Different Crypto Storage Options & How to Use them
In the world of cryptocurrency, there is a growing threat from scams, hackers and thieves. With this in mind, keeping your funds safe is paramount. To do this effectively, blockchains use crypto wallets to store the private keys needed to access your funds. To make it even clearer, if you lose access to your crypto it’s likely gone forever, as there is no protection from a bank account of brokers. It’s estimated that over 3 million Bitcoins alone have been lost forever.
You have many different options on the market for storing cryptocurrency, so let’s take a look at these options and the pros and cons of each.
What is a Crypto Wallet?
Crypto wallets allow users of a blockchain to undertake actions with their digital assets such as sending, trading, and storing. Although cryptocurrency usually remains on the blockchain, crypto wallets are a form of storage like a real-life wallet. The overall function of these wallets is to keep your private keys (the passwords that give you access to your cryptocurrencies) safe and easily accessible.
The overall goal of your wallet is to not lose your private keys, as you don’t store the live crypto in the wallet, but only the way to access them. With this in mind, it’s important to choose the right hardware for your crypto wallet, for peace of mind, safety and usability.
How Does a Crypto Wallet Work?
Each crypto wallet has a unique address that is a long string of alphanumeric characters. There are 3 forms of crypto wallets on the market currently, and these are software wallets, hardware wallets and paper wallets. Each different option has its own benefits and downsides in regard to convenience and security.
Each crypto wallet additionally is comprised of 3 key elements:
Public Key: Similar to a bank account number.
Private Key: A way of verifying access to transactions, like a pin number or passcode.
Wallet Address: A hashed version of your public key that can be shared when you need to receive or exchange assets.
Once you create a crypto wallet, you will be issued a seed phrase, and this is a human-readable version of your private key, typically this can be a 12-word phrase that must be inputted in the correct order to gain access to a wallet. These seed phrases need to be kept private and secure to ensure you can always access your wallet and its contents.
The other important distinction to be aware of is between hot and cold crypto wallets. Hot wallets have access to the internet and are often used for exchanges. Cold wallets aren’t connected to the internet and store private keys on a device or medium, these are considered safer but reduce convenience.
The Different Types of Wallets
Generally considered a ‘hot’ wallet, software wallets are always connected to the internet in some shape or form. This is considered to be less secure, but more convenient to use. There are some key types of software wallets to be aware of, and each one suits a different type of user.
These are designed specifically for mobile phones and allow for sending and receiving crypto a lot more convenient making use of mobile-friendly technology such as QR codes.
This is when software is installed on a computer, offering more control over funds.
Hosted web wallets: used to interact with blockchains through a browser with keys and assets stored by a third party.
Non-custodial web wallet: you can interact with blockchains through a browser or plugin, with users retaining full control of their assets.
Paper wallets are by far the most basic, but also, likely to be the most secure crypto wallet option. Paper wallets involve storing your seed phrases, private keys, QR codes and vital information on a physical medium, such as a piece of paper.
Paper wallets can be highly secure as they never access the internet, and thus cannot be hacked, but are also vulnerable to destruction if they get lost, or are destroyed through events such as house fires. That being said, if you often exchange cryptocurrency, you may find it hard to input all your private key data by hand each time you require it.
Hardware wallets are devices designed to prevent private keys from being exposed to the internet, instead of storing the keys offline on the device itself. The hardware wallets look and behave like USB drives and are the most convenient form of cold storage.
When you want to access the funds, you simply connect the device to the computer with the device itself signing off on transactions before accessing the blockchain, essentially acting as a bridge in this scenario. It’s important to note, however, that hardware wallets are the most expensive option, but also offer a great compromise between convenience and safety.
As far as we can tell, each form of crypto wallet suits a different type of user, and are all safe and effective ways to store digital assets. Which type of wallet you require depends on how much you interact with the blockchain. For example, NFT collectors, or crypto traders can benefit from software and hardware wallets as they need to exchange crypto often. On the other hand, if you want to store crypto for a long period of time, paper wallets can be a helpful solution. Click here if you wish to know more about Crypto Storage options.