A cryptocurrency wallet is a piece of hardware or software that houses private and public keys, allowing users to access their assets and conduct transactions with their cryptocurrency. They function similarly to wallets where you store cash and other items, such as your credit card, for easy access and spending. However, instead of physical cash, cryptocurrency wallets store tokens, or cryptocurrencies, with an easy-to-use interface for managing balances and making transactions. Crypto wallets are an essential tool for interacting with the blockchain network.

So How Does A Cryptocurrency Wallet Work

In reality a cryptocurrency wallet does not actually store cryptocurrency but instead it has the ability to store and generate information needed to interact with a blockchain and make cryptocurrency transactions. Such information are the public and private keys, keys are a stream of unpredictable characters such as text, alphabets and symbols used in cryptography, public keys are similar to your bank account number while private keys are similar to the PIN linked to your account.

With your account number you can receive cash, you can also send cash to others when you know their account number, a PIN serves as a proof of ownership to an account more like a password to an account, want to know more about public and private keys you can check out this article i wrote about public and private keys here. Since a wallet does not store cryptocurrency, it stores the information needed to interact with it, there is no physical location, file or folder that holds cryptocurrencies but instead they are stored as bits of data in a distributed database known as a blockchain.

Whenever you make a cryptocurrency transaction such as sending a token your private key is used to sign that transaction and information about the transaction is broadcasted to the blockchain network, the network then adds your transaction to the chain and updates your current balance and that of the receiver. Blockchain technology makes it possible to actually to the balance linked to a particular public address and the can then display it on its user interface you can then manage your balances as well as make you assets.

Different Types Of Cryptocurrency Wallets

There are mainly two categories of wallets known as hot and cold wallets, in this article we explain the two categories of cryptocurrency wallets and which one of them suits your needs.

Hot Wallets

Hot wallets are cryptocurrency wallets which are connected to the internet. Hot wallets are quite easy to set up and they give a user easy access to their funds. Hot wallet provides a user interface which a user can use to view their balance and as well make transactions. In a hot wallet the private and public keys are saved inside the software, since hot wallets are capable of connecting it to the internet, it exposes it to hacker and malware because they can be vulnerabilities in computer networked with can be exploited by bad actors, this is one of the main downsides of hot wallets. It is not always advisable to use hot wallets to store large amounts of cryptocurrencies, it is better to keep the amount you need for spending it. Examples of cold wallets are :

• Web wallets
• Mobile wallets such as trust wallet, blockchain wallet.
• Desktop wallets example Exodus wallet, mycelium wallet.

Cold Wallets

Cold wallets are wallets which store cryptocurrency offline, meaning they are not connected to the internet. Cold wallets are also known as cold storage, since they are not connected to the internet they have more security to cryptocurrency stored in it and are mostly shielded from hackers and bad actors. Cold wallets are isolated from other devices, they store private keys in an offline environment. Examples of cold wallets are:

-Hardware wallet: These are the most popular type of cold wallet, they resemble a USB drive, it stores and protects the private key in its memory. You sign transactions with it by connecting it with your computer using a USB interface.

-Paper wallet: This is a piece of paper in which your public and private keys are printed on it, most times they are printed out in the form of QR code. Paper wallets are secure from hacking and malware attacks but they are vulnerable to damage by environmental factors.

In addition to the types of wallet given above, there are mainly two types of wallets known as custodial and non custodial wallets. In a custodial wallet the user does have the responsibility of securing their private key, instead that responsibility is given to a trusted entity. Typically such entities are mostly exchanges, users are no longer in control of their funds as the private keys needed to make sign transactions are held by the exchange.

Most exchanges used a variety of methods to secure users funds such as Biometric authentication, Email authentication, two factor authentication. Many exchanges also transfer some portion of the users cryptocurrencies to the company cold wallet, where can be secured from hacking and other forms of cyberattacks.

On the other hand non custodial wallets are wallets in which the user has the sole responsibility of securing their private keys as well as their funds this means that users are in charge of the safety of their cryptocurrencies. When starting out with a non custodial wallet you it always best practice to write down and secure you seed phrase also know as mnemonic phrase, it is from this phrase that your private and public keys are derived, they also serves as recovery or backup Mechanism that can be used to recover your funds.

What Kind Of Wallet Is The Best To Use?

The type of wallet you should utilize, however, totally depends on your needs and most times the quantity of cryptocurrencies you now own. A cryptocurrency trader might prefer to use a hot wallet because it is easier to use, but someone who holds a significant quantity of cryptocurrency, such as an investor, may prefer a cold wallet because it provides better protection for the significant amount of cryptocurrency involved.

Additionally, for the sake of security, it is usually a good idea to use cold wallets rather than a hot wallet when working with large amounts of cryptocurrency. There is no perfect type of wallet; whether it is hot or cold, each has advantages and disadvantages. There are additional elements to take into account. : User friendliness, supported token, longevity in the market, security factors.