Information about crypto wallets
In short, a crypto wallet is a tool that can be used to interact with a blockchain network. Wallets are divided into three groups: software, hardware and paper. Depending on the operating mechanism, they can also be called hot or cold.
Most companies that provide cryptocurrency wallets use software, which makes them more convenient than their hardware counterparts. In turn, hardware wallets are more secure - as are paper wallets, which consist of data printed on a piece of paper. However, their use is now considered outdated and unreliable.
How do cryptocurrency wallets work?
Contrary to popular belief, cryptocurrency wallets are not designed to actually store digital assets. Instead, they provide tools to interact with the blockchain. In other words, these wallets can generate the necessary data to send and receive cryptocurrency through transactions. This data consists of one or more pairs of public and private keys.
The wallet also includes an address with an alphanumeric identifier, which is generated based on the public and private keys. This set of characters represents a specific “location” on the blockchain to which coins can be sent. This means that you can share your address with other users to receive funds, but you should never reveal your private key to anyone.
The private key gives you access to your cryptocurrencies, no matter what wallet you use. This way, even if your computer or smartphone has been compromised, you can still access your funds from any other device, as long as you have the appropriate private key (or seed phrase). Please note: coins never leave the blockchain, they simply move from one address to another.
Do I need a wallet to trade cryptocurrency?
The simple answer is yes. You should have a wallet address to store and trade cryptocurrencies if you are a frequent trader or just a Bitcoin HODLer. You can use a hot wallet from a cryptocurrency exchange, a mobile wallet on your phone, a browser extension, a desktop wallet, or a hardware wallet. There are many options available to you. Below we will look at the different types of wallets:
1. Hot wallet: Binance exchange.
2. Mobile crypto wallets: Trust Wallet, MetaMask.
3. Browser extensions: MetaMask, MathWallet, Binance Chain Wallet.
4. Desktop crypto wallets: Electrum, Exodus.
Note: If you are using Binance Smart Chain (BSC), be sure to check out the article: Best Crypto Wallets for Binance Smart Chain (BSC).
Hot or cold wallet?
As we have already said, wallets for storing cryptocurrency can be “hot” or “cold” depending on the way they work.
A hot wallet is any type of wallet that is connected to the Internet. For example, when you create an account on the Binance exchange and add funds to your account, you deposit them into the Binance hot wallet. Such wallets are quite easy to set up and provide quick access to your balance, which makes them convenient for traders and other regular users.
In turn, cold wallets have no connection to the Internet. Instead, they use physical media to store keys offline, making them more resistant to hacking. Thus, cold wallets are a much safer means of storing coins. This method is also known as cold storage and is especially suitable for long-term investors, or hodlers.
To protect the funds of its users, Binance keeps a small percentage of coins in hot wallets, and the rest is stored in cold wallets without an Internet connection. It is worth noting that Binance DEX provides an alternative option for users who do not wish to store funds on a centralized exchange. With a decentralized trading platform, you are given full control over your private keys and the ability to trade directly from your cold (hardware) wallets.
Software wallets
There are different types of software wallets, each with a set of unique characteristics. Most of them are connected to the internet in one way or another and are hot in nature. Below is a description of the most common wallets.
Web wallet
You can use web wallets to access the blockchain through a browser interface without having to download or install third-party software. This applies to both wallets on exchanges and any others that operate on a browser basis. In most cases, you can create a new wallet and set a personal password to access it, but some companies manage private keys on your behalf. This option may seem more convenient for inexperienced users, but it is less secure.
If you do not own your private key, you are entrusting your funds to another party. As a solution to this problem, many web wallets allow you to manage keys either in full or through shared control (using multi-signature). It is important to know the technical structure of each wallet in order to make the right choice.
When using cryptocurrency exchanges, you should consider using the available security tools.
Binance offers several security features such as device management, multi-factor authentication, anti-phishing code, and withdrawal address management.
Desktop wallets
A desktop wallet is software that you install and use on your computer. Unlike some web versions, this type of wallet gives you complete control over your keys and funds. Once you create a new wallet, a file named “wallet.dat” will be stored on your computer. This file contains the key information that is used to access your addresses, so you must encrypt it with a personal password.
If you encrypt your desktop wallet, you will be required to provide your password each time you launch the program so that it can read the wallet.dat file. If you lose a file or forget your password, you will lose access to your funds.
