The price of cryptocurrency is growing yearly, and fluctuations within a few days can be tens or hundreds of percent. Therefore, digital assets are becoming increasingly attractive trading and investment tools. To make money on them, you need to know how to store cryptocurrency and protect it from hackers and intruders. This article will analyze all the popular ways to keep cryptocurrency and their advantages and disadvantages.
What is a cryptocurrency wallet?
Since the cryptocurrency has no physical expression, the wallet has nothing to do with the usual wallet. A cryptocurrency wallet is secure digital storage that contains private and public keys for accessing user funds.
A public key is something like a card number or a bank account. It is visible to everyone on the network (however, no one knows the name of the owner). The public key is used to transfer funds to the user.
The private key is known only to the owner of the cryptocurrency. The one who enters it gets access to the coins and can transfer them to other users or use them to buy goods and services. Therefore, the question is: “How to store cryptocurrency?” essentially boils down to considering how keys are stored.
If you write down your keys in a notebook, you get the simplest version of a cryptocurrency wallet – paper. You do not have to spend money on particular programs or devices, but you can say goodbye to the capital if the leaflet is lost. In addition, you can come up with a phrase that you will not forget,
How are cryptocurrency wallets different?
Since there are many ways to store cryptocurrencies, choosing a wallet will depend on your goals. Cryptocurrency wallets can differ according to several criteria.
Several supported currencies. There are mon currency and multicurrency vaults. The first one means that they will only contain coins of the same type, for example, bitcoin wallets or Ethereum wallets. If you operate with only one cryptocurrency, it will be enough. But for operations with different tokens, multicurrency storage can be convenient. The downside is that if attackers gain access to such a wallet, you can lose your savings in several digital currencies.
How to connect to the blockchain. To authenticate blocks, the wallet must have a connection to the blockchain. If it is direct, this technology is called a “thick client” and involves storing the entire chain directly on the device. A device (for example, a computer) becomes a blockchain node and stores information about a vast number of transactions. Installing such a wallet will require several hundred gigabytes of hard disk space.
An easier way is to connect to the blockchain through the wallet developer’s server. In this case, you do not need to download the entire chain to the device; the program saves only the keys and data on the account status. Such a wallet does not require a lot of storage on the device, but it is less secure because a third party verifies the blocks. This technology is called “thin client.”
Private keys can be stored online or offline. In the first case, you need to open your wallet to make an operation and send money to someone. Such storages are called hot storages. Its advantage is quick access, suitable for trading, and making money on short-term exchange rate fluctuations. But since it can be unsafe to store cryptocurrency online, it is recommended to keep large amounts offline. In this case, the wallet must first be connected to the Internet to carry out transactions. The storage itself will be called cold storage, it is less convenient for fast transactions, but your money is protected from all Internet threats since there is no permanent wallet connection to the network.
Hot wallets are also divided into custodial and non-custodial. The former is often found on exchange websites, and access to private keys is available to the cryptocurrency owner and the site where the wallet is located. This is convenient: if you forget the key, you can restore it using your login, password, and other credentials. On the other hand, exchanges and online wallet services can be hacked, and you will lose your coins. In addition, there are phishing sites on the network that copy the design of online wallets. Through them, attackers get logins, passwords, and other user data and steal their funds. Therefore, when using custodial wallets, do not forget about two-factor authentication and always check the website address in the browser bar.
In non-custodial wallets, only the user has a private key; if it is lost, the site will not help restore it. However, hacking an exchange website or an online wallet will not mean a loss of funds for you.
What are cryptocurrency wallets?
Now let’s get down to specifics. What are the different types of wallets on which you can store cryptocurrency? As already mentioned, wallets can be connected to the network all the time or offline.
Offline is considered safer for storing large amounts. These include the already mentioned paper wallets as well as hardware wallets. These devices resemble a flash drive on which public and private keys are stored. They are well protected from hacking and are connected to the computer via USB only for transactions. The only risk is losing the device and its access to your funds. Among the famous manufacturers of hardware crypto wallets are Ledger and Trezor.
You can not purchase an additional device but simply install the program on your computer, laptop, or tablet. Such a wallet will be called software. You can lose access to funds only in case of hacking, loss, or breakdown of the device itself. Such wallets are reliable and well protected from hacking; they are not connected to the network permanently and therefore safe enough to store even enormous amounts.
Mobile wallets are arranged similarly – applications for a smartphone that allow you to store keys and conduct transactions.
Do not confuse software and mobile wallets with web wallets. These are cloud storages that you can only access online. Before placing your funds in such a wallet, check the reputation of the resource and find out if the administration of the service will have access to your keys.
Summary
Cryptocurrency has no physical expression. To access transactions and funds, users have keys – sequences of characters.
The public key is similar to a bank account number and is visible to everyone. It is used to transfer funds. The private key is known only to the coins’ owner and gives them access. Storing these two keys is equivalent to storing the cryptocurrency itself.
The place where these keys are located is called a cryptocurrency wallet.
Wallets can be cold – not connected to the network all the time, or hot – hosted online. The first ones are invulnerable to Internet threats and are considered safer since you can store cryptocurrency on them in large quantities. The latter are suitable for quick access to funds; keeping a minimum amount on them for fast transactions makes sense.
Online wallets, in turn, can be custodial and non-custodial. In the first, not only the owner of the coins has access to the keys, but also the site itself. This is convenient if you forgot the key, but the areas are often subject to hacker attacks. In non-custodial keys, only the user has access to the keys.
Online wallets can be presented in the form of mobile applications and accounts on exchanges and other sites. Cold wallets can be hardware, software, or paper wallets.
