Selecting the Crypto Wallet: A Handbook for Beginners
Cryptoverse is an exciting place to be in—new solutions popping up every year with more functionality being rolled out to users. There is a slow shift from apps that are bulky, hard to use, and impractical to more simple solutions that are intuitively understandable and don't require learning. However, just as the progress keeps marching forward, so do the hackers—they search for vulnerabilities and new ways to infiltrate the wallets. Hence, that is why opting for the right crypto wallet has become paramount. Now, it's not only the question of transferring funds between addresses but also of proper fortification. After all, the more people adopt crypto, the higher the amount of crypto stored and the more temptation to take over it.
In this module, we will delve into the intricacies of crypto wallets, where we will look for the best ways to secure your digital assets and dive into the differences between various solutions.
What is a Crypto Wallet
A crypto wallet is essentially the place where you store your crypto assets and from where you conduct your transfers. The essential characteristics of the crypto wallet are the private and public keys, where the public key is used for making transactions, and the private key is utilized for getting access to them. While the public has access to the former, only the wallet owner possesses info about the latter.
Yet, anyone who somehow gained access to the two can control the wallet, so it's crucial to keep the private key safe and as far away as possible. However, most users today make purchases and sales via CEXes (centralized exchanges) like Binance or Kraken—the drawback is that private keys do not belong to users and are known to the platform. While not ideal, if the centralized exchange has a clean reputation or is under some sort of regulation, it will function just like the conventional bank, so such an arrangement is acceptable for most users.
However, if you want to take full ownage of your keys, you have two options: hot and cold wallets.
Hot Wallets
Hot wallets are the crypto wallets that boast a 24/7 connection to the internet. They are characterized by providing the users with full ownership of crypto assets, thus giving them full control over their funds. A notable example is Metamask, perhaps the most popular hot wallet out there. With it or its alternative, you can store cryptocurrencies, make transactions, and even possess NFTs. These types of wallets are very convenient for day-to-day operations and connecting to the DEXes (decentralized exchanges) on the fly from anywhere in the world. For example, if you wish to buy NFTs on OpenSea or Rarible, you can simply sign in with your hot wallet, authorize a connection, and start buying and selling. Furthermore, you can create digital assets and post them online with ease, as well as sell those in your possession.
However, the convenience of hot wallets has its price—because of a 24/7 internet connection, they are vulnerable to cyber-attacks. You can't just switch them off; hence, if an intruder is successful in their struggle, your assets, with a high probability, will be gone forever without any possibility of recovery. Furthermore, if you experience a hack or locked yourself out, there's no one you can usually contact or call since customer support is often non-existent. It's your sole responsibility to look after the assets. In contrast, CEX wallets, which are technically hot wallets to which both the user and exchange have access, boast support that can help you deal with these issues.
Overall, hot wallets are a trade-off between convenience and security—while one can trade on the fly, it comes at the potential cost of a breach. Nevertheless, the user has full control, making them more secure compared to their CEX counterparts.
Cold Wallets
In contrast to hot wallets, cold wallets usually come in the form of a USB drive or even paper. The crucial difference between cold and hot wallet is the web access—the former is completely offline, hence keeping the keys off the internet. That's the most significant advantage of a hot wallet—cold wallets are much, much harder to infiltrate as they usually require the owner to insert a USB stick into the laptop or PC to access them or use keys written on paper to unlock the offline folder. The best-known example of the cold wallet is Ledger, which is essentially a USB drive explicitly developed to store private and public crypto keys.
However, such a fortification comes at the cost of user-friendliness—without the paper or USB, you can't really enter the wallet. As a result, it limits the owner, who has to either check the funds in a specific physical location or carry a USB or paper with them at all times. That means that while the cyber threat is way lower compared to the hot wallet, the loss of such a physical tool will result in a permanent loss of funds.
Since some cold wallets come in the form of a USB stick, it's the user's responsibility to check the manufacturer. It must be a reliable and established company to avoid any kind of threat.
Closing Thoughts
The crypto industry, just like any other technology, continues its development at a rapid speed—there are more opportunities to trade and create than a decade ago. Yet, while traversing this space, it's vital to follow cyber hygiene to avoid unnecessary threats.
To make your journey safer, there are wallets that keep your assets safe and give you full ownership of the contents. Yet, it's paramount to study the specifics of hot and cold wallets in detail to choose the best solution.