More and more people are investing in cryptocurrency, which comes with a bit of a learning curve. Unlike traditional currency you can deposit at a bank, each user is responsible for keeping their cryptocurrency safe.
While it’s possible to leave your cryptocurrency on an exchange, storing it in a wallet cuts out the third party and ensures your money is accessible and protected. We explain what crypto wallets are and why they’re necessary if you have cryptocurrency.
What is a crypto wallet?
A crypto wallet is nothing like the standard leather wallet you carry in your pocket or purse. You can’t reach into one and remove physical cash or credit cards to make payments.
Instead, a crypto wallet stores information in the form of a unique address that represents how much of a particular crypto asset it is that you have. This address also records your buying and selling on the blockchain, the digital public ledger that makes cryptocurrency possible.
The addresses your wallet stores are like passwords that ensure you can access your cryptocurrencies. If you lose your addresses, there’s no way to access your assets, and you’ll lose your cryptocurrency forever.
In short, your crypto addresses are proof of ownership, and a crypto wallet is the safest place to store this data.
Types of crypto wallets
There are three different crypto wallet types: paper wallets, hardware wallets, and online or software wallets.
The most straightforward way to store your cryptocurrency is via a paper wallet. Using a paper wallet involves writing your addresses down on a piece of paper and keeping that paper in a safe place. You’ll need to be extremely careful when using this method because, much like cash, your money’s gone if you lose this paper.
It’s also worth noting that spending your cryptocurrency is more challenging when using a paper wallet because the currency’s value is entirely digital.
Hardware wallets, also known as cold wallets, are physical key drives you can use to store your passwords. They are usually USB drives. The great thing about this method is that you can keep your drive in a safe place that isn’t connected to the internet, reducing your risk of your passwords being hacked.
Of course, the issue with a cold wallet is that you can lose the drive if you don’t keep it in a safe spot or you forget where you put it.
Software/online wallets, or hot wallets, exist entirely online. This type of wallet is the easiest one to use because your currency is always available for spending through an app or other software. A software wallet makes using cryptocurrency as simple as using an online bank account, which is why it’s so popular with users.
It’s recommended you only utilize hot wallets with two-step encryption to limit the chances of your crypto passwords being stolen.
Spending cryptocurrency from your wallet
Since many people currently see Bitcoin and other cryptocurrencies as stores of value and, therefore, investments, they’re happy to keep these assets in a wallet without spending them.
However, if you want to spend your cryptocurrency and make an online purchase, it’s relatively easy when you have the asset in a crypto wallet.
With a hot wallet, it’s sometimes possible to use an integrated browser extension to transfer cryptocurrency to retailers and other users. Otherwise, most wallets offer segregated witness addresses that are easy to copy and paste.
The gist is that you’ll go into your wallet and find the send function. From there, you’ll copy and paste the recipient’s wallet address, select how much cryptocurrency you want to send, and finalize the transaction.
Spending cryptocurrency stored in a cold or paper wallet takes an extra step because you’ll first have to transfer your assets to a hot wallet that supports importing private keys.
Choosing a crypto wallet
There are many different online brands and services offering crypto wallets, and your decision on which to go with will likely come down to personal comfort and preference. Learning as much as possible about how the technology works and defining your reason for purchasing cryptocurrency in the first place will make your choice easier.
What do you think about cryptocurrency? Let us know in the comment section below, and don’t forget to share this post with a crypto-curious person in your life!