The different types of crypto wallets explained
In short, a cryptocurrency wallet is a tool you can use to interact with a blockchain network. There are different types of cryptocurrency wallets which can be divided into three groups: software, hardware and paper wallets. Depending on their working mechanism, they can also be called online or offline wallets.
The majority of cryptocurrency wallet providers are software-based, making them more convenient to use than hardware wallets. However, hardware wallets are generally the safest solution. Paper wallets, on the other hand, consist of a “wallet” printed on a piece of paper, but their use is now considered outdated and unreliable.
How do cryptocurrency wallets work?
Contrary to popular belief, cryptocurrency wallets do not actually store cryptocurrencies. Instead, they provide the tools necessary to interact with a blockchain. In other words, these wallets can generate the information needed to send and receive cryptocurrencies via blockchain transactions. This information consists in particular of one or more pairs of public and private keys.
The wallet also includes an address, which is an alphanumeric identifier generated based on the public and private keys. Such an address is, so to speak, a specific “location” on the blockchain to which funds can be sent. This means that you can share your address with others to receive funds, but you should never reveal your private key to anyone.
The private key gives access to your cryptocurrencies, regardless of the wallet you use. So even if your computer or smartphone is compromised, you can still access your funds from another device, as long as you have the corresponding private key (or mnemonic phrase). Note that funds never actually leave the blockchain, they are simply transferred from one address to another.
Do I need a crypto wallet to trade cryptocurrencies?
Yes. Whether you are a frequent trader or a Bitcoin HODLer, you must have a wallet to store and trade cryptocurrencies. You can use the online wallet provided by your cryptocurrency exchange, a wallet you install on your phone, a browser extension, a desktop wallet, or a hardware wallet. There are many options. Here are some portfolio examples:
1. Online Wallet: Binance website.
Wallet on phone: Trust Wallet, MetaMask.
3. Extension de navigateur : MetaMask, MathWallet, Binance Chain Wallet.
4. Desktop Wallet: Electrum, Exodus.
Note: If you are using Binance Smart Chain (BSC), be sure to check out The Best Crypto Wallets for Binance Smart Chain (BSC).
Comparison of online and offline wallets
As mentioned, cryptocurrency wallets can also be defined as “online” or “offline”, depending on how they operate.
An online wallet is a wallet that is connected in some way to the Internet. For example, when you create an account on Binance and send funds to your wallets, you are depositing into the Binance online wallet. These wallets are quite easy to set up and funds are quickly accessible, making them convenient for traders and other frequent users.
Offline wallets do not have an Internet connection. Instead, they use physical media to store keys offline, making them resistant to online hacking attempts. Therefore, offline wallets tend to be a much safer alternative to “store” your funds. This method is also known as offline storage and is particularly suitable for long-term investors or “HODLers”.
To protect user funds, Binance only holds a small percentage of these funds in its online wallets. The rest is kept in offline storage, disconnected from the Internet. Binance DEX also offers an alternative to users who prefer not to keep their funds on a centralized exchange. It is a decentralized exchange platform that allows them to have full control of their private keys, while being able to trade directly from their offline storage devices (hardware wallets).
Software wallets
There are many types of software wallets, each with their own characteristics. Most of them are connected to the Internet (online wallets). Below is a description of some of the most common and important types: web, desktop, and mobile wallets.
Wallets Web
You can use web wallets to access blockchains through a browser interface without having to download or install anything. This includes both exchange wallets and other browser-based wallet providers. In most cases, you can create a new wallet and set a personal password to access it. However, some service providers hold and manage private keys on your behalf. Although this may be more convenient for inexperienced users, it is a dangerous practice.
If you don't hold your private keys, you are trusting someone else with your money. To solve this problem, many web wallets now allow you to manage their keys, either entirely or through shared control (via multi-signature). It is therefore important to check the technical approach of each wallet before choosing the most suitable one for you.
When using cryptocurrency exchanges, you should consider using the protection tools available.
The Binance exchange site offers several security features, such as device management, multi-factor authentication, anti-phishing code, and withdrawal address management.
Wallets, desktop apps
As the name suggests, a desktop wallet is software that you download and run locally on your computer. Unlike some web-based versions, desktop wallets give you full control over your keys and funds. When you generate a new desktop wallet, a file called "wallet.dat" will be stored locally on your computer. This file contains the private key information used to access your cryptocurrency addresses. You must therefore encrypt it with a personal password.
If you encrypt your desktop wallet, you will need to provide your password every time you run the software so that it can read the wallet.dat file. If you lose this file or forget your password, you will most likely lose access to your funds.
