What is a cryptocurrency wallet? What are the recommended hot wallets and cold wallets to use? How do users start setting up virtual currency wallet related functions? This article will take you step by step to understand the complete operation of a cryptocurrency wallet!
What is a cryptocurrency wallet
A cryptocurrency wallet is a tool used to store, send, and receive cryptocurrency.
Cryptocurrency, unlike cash, is not a physical thing that you can hold in your hands. They exist on the blockchain, like a giant electronic ledger that records all cryptocurrency transactions.
Crypto wallets are like bank accounts that can be used to store and manage cryptocurrencies. Users can use crypto wallets to send and receive cryptocurrencies, just like using a bank account to transfer money.
How do cryptocurrency wallets work? is it safe?
Cryptocurrency wallets do not actually store the cryptocurrency, the cryptocurrency is actually still stored on the blockchain, the wallet is just a tool used to store public and private keys.
First, cryptocurrency wallets typically generate a pair of public and private keys, with the public key used to receive cryptocurrency and the private key used to send cryptocurrency.
Public key: used to receive and represent addresses.
Private key: used to authorize sending transactions.
The private key is proof of ownership of the cryptocurrency and is therefore very important. If the private key is lost or hacked, you may lose your cryptocurrency permanently.
How to strengthen security
Therefore, it is very important to choose a secure cryptocurrency wallet and here are some measures that can improve the security of your cryptocurrency wallet.
Use a cold wallet: A cold wallet is a wallet that stores cryptocurrencies offline and is therefore more secure than a hot wallet.
Use a multi-signature wallet: A multi-signature wallet requires multiple private keys to authorize transactions, thereby improving the security of the wallet.
Back up the private key. Back up your private key somewhere off-line (in the real world) to prevent hackers from attacking you.
What is the difference between cold wallet and hot wallet?
Cold wallets and hot wallets are the two main types of cryptocurrency wallets. Cold wallets are wallets that store cryptocurrencies offline, while hot wallets are wallets that are connected to the Internet.
Cold wallets: often called hardware wallets, are the most secure as they are less susceptible to hacker attacks. However, cold wallets are also more difficult to use because users need to connect them to a computer or other device in order to send or receive cryptocurrency.
Hot wallets: More convenient to use than cold wallets because users can operate the cryptocurrency assets inside anytime and anywhere, but they are also more vulnerable to hacker attacks.
We recommend storing main assets in cold wallets and funds for daily use in hot wallets. Or withdraw it from the exchange to a cold wallet for storage, and then transfer it to the hot wallet for use when needed.
Popular knowledge: paper wallet Paper wallet is a very common method of storing cryptocurrency in the early years. The private key is written on paper or printed out. However, this paper wallet has some disadvantages: 1. It is easy to be damaged and lost. Once lost, the private key cannot be retrieved. 2. It is not very convenient to use. You need to manually enter the wallet to trade. 3. There are security concerns. If the private key is seen by others, the assets will be stolen. 4. Long-term storage may cause paper corrosion or blurred writing. If you still have concerns about cold wallets and want to use a paper wallet, it is best to store it in a safe and make new paper wallet backups regularly to prevent paper damage.
Custodial wallet vs. non-custodial wallet?
Cryptocurrency wallet storage methods are divided into "hot wallets" that are connected to the Internet and "cold wallets" that are not connected to the Internet. However, in addition to this, as mentioned earlier, the encryption wallet does not actually contain the user's funds. The focus is on access. The "private key" required for crypto assets.
Therefore, this private key storage method divides wallets into "custodial wallets" and "non-custodial wallets". The difference lies in who keeps this important private key.
Hosted wallet
Most custodial wallets are hot wallets, usually services provided by centralized institutions such as cryptocurrency exchanges. The benefit is to reduce the user's responsibility in private key management.
When users outsource wallet hosting to an institution, the individual user is not responsible for protecting where the wallet's private keys are stored, so it is very important to choose a trusted institution.
If the exchange holding the user's private key goes bankrupt or the exchange becomes the target of hacker attacks, the user's wallet assets will be at risk.
Common examples currently include OKX Web3 wallet and Bybit Web3 wallet.
Non-custodial wallet
The user holds the private key by himself and has complete control. If the user loses the private key, the assets in the wallet will basically be lost forever.
Currently popular non-custodial wallets usually generate a "private key" from a "mnemonic phrase" of 12 or 24 English words. These words are random. If the "private key" is unfortunately lost, the user can use the "mnemonic phrase" to restore the wallet.
Therefore, users must keep both the private key and the mnemonic phrase safe. If they are accidentally lost or leaked, the wallet assets will face huge risks.
Common examples are Metamask and Trust Wallet.
Mnemonic phrase
Mnemonic Phrase is a set of random word sequences used to generate private keys. It is one of the backup methods for cryptocurrency wallet private keys.
Its main features:
Mnemonic phrases generally consist of 12 to 24 words.
These words come from a fixed vocabulary, usually 2048 English words.
All private keys and addresses can be recovered through the mnemonic phrase.
They need to be entered in strict order, otherwise the private key cannot be restored.
