
While the hosted wallets offer more convenience and ease of use, non-custodial wallets offer more features and freedom.
The Pros of This Include –
You can buy NFTs.
Also, if you’re interested in staking cryptocurrencies, these wallets could be the best choice. You can buy and hold a significant number of cryptocurrencies to support a blockchain platform and earn rewards from staking over time.
The private key stays in your control. So, you can access cryptocurrencies whenever you want. Safety is in your hands.
The Cons of This Include –
The security is in your hands. So, if you lose the key, you risk losing your cryptocurrencies. You won’t be able to access the content in the wallet.
If it falls into someone else’s hands, they can access your cryptocurrencies.
However, if you’re thinking of Long-term cryptocurrency investments, then non-custodial wallets are a great way to safeguard your staked tokens.
3. Hardware Wallets
The two wallets we’ve mentioned above are software solutions for storing your cryptocurrency online. However, cold storage or hardware solutions for cryptocurrency wallets are often considered the most secure option. If you want to store the stake you have on a blockchain for the long term, then tools like hardware wallets are the best.
The Pros of This Include –
These look like small USB sticks. This is the private key you can use to access the cryptocurrency on a blockchain platform.
Hardware wallets create a safety net for your cryptocurrencies. Hackers cannot access your private key or public key since you’re storing it in the cold wallet (a hardware device).
You can keep the wallet and the private key as long as you know the recovery seed that encrypts the wallet.
The Cons of This Include –
However, these wallets or devices are expensive. Platforms like Trezor or Ledger create these wallets.
Losing the wallet may not mean losing the private key entirely since there’s a recovery seed that encrypts the wallet. But, if you lose the recovery seed, then it could mean the end of the world.
But if you’re wondering how to use the right one, it would require a better understanding of the public and private keys. Coinfomania provides more information on the different versions of crypto wallets. As for the difference between the two types of keys, continue reading.
Public Keys Vs. Private Keys: What’s the Difference?
Well, it’s easy and important to understand the difference between the two types of keys you have when investing in cryptocurrencies. Here’s what both stand for –
Public Keys
Think of the public keys as you think of the bank account numbers. It’s a long string of different numbers. You can share it with third parties like exchange platforms without compromising your wallet’s security.
This key helps users send and relieve cryptocurrency and helps complete transactions. Sometimes, it would require using your wallet address.
Private Keys
With a private key, you can receive and send your cryptocurrency during transactions. Sometimes, it would involve using your wallet address. It’s essentially a compressed version of your wallet’s public key.
However, if you’re using a private key, you have to keep it private. It’s the only way to access your cryptocurrencies on a blockchain. Also, remember that someone with access to your private key means getting access to your cryptocurrency itself. So, you’re liable to keep it safe at all costs.
Choosing the Right Wallet
Yes, platform-hosted wallets are less secure. But they are convenient when you want to carry out quick trades. Also, if you want to store your cryptocurrencies for the long term and act as a stakeholder of a blockchain, a hard wallet would be better suited to your needs.
In the end, the right choice of cryptocurrency wallet comes down to what you want in a wallet. Hopefully, this article answers all your questions. Did you find the answer you were looking for? Share your thoughts in the comment section. Thank you for reading.
To read more content like this, explore The Brand Hopper
Subscribe to our newsletter
Go to the full page to view and submit the form.