A cryptocurrency wallet is a device, software, or service storing seed phrases used for cryptocurrency transactions. The seed phrase lets you have access to your funds and do whatever you want with them. We can say that that phrase is proof of your wallet ownership. If you lose it, you lose access to your cryptos too. They do not actually store your funds but provide tools required to use blockchain. If you have a seed phrase or private key, you can use the wallet on other devices.
How do cryptocurrency wallets work?
Crypto wallets actually do not store your assets. They provide tools that allow users to send and receive transactions. Each wallet has its own address (public key) which is being used to send funds to. Simply, it can be compared to a bank account number. You can share the address with anyone. The private key gives access to the wallet. If you lose the computer or smartphone where the wallet is installed, you still can have access to it, but only if you have a private key or seed phrase.
Non-custodial wallet vs custodial wallet
A custodial wallet (hot wallet) is a wallet where private keys are held by a third party. So, the third party has full control over your funds.
A non-custodial wallet (cold wallet) is a wallet where only you have control over a seed phrase and your funds. It means that you are your own bank.
The non-custodial wallet gives you full access to your funds. Transactions appear on the chain at the same time you confirm it, but in a custodial wallet, you must wait for the entity to make a transaction. When it comes to security, custodial wallets are again in a worse place. All user data belong to the entity, however, in non-custodial wallets, everything remains with users. The risk of losing it is minimalized unless the user shares sensitive details. However, if you lose access to the custodial wallet, it is possible to recover that by requesting it from a third party. If you lose a private key to the non-custodial wallet, your funds are gone.
Types of wallets
Mobile app/chrome extension wallets
This type of wallet is very convenient for frequent transactions. You can use it both on PC and phone. However, they are vulnerable to various scams, especially phishing. You receive a seed phrase which is a password to your funds, also you can set a password to the wallet. This is probably the most popular type of wallet because of its ease to use and no need to pay for that. Examples are Metamask, and Trust Wallet.
Hardware wallets are electronic and physical devices. It is believed that these are the safest wallets. They do not require an internet connection to use them and they are recommended for large holdings. As it was in mobile wallets, you also receive a seed phrase. Apart from it, you can also set a pin code to the device. Examples are Ledger, Trezor.
You can download them on your PC as a software program. They do not require an internet connection either. Examples are Electrum, and Exodus. They let you have full access to funds. Once you generate a wallet, a file “wallet.dat” will be created on your computer. It stores the private key and all information that gives access to the wallet.
Seed phrase for these wallets is held by the third entity, like an exchange. It is important to use a trustworthy wallet provider. You can use these wallets through the browser with no need to download anything. Despite the fact that the user can set a password, you do not have full access to your funds. Remember to secure a wallet with as many methods as the wallet provider has.
How to secure your funds in a cryptocurrency wallet?
The most important thing is to keep your seed phrase in a safe place and not share it with anyone. If another person owns it too, they have full access to your crypto savings. Do not click on any suspicious links, especially when they say that you won thousands of dollars. It is just a scam that can steal your funds. If you are a member of crypto servers on Discord, you may receive many private messages from bots that are trying to steal your money. If you use an exchange wallet, do not share a password to your account. Remember that none of the Hotbit staff will ask you for the password. Many people try to do it on Telegram, so do not fall into that. Always remember to have a few copies of seed phrases hidden in safe places.
Cryptocurrency wallets are a crucial thing in the cryptocurrency field. They make it possible to send or receive funds. Before choosing a wallet, make sure that you are choosing the best option according to your investment strategy and understand how they work.