A short crash course on the subject of wallets.
If you've decided to delve a little deeper into cryptocurrencies, sooner or later you'll be confronted with wallets.
So, what is a wallet actually?
In terms of cryptos, a wallet is not the place where your coins are stored, as the name suggests. The coins remain on the blockchain. What you keep in your wallet are your keys, which you use to legitimize the actions of your coins.
I won't get too technical, however it is important to keep in mind that there are Public Keys and Private Keys. The Private Keys are the ones you never out of your hand.
There are several variants of wallets, which can be roughly divided into two groups:
- Online wallets (sometimes also called hot wallets)
- Wallets on the crypto exchanges
- Wallets with appropriate specialized providers online
- Offline wallets (sometimes also called cold wallets)
- Paper Wallets
Let's take a quick look at these different types:
Wallets on the crypto exchanges
You usually get these online wallets automatically from the respective crypto exchange when you buy a currency there.
If you plan to leave your coins in such wallets, you should fully trust the respective exchange. I mean not so much because they could take away your wallet and its contents (and they definitely can - just read the terms and conditions a little bit), because as far as I know that usually only happens in serious cases. I have only had very decent experiences on crypto exchanges so far (the platforms I know and can recommend are: Binance, BitPanda, Coinbase). Rather, you should have full confidence as these platforms are targeted by hackers every now and then and if they are successful, then you might be left without anything. One of the biggest incidents was that of the Mt.Gox exchange (auf Wikipedia you can read more about it if you want).
Whether there is any insurance (from you or the exchange) that provides compensation in such cases is questionable. Of course, the major crypto exchanges take immense measures to keep their platforms secure.
A considerable advantage over other wallets is that you can sell your coins directly if necessary, since they are already on the exchange you trust and do not have to be transferred there first.
Wallets with appropriate specialized providers online
Unfortunately, I don't really know much about his topic yet, so I don't want to make any recommendations here, but the risks for these online wallets are basically the same as the previous point. If you have any experience: let me know. I am looking forward to hear about your experiences.
They look like USB sticks, but are packed with impressive technology. They ensure that private keys stay on the device. In all cases. Since these hardware wallets are off the Internet and only plug into your computer or smartphone when needed, they are considered very secure.
To use it, you connect the stick to your device and validate your actions (typically via buttons or touch displays on the wallet itself).
The potential danger here is the computer or smartphone itself: your entries (e.g. to which address you send) could be manipulated if your device is infected and you are careless. For example, if you don't check your inputs properly (generally an important point: always check your inputs - according to the motto "Better once too much. than once too little.").
So, it is recommended to definitely have a decent security program on your devices, even if you are not into crypto, but especially in this case. Don't skimp on your cyber security.
Are that what they sound like:
Are what they sound like: the keys are physically recorded on paper or a similar medium. This makes them impervious to hackers, but you should make sure that you store them properly, if the paper wallet gets lost or damaged/destroyed, you'll be left without anything.
What type of crypto wallet to choose
The decision on which type of wallet to use is a very personal one and should be made independently and carefully. A combination of several wallets is also possible in order to spread the risk and take advantage of different types of wallets.
It may also be worth considering getting a safe deposit box in which you can store your offline / cold wallets.
I hope this article could give you a rough overview of this topic.