If you are planning to trade Cryptocurrencies, you should also be concerned about the safe storage of the currency you purchase.
Cryptocurrencies can be stored in what is called a wallet. We will now introduce the types of wallets, their basic functions, and features.
What is a Cryptocurrency Wallet?
A wallet for Cryptocurrency is a place where the currency is stored. Wallet means wallet, so it should be understood as an electronic wallet for Cryptocurrency.
Storing Cryptocurrencies in a secure wallet reduces the likelihood that they will be stolen, e.g., through hacking. Wallets protect Cryptocurrencies with a cryptographic system that uses a private key and a public key.
The public key is a code that anyone can check, while the private key is a system that is not made public. To securely store Cryptocurrency, it is important to manage the private key.
There are many types of wallets. When using wallets, it is important to use them for different purposes.
Each type of wallet has different usability and security strengths. It is important to note that the level of security varies greatly depending on whether you are using a hot wallet, which is connected online, or a cold wallet, which is offline.
Difference between an Exchange and a Cryptocurrency Wallet
To trade Cryptocurrency, you must open an account on an exchange provided by a Cryptocurrency exchange.
An exchange is an online venue for the buying and selling of Cryptocurrencies. It also has a function to store the Cryptocurrency acquired through the transaction.
To purchase Cryptocurrency, you basically deposit U.S. dollars or other legal tender into your Cryptocurrency exchange account and use the funds to make a purchase transaction, which you can easily obtain. Furthermore, you can also buy and sell between different types of Cryptocurrencies.
The main purpose of an exchange is to provide a place for investors to trade cryptocurrencies with each other and to sell cryptocurrencies.
Wallets, on the other hand, are intended to store the Cryptocurrencies they acquire. When conducting Cryptocurrency transactions, it is important to recognize that the purpose of an exchange and a wallet are different.
However, when trading on an exchange, you will also need to store the Cryptocurrency you have purchased. Therefore, by opening an account at an exchange, a wallet for the account holder is also automatically created.
You can store the Cryptocurrencies you have acquired in the exchange’s wallet as is, or you can create a separate wallet for yourself and transfer them there for safekeeping.
Benefits of a Cryptocurrency Wallet
The following are some of the benefits of using a Cryptocurrency wallet
Decentralized storage
Firstly, Cryptocurrencies can be stored in a decentralized manner.
Instead of storing them only within an exchange, you can prepare and store them in multiple wallets for your own use to ensure decentralized storage.
Also, if you use a high-security type of wallet, you can reduce the risk of hacking.
Easy balance inquiry and money transfer
Second, it is easy to check the balance and transfer funds.
Since wallets are electronic wallets, real-time balances can be easily checked.
Also, for example, if you store Cryptocurrencies in a wallet on your smartphone, you can easily transfer money by simply operating the wallet with your smartphone.
Counterparty risk can be reduced
Third, counterparty risk can be suppressed.
Counterparty refers to the other party, such as a counterparty or exchange. If an exchange closes down, you may not be able to retrieve the currency you have stored.
Therefore, you can hedge such risks by creating your own wallet and transferring your Cryptocurrencies there. However, you will have to manage your own private keys.
Types and Features of Cryptocurrency Wallets
The main types of wallets that serve the function of storing Cryptocurrencies are as follows
Online Wallet
The first is an online wallet.
This is a wallet that is always online and is provided in the cloud.
Wallets offered by exchanges fall into this type, but there are also operators that offer stand-alone online wallet services.
Online wallets serve to store Cryptocurrencies in an online account. This is the most common type of wallet among the many types of wallets.
If you store your cryptocurrencies in an exchange, you may not be able to withdraw your cryptocurrencies in case the exchange closes. Therefore, by using a separate online wallet, you can diversify your assets.
Online wallets can often be used by simply setting up an email address, ID, and password. However, it is important to note that the wallet cannot be used if the site is unavailable, such as when the service provider’s server is down.
Also, be aware that if your account is hacked and your password or other information is stolen, your stored Cryptocurrency may be a victim of theft.
Mobile Wallet
The second is a mobile wallet.