A set of mnemonic phrases can control multiple cryptocurrency addresses.
Users only need to save the mnemonic phrase and can restore the wallet anywhere without the need to hold a separate private key password.
In summary, the mnemonic phrase provides a convenient and secure way to back up private keys, but like the private key it needs to be kept properly because it can control multiple cryptocurrency addresses. If it is accidentally leaked, all will be lost through the mnemonic phrase. The generated wallet assets will be exposed to risks.
What is a multi-signature wallet?
A Multisig Wallet is a cryptocurrency wallet that requires multiple private keys to authorize transactions. It provides greater security.
The main features of multi-signature wallets are:
N signatures need to be set to enable transactions. For example, if ⅔ multi-signature is set, 2 of 3 signatures are required to send a transaction.
Each signature corresponds to a different private key, and these private keys are held by different people.
You cannot control wallet assets if you only hold a single private key.
If a single private key is lost, other private keys can be utilized for recovery.
Improved security and prevents the risk of single point failure.
Multi-signature wallets are suitable for teams or institutions to manage assets. One person cannot control all assets and can achieve decentralization of power. But at the same time, the transaction process is more complicated. The most common one is Gnosis Safe. For details, please refer to this article for instructions.
Popular cryptocurrency cold wallet recommendations (hardware wallets)
1.Ledger
Ledger is the world's most popular hardware wallet, taking into account the security and convenience of a cold wallet. Currently, Ledger system products include Ledger Nano S Plus, Ledger Nano X and Ledger Stax:
Ledger Nano S Plus: Ledger’s entry-level hardware wallet.
Ledger Nano X: Ledger’s flagship product, adding Bluetooth functionality.
Ledger Stax: In addition to the above wallet functions, it is also equipped with an electronic screen display to allow users to view and manage encrypted assets. It has the title of iPod of Web3.
Features: The world's most famous, highly convenient, Bluetooth-enabled, and regular system updates to improve security.
Price: NT$ 2503 ~ 8937.
2. Vault
Trezor is the world's first hardware storage wallet, and it mainly offers two models, including Trezor One and Trezor Model T.
Trezor One: entry-level wallet with a compact and simple appearance.
Trezor Model T: A high-end flagship version that adds a color touch screen and mnemonic recovery function.
Features: The world's first hardware wallet, with color touch screen, cheaper than Ledger.
Price: US$ 69 ~ 219.
3.CoolWallet
CoolWallet was launched by a Taiwanese blockchain company. The product is designed as a thin card, which is small, lightweight and easy to carry. And it uses innovative NFC communication technology, which can be connected to the mobile app through NFC.
CoolWallet S: CoolWallet's entry-level product, which is more affordable and can be connected using Bluetooth
CoolWallet Pro: CoolWallet's flagship product, the screen has been upgraded to color, fingerprint unlocking has been added, and asset information can be viewed directly on the device interface.
Features: Released in Taiwan, thin and light design easy to carry, integrated with many on-chain Dapps.
Price: US$ 99 ~ 149.
Popular Cryptocurrency Hot Wallet Recommendations
Metamask：
Metamask is the most popular hot wallet on Ethereum, which can be used to access various Dapps on the Ethereum blockchain, and currently has approximately 20 million monthly active users.
Features: Most people use it, supports most devices, and the interface is user-friendly.
Supported blockchains: Ethereum and EVM compatible networks (e.g. BSC, Arbitrum, Optimism)
Supported devices: Chrome, Firefox, Brave, Edge, Opera, IOS, Android.
OKX Web3 Wallet
OKX Web3 Wallet is launched by a world-renowned cryptocurrency exchange. It supports a variety of blockchain network cryptocurrencies and provides more friendly operation methods.
Features: Supports 60+ blockchain networks, can create private keyless/AA smart contract wallets, user-friendly interface, and is guaranteed by the exchange.
Blockchain support: Access to most popular blockchains on the market, such as Ethereum, Bitcoin, Solana, Tron, BSC, etc.
Support equipment：Chrome、Brave、Edge、IOS、Android。
Trust Wallet
Trust Wallet is a hot wallet acquired by Binance, the leading cryptocurrency exchange, and supports most popular cryptocurrency networks.
Features: Supports 70+ cryptocurrency networks, supported by Binance, and can be used for staking operations in the wallet.
Blockchain support: Access to most popular blockchains on the market, such as Ethereum, Bitcoin, Solana, Tron, BSC, etc.
Supported devices: Chrome, Brave, Edge, Opera, IOS, Android.
in conclusion
In summary, if you want to delve deeper into the currency circle, a cryptocurrency wallet is an essential storage tool for investors. But among the current cryptocurrency wallet options, there is no perfect solution. Each type of wallet has different advantages and disadvantages. Here are some recommended approaches:
Large assets/assets that do not require operation: placed in a multi-signature wallet or cold wallet.
Small assets/on-chain interactions (DeFi, NFT): placed in hot wallets.
Through the combination of hot and cold wallets, investors can take into account both security and convenience, and store cryptocurrency assets at a more appropriate risk balance.
