What is a Crypto Wallet and How Do You Use One? CoinFlip Explains
Cryptocurrency Explained: What is a Crypto Wallet
With all the hype around cryptocurrency markets recently, you might be considering hopping on the bandwagon and investing in some cryptocurrencies like Bitcoin, Ether, and Litecoin. But first, you will need to have a crypto wallet. With so many different types of crypto wallets, deciding which option is the best for you can be challenging. Have no fear; we're here to break down everything you need to know about digital wallets as a beginner.
What is a crypto wallet?
A crypto wallet, or a digital wallet, is really like an ATM card that you use to access your cryptocurrency safely. Unlike a traditional wallet you keep in your pocket or purse that holds physical bills and cards, the crypto wallet doesn't store any currency or exist in a physical form. Instead, it is a tool that helps you interact with the blockchain network.
All that is in a crypto wallet are the deposit and withdrawal "keys." A crypto wallet is simply software that holds these keys while interacting with various blockchains.
Crypto wallets can be broken down into two categories: "hot" and "cold." A hot wallet is one that is connected to the internet, and cold wallets exist offline. There are many different digital wallets out there, but the three most popular options are custodial wallets, non-custodial wallets, and hardware wallets. Custodial wallets and non-custodial wallets are considered hot wallets because they are connected to the internet. Conversely, hardware wallets are considered cold wallets because they are not connected to the internet. Generally, cold wallets are more secure than hot wallets because they cannot be breached via the internet.
First, let's go over the hot wallets.
A custodial wallet, or hosted wallet, is one that is maintained by a third-party. In most cases, that third-party is a cryptocurrency exchange like Binance or Coinbase. Keeping your crypto in a hosted wallet can be considered similar to keeping your money in a bank checking or savings account. The main benefit of a custodial wallet is that you have the option to recover your password if you happen to lose or misplace it. However, the drawback is that you do not have total control over your funds as you rely on a third-party.
There is a saying in the crypto industry, "if you don't control your keys, you don't control your funds." When using a hosted-wallet, there is always a risk that the third-party involved could be hacked or compromised, and you could potentially lose your crypto.
Keeping some money in an exchange wallet can be advantageous if you plan to trade crypto regularly. Still, you should keep the majority of your funds in a non-custodial or hardware wallet to avoid the risk of foul play and keep total control over your crypto.
Non-custodial wallets (also known as a "self-hosted" wallet) allow you to have complete control over your crypto. A non-custodial wallet does not rely on a third-party to keep your crypto safe. Instead, they provide the software necessary to store your crypto. With non-custodial wallets, remembering and protecting your private key and password is your responsibility. If someone gains access to your private key, they will gain full access to your crypto.
To get started with either of these wallets, you must first download their respective apps.
BRD, formerly known as Bread Wallet, was founded in 2015 by the Swiss company Breadwinner AG. BRD is a mobile wallet that is available on iOS and Android. BRD's interface is simple and easy to use, with a built-in tutorial for those just getting started. With BRD, you can trade or buy cryptocurrency using a credit card directly from the app.
Monarch Wallet is another mobile wallet that was launched in 2018, available to iOS and Android users. In addition to allowing you to store, send, and receive crypto safely, Monarch provides the ability to earn interest (up to 8%) and buy crypto with your bank account or credit card directly from the app.
Monarch Wallet supports buying Bitcoin, Ether, Bitcoin Cash, XRP, and Litecoin. However, with Monarch Wallet, you can only sell Bitcoin and Ether and have the funds directly deposited into your bank account.
Now, let's discuss cold wallets.
Finally, the third most common option for storing cryptocurrency is by using a hardware wallet. Hardware wallets store your private keys on a hardware device like a USB thumb drive. They make transactions online but are held offline, providing increased security. When making a transaction using a hardware wallet, you must plug the device into your computer and enter a pin.
Popular hardware wallet brands are Trezor and Ledger. However, these companies aren't free from the threat of security breaches. Over the summer, hackers penetrated Ledger's database and steal names, mailing addresses, and phone numbers for 272,000 Ledger customers. While the hackers did not access private keys, just last week, the hackers released the personal information of hundreds of thousands of customers to the public.
Now that you know everything you need to know about crypto wallets, you should be ready to get started. Head to your closest CoinFlip ATM and add some coins to your wallet today!