Ukraine’s official twitter-handle tweeted, “Stand with the people of Ukraine. Now accepting cryptocurrency donations. Bitcoin, Ethereum, USDT.” And then it gave out the crypto wallet addresses. Within a matter of a few hours, the wallet had received over $4million in cryptocurrency.
This was done in light of the recent invasion of Ukraine by Russian armed forces. And who would have thought that cryptocurrency could help a country defend its borders and protect its people in whatever little but significant way that it can! There is no denying that crypto is changing the way money works in today’s world. It has become an enabler of sorts. It has caught the attention of investors, entrepreneurs, gamers, artists, and now, even governments.
Let’s say you have decided that you want to get onto the bandwagon and invest in crypto. What next? Where and how do you store something that is not tangible? This is where crypto wallets come in.
What is a crypto wallet?
A blockchain wallet, or a crypto wallet, holds your cryptocurrency much in the same way that a real wallet holds your paper and metal currency. But that is not all.
It also works like a PhonePe or a PayPal i.e. it helps you execute transactions and make payments. These transactions are just as secure, if not more, as they are based on blockchain technology. Apart from being secure, they also provide a level of anonymity and the identity of the user is kept private.
Some other advantages are that the wallets can be accessed from your mobile, your laptop, or your desktop. Most wallets also hold multiple cryptocurrencies, so conversion from one to another is relatively easy.
Types of crypto wallets
Wallets come in different types as well. Before getting into that, let us see what a private key and a public key are.
In Ukraine’s tweet, a series of alphanumeric characters were included. If you are wondering what those were, those were the public keys. Once a wallet is created, you are given a public key. It functions as an e-mail id. If others have the public key, they can send you crypto. It is also known as a wallet address.
You will also be given a private key. This private key is different from a public key and functions like a password. It will help you access your wallet and use the crypto that you have. The private key should be kept as secretive as you would your password or an OTP. If it falls into the wrong hands, then you could lose all your crypto.
The two basic types based on private keys are a hot wallet and a cold wallet.
Hot wallet – It is an online wallet wherein crypto can be transferred with ease. Since they are connected to the internet at all times, they offer lesser security, but better usability.
Under hot wallets, you will find desktop wallets, mobile wallets, and web wallets. Mobile wallets can be installed by simply downloading an app e.g CoinBase. Although there are security risks, they are very easy to use. Desktop wallets are similar to mobile wallets; you will just need to download the app onto your desktop. The risk factor here comes due to viruses or malware attacks. Web wallets are the most prominent kind of hot wallets. You will not need to download any app. All you need is a web browser and an internet connection. Even if you lose your phone or your desktop crashes, you can still access these web wallets from any device with a browser.
Cold wallet – It is an offline wallet wherein transactions are done offline and then revealed online. People holding a large number of crypto assets are better off having cold wallets as it offers more security.
Paper wallets are a type of cold wallet where the paper contains all the data you would need to access the cryptocurrency. But if you lose the paper document, you lose access. Hardware wallets are true cold wallets. They offer proper security by saving private keys on a physical device in an offline mode (picture a pen drive). Hacking them is not impossible, but highly difficult (especially compared to hot wallets). They can be connected easily to desktops or laptops or smartphones. Even if the device is connected to the internet, only upon authorization the details will go online. Ledger is a popular hardware wallet.
With the different types of wallets and the different features they bring in, it is essential that you choose one that fits your needs and investment size the best. You can also have a combination of a hot and a cold wallet to give room for flexibility.
How to choose and set up your own wallet
Choosing – The basic difference between an exchange and a wallet is that a wallet is used to store your crypto and keep your digital assets safely, whereas an exchange facilitates transactions between coins and tokens. The main focus of the exchange is on transactions and not the storage of digital assets.
