In the market for a crypto wallet? This article will explain what you need to know and guide you in finding a wallet best suited for your needs.
What Is A Crypto Wallet?
A crypto wallet is a software program or a physical device that allows you to store, send and receive cryptocurrency. Think of it like a bank account for your crypto. When you first initiate a transaction, a unique pair of public and private keys are created. Each key is a long string of alphanumeric characters that serves a different purpose.
Public Key
A public key is a cryptographic code that is created from the private key. Public keys allow the wallet to receive crypto via a specific address, known as the wallet address.
Anyone can send crypto to the wallet address, but you must have the private key to access the wallet and the crypto in it.
Private Key
You may have heard many warnings telling you not to share your private key with anyone. Your private key is similar to the password to your digital banking account, or the key to your safe. You wouldn’t give your password or key to anyone else, would you?
Your private key can be found in your wallet. It proves your ownership over the wallet and gives you the ability to digitally sign transactions - hence the ability to manage your crypto funds. Do not share it with anyone if you don’t want your funds to be compromised.
Seed Phrase
Another thing to note is your wallet’s seed phrase. When you first create a wallet, you may be asked to write down a 12-word seed phrase which acts as a backup for your private key. You can think of the seed phrase as a readable version of your private key.
As long as you have the seed phrase, you would be able to access your wallet and transact crypto from anywhere. Hence, you should never disclose your seed phrase to anyone either.
How Do They Work?
Contrary to popular belief, crypto wallets don’t really store digital assets. What they do is allow interactions with the blockchain that your crypto is on, via public and private keys.
When you make transactions, your coins are transferred from one location on the blockchain to another. You would need to digitally sign the transaction for it to go through.
Different Types of Wallets
Crypto wallets differ in how they operate and whether they are custodial or non-custodial.
How Wallets Operate: Hot vs Cold Wallets
|
Hot Wallet |
Cold Wallet |
|
Connected to the internet |
No connection to the internet |
|
Private keys generated via software program |
Private keys generated offline |
|
Less resistant to online hacking attempts |
More resistant to online hacking attempts |
|
Good for everyday traders |
Good for long-term holders |
|
Typically web, mobile wallets e.g. Exchange wallets, Metamask, Trust Wallet |
Typically hardware wallets e.g. Ledger, Trezor |
Hot wallets are connected to the internet and can be easily accessed with a few clicks. Exchange wallets are typically hot wallets. However, many exchanges like ApolloX opt to store the majority of crypto in cold wallets for better security.
Generally, traders are not recommended to store large amounts of crypto in hot wallets like web or mobile wallets as there is risk of cybertheft and hacking.
Type of Wallets: Custodial vs Non-Custodial Wallets
|
Custodial Wallet |
Non-Custodial Wallet |
|
Third party holds your private keys on behalf of you |
You hold your own private keys |
|
Third party has control over your funds; they are responsible for securing your funds |
You have full control over your funds; you are solely responsible |
|
Easily accessible, speedy transactions |
Slightly more cumbersome to trade |
|
You could seek help from the custodial party if you lose wallet access |
Once you lose your keys, you lose your funds |
|
Often require KYC |
No use for KYC |
Custodial wallets are typically web and mobile wallets of centralized exchanges (CEX). When you trade on CEXs, you often utilise their hot wallets to send and receive crypto. The exchange holds your private keys and has control over your funds; you simply have to give them permission to carry out transactions. If this suits you, make sure you find a trustworthy exchange and put in place security measures to safeguard your funds.
In contrast, non-custodial wallets are used for trading on decentralized exchanges (DEX), which are designed to not have control over your funds or have access to your wallet.
Further reading: DEX vs CEX: What You Need To Know
Best Practices To Safeguard Your Wallet
Here are some tips to secure your wallet and funds.
- Cold wallets for long-term investments - Those who want to hold coins long-term should consider using cold storage, only leaving what they need for everyday trades in hot wallets.
- Non-custodial wallet over custodial - Not your keys, not your coins. An example of a non-custodial wallet is the ApolloX DeFi Wallet. Users hold their own private keys and control their own funds for better security and anonymity when trading.
- Never share private keys - Once you lose your keys, you lose your coins. Make sure that you also write down your private key or seed phrase on paper and store it somewhere safe.
- Beware of phishing scams - Malicious actors in crypto may impersonate companies or people to encourage you to click on phishing links. Always check the website domain, email sender and link address carefully. Check with customer support if you are trading on an exchange.
- Follow recommended security measures - Crypto companies often provide guidelines like setting up 2FA and whitelisting addresses to safeguard your accounts and wallets. Make sure you set them up. Better be safe than sorry.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
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Risk Reminder: Crypto trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
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