What You Need to Know About Cryptocurrency Wallets

From Bitcoin's inception in 2009, cryptocurrency has continued to grow and evolve, and now the market is dense with thousands of altcoins and even more investment opportunities for brave early adopters. Tesla's pull-out from accepting BTC payments and the Chinese government's intense crackdown against crypto-related activities merited a massive market-wide sell-off. But crypto remains future-proof with an unwavering interest among truly dedicated investors who believe in changing the financial ecosystem.

What You Need to Know About Cryptocurrency Wallets
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If you're new to the venture, it's important to know that the cryptocurrency ecosystem is an entire league of its own, with platforms and software dedicated to keeping the digital dream alive. And among trading essentials are crypto wallets, which act like banks and physical wallets for coins, allowing you to securely store crypto. Here's everything you need to know about them.

Why You Need a Cryptocurrency Wallet

It's not hard to see the benefits of cryptocurrency wallets: they allow you to securely store cryptocurrencies and make transactions. While crypto exchanges can hold your coins for you, they're not the safest platforms for long-term storage due to their susceptibility to hacks and other forms of attacks. When this happens, you risk losing all your funds, hence why moving them to a safer place is always the better option.

Crypto wallets work similarly to third-party payment gateways like PayPal to hold, send, and receive money. However, this time, the supported currencies are all crypto—thousands of them. From Bitcoin (BTC) to Terra (LUNA), Tether (USDT), and The People's Reserve (TPR), dedicated wallets can hold just about any coin in circulation. It's highly recommended to move your funds to a wallet if you intend to hold them for the long term. Leaving them in exchanges is only a more practical option if you're actively arbitrage trading.

Types of Crypto Wallets

While multiple forms of crypto wallets are available, the two most popular options are hot or online wallets and cold or offline wallets.

Hot wallets, like Coinbase and Exodus, are software-based options that only exist on your computer. They can usually be accessed both offline and online, but most services will require an internet connection. Dedicated wallets specific to certain blockchains, like the Daedalus Mainnet for ADA and The People's Reserve app for TPR, also offer a range of in-house functionalities, like staking. As a result, they're extremely easy to use and can often sync with exchanges, creating a smooth workflow between the two platforms. While easier to use, online wallets are at a higher risk of being hacked as they always live in the digital space, which persistent hackers can get into.

In contrast, cold wallets like the Ledger and Trezor often come in the form of hardware devices that can only be accessed by plugging them directly into your computer or phone. They're the most secure form of storage for coins but also the least convenient options. Accessing them involves a similar process to using a USB—they plug directly into a port and create a private network, enabling you to send funds between different cryptocurrencies without needing an internet connection. Going online to connect to exchanges is possible but a hassle, so investors often use this option to store large amounts of coins left to grow in value for a long time.

How to Use a Crypto Wallet?

Using a crypto wallet is a lot simpler than it sounds. Follow these steps to access yours with ease!

  • Download a crypto wallet from the App Store, Google Play Store, or the website online. You can also opt to purchase hardware and plug it into a computer to get started.
  • Upon booting up the wallet, you'll be asked to create a password and memorize an optional 12-24 word recovery seed. It's highly recommended that you choose to opt-in on the seed, as it's the only way to restore your wallet on the occasion that you lose access to the hardware or computer. It's also important not to store your password or seed in a password manager or any other place where it can be compromised. Most experts recommend keeping it in physical storage—like a safe.
  • Your wallet will then generate a public address (also known as a wallet address), which you can share with someone else so they can send funds to it. If you're sending the funds from your own account and not an exchange, make sure that the payment is "broadcasted" by clicking on one of the three buttons under "Send."
  • When you withdraw cryptocurrency from your crypto wallet back into U.S. dollars or other fiat currency, remember that most exchanges charge fees for this service—typically between 0-15%. It's important to be aware of these fees—which are disclosed on the wallet's website—before committing to one, as you don't want to end up with a platform that charges more than you're comfortable with.

You don't need to stick to one wallet—most investors own multiple, as each platform supports various cryptocurrencies. It's harder to find crypto wallets that support newer altcoins, but a workaround is to look into the blockchain's native wallet, which is usually built by the same developer behind the coin. While online, it's a safer option that will allow you to hold crypto without converting it.

Should You Use a Hot or Cold Wallet?

A big consideration to make when deciding on a wallet ecosystem is your trading activity. If you're an avid crypto trader who buys and sells almost daily, then choosing an online wallet or even leaving your active funds in an exchange may be more practical, so you don't have to pay the gas fees incurred from transferring between wallets. However, suppose you're holding a large number of coins and intend to HODL for the long term. In that case, it's highly recommended that you choose an offline wallet, as hardware storage offers the most robust protection for your digital assets.

Likewise, many investors choose to keep a combination of the two. Online wallets are often used for mining, staking, and making daily transactions, while offline wallets are treated like "bank accounts" to hold the majority of their crypto savings. Ultimately, the choice is up to you, so feel free to explore your options!