For this reason, you should always back up your wallet.dat and store it in a safe place. In addition, you can export the corresponding private key or seed phrase, so you will be able to access your funds on other devices if your computer is inaccessible.
In general, desktop wallets can be considered more secure than most web versions. However, before setting up and using such a wallet, it is important to make sure that your computer is free of viruses and malware.
Mobile wallets
Mobile wallets function in the same way as their desktop counterparts, but are designed specifically as smartphone apps. This is very convenient as it allows you to send and receive cryptocurrency using QR codes.
Thus, mobile wallets are well suited for daily transactions and payments, making them a viable option for using Bitcoin, BNB and other cryptocurrencies in the real world. Trust Wallet is a great example of a mobile cryptocurrency wallet.
However, just like computers, mobile devices are vulnerable to malicious apps and viruses. Therefore, it is recommended to set a password for your mobile wallet and make a backup copy of your private keys (or seed phrase) in case your smartphone is lost or damaged.
Hardware wallets
A hardware wallet is a physical electronic device that uses random number generation (RNG) to generate public and private keys. These keys are then stored on the device itself, which is not connected to the internet. Thus, hardware storage is a type of cold wallet and is considered one of the most secure.
Although these wallets provide a higher level of protection against various attacks, the weak point of such devices is various types of firmware glitches. Additionally, hardware wallets are not as convenient as hot wallets due to more difficult access to funds.
To solve this problem, you can use Binance DEX to connect your device directly to our trading platform. This is a secure way to access your funds because the private keys remain on the connected device. Some web wallet service providers offer a similar service that allows you to connect hardware wallets to a browser interface.
You should consider using a hardware wallet if you plan to store cryptocurrency for a long time or in large quantities. Today, most of these wallets allow you to set your own PIN code, as well as a recovery phrase in case you lose your device.
Paper wallet
A paper wallet is a piece of paper with an address printed on it and its private key in the form of QR codes that can be scanned to perform cryptocurrency transactions.
Some websites allow you to download the code from your paper wallet to generate a new address and key offline. Thus, the wallet is highly resistant to hacker attacks and can be considered as an alternative to its cold counterparts.
However, due to numerous disadvantages, it is not recommended to be used for storing cryptocurrency. If you do choose to use it, it is important to be aware of the risks associated with it. The main disadvantage of paper wallets is that they are not suitable for sending partial funds, only allowing you to send your entire balance at once.
Let's give an example. Imagine that you generated a paper wallet and sent several transactions to fund it, totaling 10 BTC. If you decide to spend 2 BTC, you must first send all 10 coins to another type of wallet (for example, a desktop wallet) and only then spend part of the funds (2 BTC). Later, you can return the remaining 8 BTC, but to a new paper wallet. So, to solve this problem, a hardware or software wallet is better suited.
Technically speaking, if you import your private key from a paper wallet into the desktop version after spending only a portion of your funds, the remaining coins will be sent to another address that is automatically generated by the Bitcoin protocol. If you do not set this address manually, there is a possibility that you will lose your funds.
Most modern software wallets will send your remaining coins to an address that is part of your wallet for you. But it's important to remember that your paper wallet will be empty after sending your first transaction, regardless of the transfer amount. So don't count on reusing it.
The importance of backup
Losing access to your cryptocurrency wallet can be costly, so it's vital to back it up regularly. In many cases, this is achieved by simply backing up the wallet.dat file or seed phrase. The principle of operation of a seed phrase is very similar to the principle of operation of a private key. It creates and provides access to all keys and addresses in the crypto wallet. If you choose password encryption, be sure to back it up as well.
What type of crypto wallet should I use?
There is no clear answer to this. If you trade frequently, a web wallet will allow you to quickly access your funds. If you've taken extra steps to secure your account using two-factor authentication (2FA), then your cryptocurrency is generally secure. But if you store a large amount of cryptocurrency that you don't intend to sell just yet, cold wallets are a better option because they are not connected to the internet, which means they are more secure and resistant to phishing attacks or scams.
Summary
Cryptocurrency wallets are an integral part of life for those who use Bitcoin and other cryptocurrencies. They are one of the main elements of the infrastructure and allow you to send/receive funds through blockchain networks. Each type of wallet has its own advantages and disadvantages, so before using it, it is important to understand the principles of their operation.