Most exchanges have in-built wallets. After users make exchanges, they tend to leave the crypto in the wallet that the exchange provides. Although this is easy and convenient, it would serve well to have a separate wallet for security purposes as the risk of hacking is high. KuCoin, which has the fifth-largest exchanges by volume, was hacked and lost $200 million worth of crypto! The funds were recovered, but this just shows how exchanges are vulnerable to hacks.
If you are just beginning, then take some time to understand your expectations from a wallet, and then decide which type of wallet you want to go for. It is better to go for a wallet that has been in the game for long since it is time-tested and the developers have been updating their security protocols. Be a little cautious with new wallets and wait until they have proved their mettle.
If you are just a speculative investor, then the built-in wallets with exchanges are good enough.
Set-up – Once you make a choice, start setting up the wallet.
For hot wallets, you will need to download, install, and create an account. Mobile wallets require downloading an app; desktop wallets can even be a browser extension.
Creating an account involves you creating a password and also a “seed phrase”. A seed phrase is crucial. What is it? It is a series of words that can be used to recover your account if you forget the password. You have to remember this no matter what. You may write it down in your diary, mail it to yourself, or commit it to memory if you are sure your memory will not fail you. If you forget your password, but remember the seed phrase, then all is not lost. But if you forget both, then you may lose millions of dollars worth of crypto that you may have accumulated.
Add funds – Once you have set the wallet up, transfer the currency that you have in exchanges to this wallet. You may also exchange one cryptocurrency for another within the wallet itself if it allows the user to do so. Experts suggest using USD to buy USDC, which is a cryptocurrency that has the same value as the USD. This USDC can then be used to exchange or purchase other cryptocurrencies that you are interested in. Each currency that the wallet carries has a different address i.e. the address for USDC will be different from the addresses of say Bitcoin and Ethereum.
Some wallets to consider – Coinbase is the best wallet for beginners. It is user-friendly and supports more than 500 cryptocurrencies. It is secure enough as it has 2-factor authentication. But it has security issues that any hot wallet would have.
Mycelium Crypto wallet is best for mobile users. It is also compatible with cold wallets. But it could be confusing for first-time users. It allows only Bitcoin, Ether, and ERC-20 tokens.
Exodus crypto wallet is good for desktop users. It supports over 145 crypto assets. It is also compatible with a few cold wallets. But it does not have 2-factor authentication and transaction costs are high.
Ledger, as mentioned before, is the best hardware wallet available presently. It is however more expensive than other cold wallets.
Are these wallets regulated?
Crypto exchanges are regulated under the Bank Secrecy Act (BSA). It means that the exchange must maintain records and submit reports to authorities.
The government believes that though private wallets are used to keep transactions private, the lack of regulation can create a harmful situation. Large amounts of money should not be able to move without regulation. Hence, in 2020, FinCEN had proposed that along with exchanges, even private wallets start collecting user data like names and addresses among other personal details. Industry insiders have claimed that for some wallets this might be impossible as these wallets are not controlled by people. This rule, for now, is not in effect.
Can crypto wallets be used for NFTs?
Since NFTs are all the rage these days, it is essential you have an NFT wallet. An NFT wallet is a type of crypto wallet. The wallet needs to support NFTs as well as the currency used to buy the NFT. Most NFTs use the Ethereum blockchain, so any wallet that supports Ethereum can work as an NFT wallet as well.
Metamask is one of the most popular NFT/crypto wallets. The browser extension can give you access to NFT marketplaces. It also has an app and the holdings sync well across devices.
Alpha wallet, Math wallet, Trust wallet are other NFT wallets that are popular among users.
A common practice among users is to set up a separate NFT wallet called a “burner wallet” for a single transaction while buying NFTs to reduce exposure to hacks. This way the assets only in the burner wallet will be at risk and not the entirety of your assets. So once the purchase of the NFT is done, you can transfer the NFT and the unused funds back to your main wallet.
To sum it all up, treat your crypto wallets like you would treat your bank accounts. Do not share passwords, check which wallets fit your needs personally, keep the apps and wallets updated to reduce the risk of hacks.