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July 3, 2022
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We are currently living in an era where cryptocurrencies have started becoming mainstream. Most people are comfortable with buying and selling cryptocurrencies like BTC and ETH, SOL, etc. But there’s one less talked about and yet important element of cryptocurrencies known as crypto wallets.
Whether you are an active trader or a long-term holder, cryptocurrency wallets are something you should be familiar with. Therefore, in this article, we are going to throw some light on the different types of crypto wallets available and will help you set up a crypto wallet from scratch.
Well, almost everyone must be familiar with the word wallet from various different applications. A cryptocurrency wallet is not very different from any wallet associated with money exchange or in this case crypto exchange. So, a crypto wallet is a storehouse where you can store your cryptocurrency whether it is your bitcoin, dogecoin, ethereum, or any other token that you possess.
When you plan to get involved in cryptocurrency and start investing, setting up your wallet is one of the most basic steps. All the currencies are safely stored in these wallets as they come with a private key that allows access to only the owner of the wallet.
Now, these wallets can be used not just to store your currency but also to send and receive currencies. Even though the crypto wallets are available in different types, they all share similar functions. Wallets may be application-based or they can be available in USB-like form. Let us dive into more details about the types of crypto wallets and how one can set them up.
The crypto wallets are classified into two categories; software and hardware, which are known as hot wallets and cold wallets respectively. These hot and cold wallets are also further divided into more subcategories which we will look at later. For now, let us find out what hot and cold wallets are.
As mentioned earlier, a hot wallet is the one that falls in the software category. A hot wallet is one that is available on or connected to the internet which is why it is easy to access anytime you want. It is nothing but an application that is connected to the framework of cryptocurrency.
As these wallets are application based, they can be used on a mobile phone or even a laptop, and are often a preferred option for regular users. This wallet being connected to the internet gives the users an easy-to-work interface that enables them to make transactions seamlessly.
While these hot wallets are easy to use, they come with a considerable drawback when it comes to security. Since these wallets are connected to the internet, it makes them susceptible to cyber hackers and attackers, and this is exactly why it is never advisable to store digital assets on a large scale.
To sum it up, a hot wallet is a medium for a user to store and access their cryptocurrencies. It is best suited for everyday traders. It is often said that using more than one type of storage minimizes the risk of any loss or theft.
Moving on to the next type of wallet, a cold wallet falls in the hardware category, they are available i types; either hardware or paper, which we will talk about in a while. A cold wallet is not connected to the internet and is available in physical form. However, they are connected to the internet when a transaction is to be carried out.
As these wallets are in the form of a physical device they are protected from cyber-attacks. These wallets are considered to be the most secure storage options for cryptocurrency. However, being a physical device comes with its own drawbacks. These wallets do not have any backup and are prone to physical damage and risk of getting lost, although that can be taken care of.
If you wish to hold your currency for a long period of time then cold wallets are the right option for you. However, if you are a regular trader or do not wish to hold currencies for a considerate amount of time then you might want to go with a hot wallet.
To sum up, cold wallets are physical devices and render a high level of security. They are best suited for users who wish to store large amounts of digital assets in the wallet and hold their currencies for a long time.
Since you are now well equipped with the basics of these wallets, let us move on to further types of these wallets and also find out how to set them up.
As you learned above, Hot Wallets are Internet Oriented wallets, and these are easily accessible. Compared with the other types, hot wallets have more security problems as they are more vulnerable to hacking. Just like all wallets do, hot wallets too comprise of a private key and seed phrase as an encryption feature.
Hot Wallets can be further classified into two categories depending upon their operating principle.
Hosted wallets are mostly like a Bank, you can open an account and use it for your transactions. But here between you and your cryptocurrency, there will be a lot of interference from a third party. As from the above "Bank" example, you can understand whatever you buy or sell, all your private information will be accessible and this would be a point of concern.
Hosted wallets hold private keys and anyhow in the future if you forget your password, there are multiple options in hosted wallets to recover your account. You can say hosted wallets are good at retrieving data. But, it is quite restrictive in terms of making purchases or showing some interest in new things, as you have too much third-party involvement.
Now you know the basics about the hosted wallet, let's learn how to set them up.
Setting up a hosted wallet is nothing more than creating a bank account or making an online payment gateway account. Let's go through the process and understand it briefly.
The name Self-Custody itself explains everything about these wallets. A self-Custody wallet would be the wallet everyone would love to use, it allows you to buy anything of your interest. You can have NFTs, you can trade cryptos, and can earn rewards through it, all these with no third-party involvement. Self-Custody wallets offer real freedom with one condition, that all aspects of your wallet will be in your control including the responsibility of security.
Self-Custody Wallets are filled with all goodies with only one drawback, if you ever forget your password there’s no other way to retrieve your data back. Self-custody wallets offer no other way to get back your cryptos or access your account.
As we mentioned above, both these wallets share the same security system but work in a totally different manner. Setting up a Self-custody wallet has a series of steps to follow, let’s have a quick glance at them.
It is quite easy to set up a self custody wallet in just Four easy steps.
During this process, you have to remember to keep your private key safe and write it down so you can get it when you need it. If you forget your password there will be no way to get your account back. The most important part, you can only transfer cryptocurrencies, as transfer of traditional government owned currency is not possible.
By now, you must be familiar with a cold wallet. A cold wallet is basically an offline wallet. Cold wallets are not meant for traders, but for those who want to hold their cryptocurrencies over a long period.
There are two types of cold wallets currently available if you want to store your crypto.
Both of these cold wallets will make sure your holdings stay completely off the internet. This is good if you want to keep your investments far away from hackers. On the other hand, these wallets are more susceptible to physical damage.
Before we get to the setup process of these cold wallets, let us understand how these wallets work.
These kinds of wallets are by far the most secure option to store your cryptocurrencies. In a hardware wallet, you can download and store your crypto tokens on an offline storage device, similar to a USB stick.
Hardware wallets similar to hot wallets make use of a public key, private key, and a seed to create a highly encrypted environment for your cryptos. Let us see what these terms mean.
Now that you know about a hardware wallet, it’s time to see how to set up one. “Ledger” and “Trezor” are two leading companies when it comes to manufacturing hardware wallets. These are our recommendations but you can purchase any other hardware wallet you like from the Amazon store.
Each hardware wallet you buy comes with on-screen instructions. These instructions show up once you connect the wallet to your computer using the USB cable given in the box.
The procedure of setting up a cryptocurrency wallet is similar no matter what company you choose. Here we will be using “Ledger Nano S” to demonstrate the setup of this hardware wallet.
That’s how you can set up a hardware wallet in just 5 simple steps. Always use a private internet connection and a personal computer for setting up a wallet to avoid loss of data. Now, let’s see what a paper wallet is and how to set up one.
A paper wallet is nothing but a sheet of printed paper. When a user opts for a paper wallet, their cryptocurrency is taken off the network and the private and public keys associated with the account are printed on a sheet of paper.
Some paper wallet services print a barcode or a QR code containing users’ credentials. In the case of paper wallets, your crypto holdings are removed from your digital wallet but not erased. You can access your cryptos again by logging in using the private key given to you.
There are many paper wallet generators available online. But never use any service which works on an online-only framework. Let us see how to set up an offline paper wallet.
That is how a paper wallet is created. Once done, you can transfer your cryptocurrencies from a hot wallet to your new paper wallet using the randomly generated address.
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