No matter what other articles say for the sake of simplification, cryptocurrency is not stored in a wallet, but in a blockchain. A cryptocurrency wallet is just a way of storing a secret key to access your cryptocurrency. A simple analogy fits here – your plastic credit card doesn’t hold any money either, it just gives you access to your bank account.
How a cryptocurrency wallet works: public key, private key, and seed phrase
A cryptocurrency wallet consists of two parts: a public key and a private key. The keys are a long sequence of characters. Whoever holds this pair can do whatever they want with the account.
What are public and private keys?
A public key is the identifier of your wallet, simply put – its address on the blockchain. The public key is known to everyone in the system and is given to you when you ask someone to send you cryptocurrency.
The private key is used to confirm transactions, in other words, it is a password that you enter to make a transaction.
A seed phrase is a sequence of random 12-24 words that will help you recover your private key if you lose one. If you forget both your private key and your seed phrase, you will never see your money again. Now let’s look at the types of wallets out there and which one to choose for each use case.
Different types of crypto wallets and which one to choose
There are two types of crypto-wallets: hot and cold ones.
Hot wallets are connected to the internet.
Cold wallets are offline.
Cold wallets have a physical form, you can touch them, take them with you or put them in a safe, like a paper wallet.
There is no perfect wallet for all occasions, each one is well sharpened for a particular task. Now let’s talk about how to choose them.
Hardware Crypto Wallet
This is the cold type of wallet. It looks like a flash drive that you can insert into a USB port and start transferring cryptocurrency.
Sometimes there’s extra security: for example, you have to enter a passphrase to decrypt the keys, or the body of the flash drive may have a fingerprint reader on it.
Some wallets are Bluetooth-enabled and can be operated from your phone.
The main advantage of a hardware wallet is that it’s not connected to the internet – it can’t be hacked online. But it is possible to take it out of your pocket.
Should you get a hardware wallet?
A hardware wallet is a good choice if you want to be sure that your crypto-assets are safe and you don’t trade often.
A hardware wallet is also great to take your money with you when you move abroad. You simply exchange your money for bitcoin, drop it on a flash drive, and put the flash drive in your backpack, then you can exchange the cryptocurrency for the local currency on the spot. No explanations to banks, tax authorities, or any other mess.
Pros of a hardware wallet:
- No internet connection – impossible to hack and steal your money.
- No need to rely on online services – only you have access to your money.
Cons of a hardware wallet:
- Easy to lose.
- No way to recover money in case of the loss, the damage, or forgotten passphrases.
Custodial services
These are the services that store your public and private keys on their server and access the cryptocurrency by username and password.
Very often such services offer additional financial tools: investing, trading, futures, loans, and so on. For example, you can easily sell usdt for euros in one of the most popular custodial services.
Basically, all cryptocurrency exchanges are custodial services. The main drawback to custodial services is their security. But nevertheless, they are very popular and here’s why.
Who needs custodial services?
First and foremost, traders, miners, and anyone who frequently sells and buys cryptocurrency need them. A delay in transferring from a cold wallet to a hot wallet can have a negative impact on how much you earn.
In general, it’s worth choosing custodial services when you:
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Need to buy and sell often.
It makes sense to keep funds where you can catch a price spike and make a transaction in time.
you can buy crypto with credit card
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Want to get a small interest on your money
These services will kick up a percentage for keeping your funds with them. If your eye twitches at the thought of having money lying around for nothing, then it is definitely worth depositing your money to such a platform.
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You want to invest and earn a decent interest
Many services have an option to invest funds immediately – for example, to lend or borrow money secured by cryptocurrency. This allows you to earn some money.
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Restore access to funds even if you forget your seed
All such services ask for KYC – uploading your passport details – in order to legally link your money to your persona. Therefore, if you lose your password, the service restores access to your account using your personal data.
With some services you can buy crypto with credit card. Basically, they link your wallet to a regular credit card, so you can make any purchase in a few seconds.
