Introduction to Cryptocurrency Wallets

A cryptocurrency wallet is a central storage location for cryptocurrencies and other types of digital assets that also offers the ability to send and receive cryptocurrencies. There are many different types of cryptocurrency wallets, each with different pros and cons.

This guide covers some of the most important topics pertaining to cryptocurrency exchanges, including:

How cryptocurrency wallets work

The difference between the types of cryptocurrency wallets

Sending and receiving cryptocurrencies to and from a wallet

Safety concerns and tips

How to choose the right type of cryptocurrency wallet for you

…and much more!

How Do Cryptocurrency Wallets Work?

A cryptocurrency wallet is an interface that allows users to interact with a blockchain where a cryptocurrency’s public and private cryptographic keys are stored. Some cryptocurrency wallets feature a graphical user interface layer for ease of use.

A private key is a secret cryptographic code that allows a cryptocurrency to be sent or spent. Keeping a private key safe and secure is of the utmost importance. A wallet address is a hashed version of the wallets public key.

The Different Types of Cryptocurrency Wallets

There are many different types of cryptocurrency wallets, each offering unique benefits and pitfalls.

Software wallets are typically a web-based wallet where private keys are managed by a third-party. These can be accessed via a website on a computer, or via a smartphone application. Software wallets are among the easiest to use, with the most professional interfaces. However, due to their constant state of being connected to the internet, software wallets are among the least secure wallets available.

Wallets located on cryptocurrency exchanges are a type of software wallet, so choosing a reputable cryptocurrency exchange such as Covesting is of the utmost importance if an investor is choosing to keep assets stored on an exchange.

Hardware wallets are generally considered the safest way to store cryptocurrencies, because the private keys are located on a secure device. The hardware wallet – typically a USB-based device – generates the private key from within, and the private key can only be accessed from the device itself. Hardware wallets typically use a mnemonic phrase for backup, which should be written down on paper and stored in a secure place, separate from the hardware wallet.

When choosing a hardware wallet, choose a reputable brand such as Trezor, or the Ledger S Nano.

Paper wallets are among the simplest and most secure types of cryptocurrency wallets. Since cryptocurrencies are stored on the blockchain, and wallets merely act as a way to access private and public keys, both the private and public keys can be printed or written on paper. However, paper wallets are inconvenient, as there is a lack of easy-to-use user interface and the paper must be stored in a safe place for security reasons.

Cryptocurrency Wallets: Sending and Receiving

Using a cryptocurrency wallet, users can send and receive a specific amount of a cryptocurrency.

Each cryptocurrency has its own unique divisibility and characteristics. For example, some cryptocurrencies, such as Ripple (XRP) and Stellar (XLM) have Destination Tags in addition to a wallet address.

Before sending any cryptocurrencies, be sure you check to make sure the right cryptocurrency is being sent to the correctly corresponding wallet address. Sending Bitcoin to an Ethereum address, for example, could result in the funds being lost forever. Also, be sure to double- and even triple-check the receiving wallet address is correct before sending any cryptocurrencies.

When receiving cryptocurrencies, the user can provide the direct wallet address or a QR code version of the wallet address that can be used to send cryptocurrencies to.

Cryptocurrency Wallet Safety Tips and Concerns

The biggest safety concern to consider when reviewing the types of cryptocurrency wallets to choose from is to choose a hot or cold wallet storage solution.

Hot wallets are wallets that are connected to the internet in some way, leaving them potentially exposed to cyber criminals. Web- and app-based wallets are often the target for hackers. Cryptocurrency exchange wallets are also a type of hot wallet, so ensuring a reputable, licensed cryptocurrency exchange is chosen is extremely important.

Cold wallets are wallets that are not connected to the internet, and include paper wallets and hardware wallet solutions such as Ledger S Nano. These wallet types are considered much more secure and safe, however, they are not fully without risk. There is a chance a hardware wallet becomes damaged, is stolen, or a paper wallet is discovered, lost, or damaged. Oftentimes, this leads to users unable to access their cryptocurrencies, and the assets will be forever lost on the blockchain.

Each wallet type offers unique benefits and risks. Being in charge of caring for and storing your own wealth can be a daunting task, and additional care is warranted. Here are some additional steps one can take to protect their cryptocurrency wallets.

Paper wallets and mnemonic phrases generated by hardware wallets can become lost, or damaged. Keeping these intact and in a safe, secure location is required. For additional protection, the mnemonic phrase of a hardware wallet should be stored in a separate location from the hardware wallet itself. Paper wallets can be damaged in floods or in fires, so storing them in a fireproof lock box is an optional yet recommended step. Other methods for preserving private keys and mnemonic phrases exist, including steel engraved versions of paper wallets that cannot be burned or destroyed.

Choosing the Right Cryptocurrency Wallet for You

Choosing the right cryptocurrency wallet is among the most important decisions a cryptocurrency investor can make, both for safety and security reasons, but also for ease-of-use and peace of mind.

Cold storage hardware wallets are always the most secure and safe solutions for long-term storage, however, they are not always a great option for short-term holders, or cryptocurrency traders, who need regular access to their funds.

If an investor must rely on a hot wallet, similar to the types of wallets found on cryptocurrency exchanges, choosing a reputable, licensed provider will provide an added layer of protection, as licensed and regulated exchanges like Covesting are proven to have the infrastructure and security necessary to keep funds safe and secure, while still allowing holders and traders to easily access their funds on a whim.

To sign up for one of the world’s most reputable, fully-licensed cryptocurrency exchanges with the most advanced and secure cryptocurrency wallet system, visit Covesting’s user registration page and sign up for a new account. Here is how to get started: