Because crypto wallets don't hold cryptocurrency like physical wallets do with cash or credit cards, the name "wallet" might be slightly misleading. However, crypto wallets have a set of keys that let you conduct crypto transactions on any given blockchain. These keys come in the form of private and public keys.
A key is essentially a lengthy series of ambiguous, random characters. A private key is similar to the PIN or password you'd use to log in to your bank account. In contrast, a public key is a number similar to a bank account number and may be freely shared.
Keys use cryptography as a form of encryption to stay secure and protected. Each public key is linked to a private key. Public keys enable users to receive cryptocurrency, while private keys provide proof of public key ownership. Both work in tandem to encrypt and decrypt information.
A seed phrase, also known as a recover phrase or a mnemonic phrase, is a randomized string of words that holds the information needed to retrieve or recover cryptocurrency from blockchains or crypto wallets.
Crypto wallets include software that generates seed phrases and advises users to write them down for safety. This is useful in the event of a hardware failure or data corruption, where the user simply reinstalls the relevant software and recovers control of their funds.
A cryptocurrency wallet is a software linked to a blockchain that stores public and private keys to enable cryptocurrency transactions. It allows users to hold, send, and receive cryptocurrency. They also help safeguard crypto assets.
Custodial wallets are wallet software programs provided by centralized platforms or corporations like a cryptocurrency exchange. They include less user accountability for managing private keys. A user effectively outsources their private keys to a company when they give that company possession of their wallet.
In general, custodial wallets are options that are the most similar to traditional finance and best-suited for beginners. They’re easy to use but present the same risk of traditional financial intermediaries.
Non-custodial wallets don’t involve outsourcing to a third party. Instead, the user is in charge of the private key, making transactions virtually free of any central intervention. However, they aren't as user-friendly as custodial wallets.
If you want to store your coins, it's ideal to find a combination of practicality and protection, which brings us to hot and cold wallets.
Hot wallets are often easier to use than cold wallets, thanks to a straightforward user interface. As these operate online, one doesn’t need to switch between offline and online platforms to perform a cryptocurrency transaction.
ransacting with cold wallets requires more effort than with hot wallets. For example, cold wallets are hard drives or paper wallets that need physical devices like laptops or desktops that you would plug into, transfer crypto to your hot wallet, and then use your coins. This, in fact, makes cold wallets more secure. Since they're offline wallets, one would need to physically access a cold wallet and its private key to gain access to the wallet's funds.
In short, cold wallets are arguably less vulnerable to hackers and cyberattacks, making them more secure than hot wallets. However, hot wallets are faster and some consider them more convenient for storing crypto and making transactions.
Many beginners purchase cryptocurrencies through an exchange like Coinbase or Kraken and keep their assets in the "custodial" wallets available on such platforms. However, these platforms are susceptible to attacks as they serve as a hub for daily transactions totaling billions of dollars. As a result, it’s essential to safeguard your cryptocurrency by employing the following practices:
Your seed phrase is like the PIN to your debit or credit card. Sharing your seed phrase will give the holder access to your wallet, and you could potentially lose all your funds. Seed phrases are created to ensure security and sole accessibility to the owner. Never listen to any individual or company claiming they need your seed phrase; it's most likely a scam.
Consider using two-factor authentication (2FA) for all your wallets and linked accounts. It uses two separate verification methods to secure an account. The first method usually involves a username and password, while the second is unique to the user, like their phone or a set of personal security questions.
Multi-signature (multi-sig) security protects your cryptocurrency so that your account stays safe if one of your linked devices gets lost or stolen. It uses several keys to verify a crypto transaction instead of one signature for a single key.
A strong account password can ensure security. Try not to use a password with words or numbers that are personal to you. Instead, use unrelated terms in both capital and lowercase with numbers and characters. Password managers also help. However, ensure you're the only individual with access to the device or browser with your password manager. Always remember to keep your passwords safe. Never share them with anyone.
Back up your accounts frequently, and keep copies of your backups in a safe place that only you’re aware of and can access. Additionally, ensure you have access to all your linked accounts and email addresses if you need to use the "Forgot my password" feature.
Create, record, and hide your wallet's private key on a physical register. If you ever forget your key or your cold wallet's hardware fails, you can always lean back on a physical copy of your private key in a secure location.
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