You can install the wallet’s application on your smartphone or tablet.
Mobile wallets are used by installing a wallet on a mobile device. The benefits are that by installing the application on your smartphone or tablet and storing your Cryptocurrency, you can ensure that you are always in possession of your Cryptocurrency.
You can easily use and transfer Cryptocurrencies while on the go, and you can also manage your balance with one of your smartphones. This wallet is suitable for shopping at stores that accept Cryptocurrency payments.
Security methods vary slightly depending on the specifications of the mobile wallet. If the type allows you to manage the private key required for transferring Cryptocurrency on your smartphone or other device, you can manage the security yourself.
With this type of mobile wallet, even if the management company providing the service is hacked, you can avoid a situation where the Cryptocurrency in your smartphone is stolen.
Desktop Wallet
The third is a desktop wallet.
It is sometimes referred to as a client wallet. It is common to install a wallet on a computer.
A desktop wallet is also sometimes referred to as a client wallet or local wallet.
This type of wallet is not managed on a server, but on individual local client terminals. Generally, you install wallet software on your own computer and manage your Cryptocurrency in a local environment.
While an Internet connection is required for remittances and other transactions, the wallet can be used without an Internet connection in all other cases. Therefore, there is no risk of being hacked when not connected to the Internet, providing higher security than online wallets.
It is also important to understand that there are two types of desktop wallets.
One type is called the complete type. This type downloads the entire blockchain containing all the transaction history of the Cryptocurrency and requires a large amount of capacity.
The other is a simplified type. It requires less capacity, but has the disadvantage that it cannot be managed if the computer malfunctions.
Hardware Wallet
The fourth is a hardware wallet.
This is a form of storage on a USB-like device. Since private keys can be managed offline, it is said to be a more secure storage method than online wallets.
Hardware wallets use a hard device like a USB. It must be connected to a computer or other device for remittance and balance management, but it is usually stored in a disconnected state.
Hardware wallets are characterized by the ability to store private keys without being connected to the Internet. Another benefit is that the wallet can be used without the use of an application, as long as the wallet in the form of a USB device is purchased.
Because it can be stored without an Internet connection, the risk of hacking is lower. Therefore, it is a wallet with a high level of security.
However, caution should be exercised when using a used hardware wallet. There is a risk of hacking from the previous owner or others at the time of connecting to the Internet.
It is also important to understand that if you forget the encrypted private key, called a recovery or restoration phrase, you risk being unable to retrieve the Cryptocurrency stored inside.
Paper Wallet
The fifth is a paper wallet.
Literally, the information needed to restore the Cryptocurrency in storage is printed out and stored in paper form.
The information on the private key required to retrieve Cryptocurrency is printed on paper in the form of a QR code or alphanumeric characters. Normally, the information is stored in paper form, but when transferring money, it is necessary to read the information on the paper to process the withdrawal.
This is said to be the safest type of wallet in terms of avoiding hacking risks. Since private key information does not exist except printed on paper, hacking is almost impossible if the wallet is kept in a paper wallet state.
However, be careful to store the paper on which the private key is printed. If the printed information is lost or burned, the stored Cryptocurrency cannot be recovered.
You will also lose your Cryptocurrency if you lose it. While the risk of being hacked can be reduced to almost zero, it is necessary to be aware of other risks.
How to Choose the Best Cryptocurrency Wallet
When using multiple types of wallets, you need to choose the wallet that best suits your purpose. To avoid risks such as theft or loss, it is effective to use multiple wallets for diversified storage.
If you store your cryptocurrencies in only one wallet, you will lose all of your cryptocurrencies if that wallet is hacked or damaged. It is important to always be aware of decentralized storage.
Users who are confident in their ability to manage their own money and want to hold it for the long term while minimizing the risk of hacking should use a paper or hardware wallet.
Mobile wallets are suitable for users who want to use them for daily payments. Those who trade frequently may want to keep their Cryptocurrencies in an exchange wallet and transfer those not used for trading to other wallets.
It is important to be aware of how to make the most of the features of each wallet.