Decoding Cryptocurrency Wallets: A Comprehensive Guide for Beginners

When investing in cryptocurrencies, investors will need to store their assets in a wallet.

A cryptocurrency wallet allow holders to store and transfer their assets and use multiple blockchain networks all on one platform. 

However, there’s plenty of cryptocurrency wallets out there, so in this article, we’re going to run through the different types of wallets, what they do and who they’re better suited for in regards to investment strategies.

A “hot” wallet is a software-based cryptocurrency wallet that remains connected to the internet and the blockchain network when it’s active. Hot wallets are most commonly used to send and receive assets to other wallets or exchanges, interact with popular DeFi platforms or purchase assets online using decentralised exchanges or non-fungible token (NFT) platforms.

Software wallets like Metamask and Phantom exist entirely online and require an internet connection to use. Hot wallets use public and private keys to secure the wallet, as because they are connected to the internet, they are more exposed to scams and hacks than other types of wallet.

A cold wallet, or cold storage wallet, is most often a hardware wallet that is used to store cryptocurrency assets offline and disconnected from the internet. On acold wallet, the digital wallet is hosted on a platform not connected to a network, meaning that the wallet is better protected from hacks and unwanted access to the wallet. For long-term investors, cold wallets are oiften seen as the better solution. 

A hardware wallet like Ledger is a physical device that enables holders to store their cryptocurrencies “offline”, which is much safer and secure for long-term investors.

There are many different types of wallets out there, with the most common being software (hot) and hardware-based (cold) wallets. The most commonly used “hot” wallet in the cryptocurrency industry is Metamask, which allows users to interact with blockchains such as Ethereum and Avalanche. Popular hardware wallets include Ledger and CoolWallet Pro.

Other types of cryptocurrency wallets include:

A custodial wallet is a wallet provided by a centralised entity such as a cryptocurrency exchange or savings platform. Custodial wallets have proven to be popular for users as they offer minimal responsibility storage of cryptocurrency assets alongside the additional security provided by the best exchanges and platforms.

When a user sends their assets to a custodial wallet or purchases cryptocurrencies on a centralised exchange, the assets are automatically stored in the wallet. This essentially outsources wallet custody to the providers and therefore entrusts the entity with control over the assets in your wallet and the ‘keys’ to your assets. 

A non-custodial wallet is a wallet controlled entirely by the user, with the keys and assets staying in possession of the wallet holder. These wallets do not require a centralised entity to operate and can execute ‘trustless’ transactions using decentralised finance (DeFi) platforms such as exchanges and lending and borrowing products.

Transactions that place using a non-custodial wallet are practically resistant to censorship as the private keys belong to the user, and due to there being no centralised middleman, transactions cannot be halted or stopped from being completed.

A paper wallet is a piece of paper with your seed phrase (your private and public keys) written down or printed, alongside the option of a QR or barcode that can be exported by a wallet app. Much like hardware wallets, they remove online access to your keys, with your assets remaining within your wallet.

A public key is a cryptographic code linked to a private key that allows users to receive assets and transactions. 

With a public key, anybody can send transactions to the wallet address – a shortened version of your public key. This means that your wallet address, which is formed of a sequence of numbers and letters, can be shared with anyone in order to receive assets.

However, to access the assets in the wallet, you need a private key to “unlock” them. A private key enables users to verifiably prove ownership of the assets or approve transactions. A private key comes in various forms, including 256 character binary code, hexadecimal code, a QR code or mnemonic (seed) phrase.

When your assets are kept in a custodial wallet provided by an exchange or platform, that entity becomes the ‘custodian’ of your keys – meaning you’re entrusting them to safeguard your assets. On a non-custodial wallet, you are in charge of your private keys, which are commonly stored in the form of a 12-word seed phrase. 

Investors need a cryptocurrency wallet to store and secure their assets. Whether it’s a software or hardware wallet, the crypto wallet you choose will enable you to hold your assets on whatever blockchain network you wish, or hold them on a centralised platform on a custodial wallet.

Using a cryptocurrency wallet also brings users a number of advantages, including:

• – Improved asset security as your assets are held in a wallet either that you own or hold on a reputable exchange
• – Cryptocurrency wallets are easy to use, with intuitive features that make sending, recieving and trading assets simpler
• – Cryptocurrency wallets make it easier for you to manage your portfolio and view your assets as your balances will be displayed clearly for you at all times
• – Cryptocurrency wallets provide you with access to both decentralised and centralised exchanges, along with some offering access to decentralised finance and NFT platforms through in-built integrations.

The type of wallet you download is entirely dependent on what you want to do with your assets. However, most wallets can either be downloaded from the internet or if it’s a hardware wallet, purchased online. Wallets can be set-up easily and will only take 10-15 minutes to configure. Additionally, if you’re using an exchange like Kinesis pro, your wallet will be set-up already for you to use.