Cryptocurrency Wallets - What They Are and The Best Wallets To Use
By Nerly Shammah Dec 29, 2022
A Cryptocurrency wallet is software programs that allows individuals to safely store and manage digital assets such as fungible assets like bitcoin, and non-fungible assets like NFTs, both commonly addressed as crypto assets. Cryptocurrency wallets are essential components of the cryptocurrency ecosystem, as they enable users to securely store their digital assets, as well as carry out financial transactions across multiple blockchain networks.
What Are Crypto Assets?
Crypto assets are digital assets that are protected by cryptography, a blockchain-based algorithm that securely allows individuals to transact value from one point to another for diverse financial or trade purposes. Crypto assets are divided into two, the fungible assets as aforementioned like Bitcoin, Ether, Hive, OP and more, these asset types are called fungible because there can be interchanged for the other, their unique values are the same whereas non-fungible assets, the second type of crypto assets are unique to themselves and not interchangeable as fungible assets are.
These asset types are commonly called NFTs and are basically tokenized assets that could represent anything such as a digital art, a physical property or even a certificate. What puts both assets apart from each other is the smart contracts that powers and protects them, for the most popular smart contracts compatible blockchain network Ethereum, this is the ERC-20 and ERC-721 token contracts.
To learn more about cryptocurrencies see this introductory guide to cryptocurrency.
What is Blockchain Technology?
Blockchain technology is a distributed ledger technology where data passed through the ledger are distributed across multiple computers in an attempt to keep the record safe and immune to central attacks. Public blockchains more specifically are the pillars of crypto assets, the functionality of them are based on the consensus of these networks and their values are derived from the economic activities within.
See this comprehensive guide to blockchain technology to understand more on how it works.
Types Of Cryptocurrency Wallets
Although examples of crypto wallets are often directly mistook for the types, the two major types of cryptocurrency wallets are:
- Custodial Cryptocurrency Wallets
- Non-Custodial Cryptocurrency Wallets
Custodial Cryptocurrency Wallets: A custodial cryptocurrency wallet is a type of wallet where the private keys are stored and managed by a third party, more commonly a cryptocurrency exchange. Custodial wallet users do not have direct control over their digital assets stored in these wallets given that the private keys are not accessible by them and so they must trust the custodian to keep their digital assets safe. Some examples of custodial wallets include online or web-based wallets offered by cryptocurrency exchanges and some mobile wallets provided by centralized entities.
Non-custodial cryptocurrency wallets: non-custodial cryptocurrency wallet is a type of wallet where the user has full control over their private keys and assets therein. This means that the user is solely responsible for the security of their digital assets and must take steps to protect their private keys from leaks. Non-custodial wallets are considered to be more secure given the absence of a third party control on wallet keys, the user has complete control over their assets and does not have to rely on or trust any centralized entity. Some examples of non-custodial wallets include hardware wallets, and paper wallets.
It is important to carefully consider the type of wallet you choose, as each has its own set of benefits and drawbacks. Custodial wallets are generally more convenient to use, but they are less secure because the user must trust the custodian to keep their assets safe. Non-custodial wallets offer greater security, but they require the user to take on more responsibility for the security of their assets.
Examples Of Cryptocurrency Wallets
There are several examples of cryptocurrency wallets under the aforementioned types, each with its own unique features and benefits. As though these wallets are safe houses for cryptocurrency users, diligently choosing a wallet type is crucial to meet a user's needs.
Software wallets: These are digital wallets that are installed on a computer, smartphone, or other devices. They are commonly called hot wallets. Hot wallets, such as desktop or mobile wallets, are convenient for daily transactions as they are easily accessible, but they are also more vulnerable to hacks and cyber attacks. An example of a hot wallet is MetaMask, most software wallets are non-custodial, meaning only the user has access to the private keys and takes responsibility for the assets security.
Online or Web-based wallets: These are wallets that are accessed through a browser. They are convenient as they can be accessed from any device with an internet connection, but they are also more vulnerable to security threats as they are mostly functioning via a centralized server and can be hacked. An example is MetaMask which has a Web extension. That said, centralized exchange wallets are the most common web-based or online wallets such as Binance and Coinbase, these exchange wallets are custodial so the exchanges are responsible for the safety of the assets stored in them as they are the holders of the private keys.
Paper wallets: These are physical wallets that store the user's private keys on a piece of paper, one of the earliest types of code storage. They are considered to be very secure as they are not connected to the internet and are therefore immune to hacking. However, they are not very convenient for daily use as they require the user to manually enter the private keys whenever they want to access their digital assets.
Hardware wallets: These are physical devices that store the user's private keys and allow them to securely manage their digital assets. They are also called cold wallets and are considered to be one of the most secure types of wallets as they are not connected to the internet and are resistant to hacking. However, they can be lost or stolen, so it is important to store them in a safe place. An example of a hardware or cold wallet is Ledger Nano X.
What To look Out For When Choosing A Cryptocurrency Wallet
It is important to choose a wallet that is not only secure, but user-friendly, and compatible with your choice of cryptocurrency or assets. Here are some crucial factors to consider when choosing a cryptocurrency wallet:
Security: Choose a wallet that has strong security measures in place, such as multi-functional authentication and security structures. You can always look up the features before installing or purchasing the wallet.
Ease of use: Look for a wallet that is user-friendly and has a good user interface. A choking interface exposes you to risk of asset loss, a wallet that is much easier to grasp each feature within should be a priority.
Compatibility: It is important to know what networks a cryptocurrency wallet is compatible with and if your choice of assets are in fact supported.
Fees: Consider the fees that the wallet charges for transactions and other services in order not to fall prey to high service fees or charges and something of sorts like many banking institutions.
Reputation: Oftentimes, going for reputable wallets is better than gambling on what's new and having little history of efficiency, reliability and trustworthiness.
What are the most popular cryptocurrency wallets?
Bitcoin wallets: Some popular bitcoin wallets include Electrum, Bitcoin Core, and GreenAddress.
Ethereum wallets: The most popular ethereum wallet is MetaMask.
Litecoin wallets: Some popular litecoin wallets include LoafWallet and Litecoin Core.
Ripple wallets: Some popular ripple wallets include GateHub, and Ledger Nano X.
Binance Coin wallets: Some popular Binance Coin wallets include Trust Wallet and Ledger Nano X.
The security of your assets and the smoothness of your crypto journey will depend greatly on the wallet you choose to use, so it is important to carry out thorough research on each wallet that interests you before installing or buying.
The best cryptocurrency wallets are those that put security as a priority, these are mostly cold wallets also called hardware wallets. However, some software - non-custodial wallets can do just as great at security and even more, given that they are connected to the Internet and are the ultimate convenient gateway to facilitating diverse blockchain-based transactions.