So it is crucial to backup your wallet.dat file and keep it in a safe place. You can also export the corresponding private key or mnemonic phrase. This will allow you to access your funds on other devices, in case your computer stops working or becomes inaccessible in any way.
In general, desktop wallets can be considered more secure than most of their web counterparts, but it is essential to ensure that your computer is free of viruses and malware before setting up and using a desktop wallet. cryptocurrencies.
Mobile wallets
Phone wallets work much like their desktop counterparts, but are designed specifically as smartphone apps. This is a very convenient solution because it allows you to send and receive cryptocurrencies through QR codes.
As such, mobile wallets are particularly suited to making everyday transactions and payments, making them a viable option for spending bitcoin, BNB, and other cryptocurrencies in the real world. Trust Wallet is an example of a recognized mobile cryptocurrency wallet.
However, just like computers, mobile devices are vulnerable to malicious applications and virus infection. It is therefore recommended to encrypt your mobile wallet with a password, and to back up your private keys (or mnemonic phrase) in case your smartphone is lost or broken.
Hardware wallets
Hardware wallets are physical and electronic devices that use random number generation (RNG) to generate public and private keys. The keys are then stored in the device itself, which is not connected to the Internet. Therefore, hardware storage is a type of offline wallet and is considered one of the safest alternatives.
Although these wallets offer higher levels of security against online attacks, they can pose risks if the firmware implementation is not done correctly. Additionally, hardware wallets tend to be less user-friendly and funds are more difficult to access compared to online wallets.
To overcome the lack of accessibility, you can use Binance DEX to connect your device directly to the trading platform. This is a secure way to access your funds because the private keys never leave your device. Some web wallet service providers also offer a similar service, allowing hardware wallets to connect to their interface.
You should consider using a hardware wallet if you plan to hold your cryptocurrencies for a long time or if you hold large amounts of cryptocurrencies. Currently, most hardware wallets allow you to set up a PIN to protect your device, as well as a recovery phrase that can be used if your wallet is lost.
Paper wallets
A paper wallet is a piece of paper on which a crypto address and its private key are physically printed as QR codes. These codes can then be scanned to execute crypto transactions.
Some paper wallet websites allow you to download their code to generate new addresses and keys while offline. As such, these wallets are very resistant to online hacking attacks and can be considered a form of offline storage.
However, due to the many disadvantages, the use of paper wallets is now considered unsafe and should be discouraged. If you want to use it anyway, it's essential to understand the risks. One of the main flaws of paper wallets is that they are not able to send a fraction of their balance, but only the entire amount.
For example, imagine you created a paper wallet and made several transactions to fund it, for a total of 10 BTC. If you decide to spend 2 BTC, you must first send the 10 BTC to another type of wallet (for example, a desktop wallet), and only then spend the part of the funds you wanted (2 BTC). You can then transfer the 8 BTC to a new paper wallet, although a hardware or software wallet is a better choice.
Technically, if you import the private key from your paper wallet into a desktop wallet and spend just a portion of the funds, the remaining funds will be sent to an "exchange address" automatically generated by the Bitcoin protocol. If you do not manually set the exchange address to an address that you control, you may lose your funds.
Most current software wallets take care of the exchange address for you, sending the remaining funds to an address that is part of your wallet. But remember that your paper wallet will be empty after sending its first transaction, regardless of the amount. So don't expect to be able to reuse it later.
The importance of backups
Losing access to your cryptocurrency wallets can cost you dearly. It is therefore important to back them up regularly. In many cases this is done by simply saving wallet.dat files or mnemonic phrases. A mnemonic phrase works like a nightingale that generates and provides access to all the keys and addresses of a crypto wallet. If you have opted for password encryption, remember to back it up too.
What type of cryptocurrency wallet should I use?
There is no clear answer as to which cryptocurrency wallet you should use. If you are a frequent trader, using an online wallet allows you to quickly access your funds and make trades easily. Assuming you've taken extra steps to secure your account with two-factor authentication (2FA) methods, your cryptos are generally safe. However, if you are HODLing a large amount of cryptocurrencies that you do not wish to sell, cold wallets are better alternatives because they are not connected to the Internet, increasing security and resisting online phishing attacks or scams. scams.
To conclude
Cryptocurrency wallets are an integral part of using Bitcoin and other cryptocurrencies. They constitute one of the basic infrastructures that allow sending and receiving funds through blockchain networks. Each type of cryptocurrency wallet has its advantages and disadvantages. It is therefore essential to understand how they work before storing and transferring your funds there.
