Cryptocurrency Wallets Explained

What is a Bitcoin wallet?

In cryptocurrency we find many examples of misleading terminology, which doesn’t necessarily mirror functionality. The term *bitcoin wallet* is one of those. To understand what a wallet is, you must first understand that Bitcoin and other cryptocurrencies are simply giant online ledgers that keep track of who owns what. Your wallet actually holds keys to unlocking a specific account or set of accounts, kind of like a keychain. These keys enable you to move funds out of those designated “wallets”.

Let’s now breakdown some different types of Bitcoin wallets!

“Hot” Wallet

Typically an app on your phone, tablet or personal computer. The keys to your account reside on that device, meaning they are only as secure as the device itself. If device is stolen or hacked, someone can feasibly get access  to your money. Hot wallets are best used for day-to-day spending, not for large holdings or savings.

You can watch my video on the Samourai Wallet below:

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“Cold” Storage

This term that means your keys are not held on an internet-connected device. Cold storage can take different forms, the most common being paper wallets or hardware wallets. We’ll dive into these below:

Paper Wallet

Exactly what it sounds like; piece of paper that holds the key to your account. Paper wallets allow you to top up your balance, or remove all funds. In order to access the wallet, you need to use a secondary application like a mobile wallet to send/receive. This is good cheap method to store coins, but can be susceptible to water/fire damage - so be sure to store securely and have copies! It can also be insecure if someone is able to snap a picture of the codes on the page, as this is the equivalent of making a copy of the key to your account. Always treat paper wallets with care and keep them away from prying eyes.

To learn how to create and use a paper wallet, watch below:

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Hardware Wallet

These are small devices that allow you to hold various cryptocurrencies securely. The most popular ones include Trezor and Ledger, but there are many options on the market today. Hardware wallets work by holding your key on the device only, which does not directly access the internet. The devices are used by connecting to a computer or phone to approve and execute transactions. During this process, your key never leaves the physical device, and cannot be viewed by the connected computer (even if it has been hacked). 

For an example of a popular hardware device, you can view my video on the Ledger:

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The previous wallet examples all have the user holding their own funds, but there is another method of storage we should talk about…

Custodial Wallets

This type of storage is important to differentiate from the rest. The term “custodial” means that a 3rd party actually holds your account keys for you. Examples of this would be online exchanges like Bittrex, Binance, Poloniex and Coinbase. An easy way to tell if you’re using a custodial wallet is if you need to use a username and password (though this can vary in some cases). While this may be convenient for those that are not well versed in proper security, or for those that need to execute quick trades between various currencies... it also puts you at risk of frozen accounts, or hacks. When an entity holds a large amount of funds for customers, they become a very attractive target for hackers. It is advisable to only store funds on a custodial service when necessary, or at the very least to fully understand the implications of doing so.

For an example of a custodial exchange, check out my video on Coinbase:

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