A cryptocurrency wallet is basically an address where your cryptocurrency is 'stored'.
Because Bitcoin isn't actually a physical coin (which is why you can't steal Bitcoin from a Bitcoin ATM, surprise!), storing Bitcoin means that the transaction records point ownership of the Bitcoin to your address.
When a person or an exchange sends you Bitcoin or any other cryptocurrency, they are signing off ownership of the coins to your wallet's address.
Very important question. It's also the reason you might have heard some advice on not storing your crypto in your exchange wallet, for example. This is where keys come in.
What are the crypto keys?
Every cryptocurrency wallet is made up of two parts:
(1) Public key
(2) Private key
A securely generated version of the public key makes your wallet address. This is the public address where your cryptocurrency is stored. If someone wanted to send you some crypto, you would share this public address with them – sort of like your bank account number. They typically look like this:
Bitcoin public address: 19Dg48ZxQbxinBpq19gJepGYLVBdUND4B7
Ethereum public address: 0x5D5701A8e0EF8Fa9B53Aea493965fe628c5160fe
I know we say key, but think of the public address as a lock. Anyone who's at your front door can see your lock, and that's usually not a problem.
This is a private string of numbers and letters that is like a 'password' to your public key. If your public key was your bank account number, the private key would be the password to your bank account. You don't share this with anyone, ever.
Think of the private key as the actual key to your lock. Anyone who has this key can access your lock, open your vault, and steal your crypto.
Hence when we talk about crypto wallets, we really mean an interface that gives you access to these keys. Now that we've established their importance and what they do, we can discuss wallets and why some wallets might be better for you than others.
No access to private keys usually
Some hot wallets do give you access to private keys. Check if there is a way to extract the private keys by looking at their support pages or by contacting customer support.
Needs internet connection to access
Since you'll access the wallet by logging in with your username/email and password, it needs to be verified online.
You'll just have to sign up, usually using your email and by creating a password.
Easy access to your wallet and funds
All you have to do is log in! Even if you lose your password, you can easily reset it.
Most are backed by multiple security features
Two-factor authentication, email verification, and login notifications are some common security features that make your hot wallet secure.
Free to use
For most of them, at least!
Not as secure as a cold wallet
Although they are packed with security features, hot wallets are connected to the internet. This increases the risk of being hacked.
Don't have full control of your cryptocurrencies
Some hot wallets, such as those provided by exchanges, don’t give you access to your private keys. This means that you never have full control of your funds, and you are at the mercy of the hot wallet provider if your wallet balance doesn't tally, for example.
For its convenience and for storing small amounts of cryptocurrencies (small enough that you won't be too fussed losing them), absolutely!
Some services also require you to use their hot wallets, for example, if you are trading on an exchange or spending your cryptocurrencies daily using the TenX Card.
At TenX, we recommend that you store just enough crypto in your TenX Wallet for a week's worth of expenditure on the TenX Card. You can top up your wallet any time it is running low, as there are no fees involved with depositing your Bitcoin and Ether.
Access to both public and private keys
The private keys may be stored in hardware, in the form of a Mnemonic phrase, a keystore file, or the actual private keys.
Not connected to the internet
Cold wallets are offline. As you can imagine, there are a lot of different types of cold wallets - from physical hardware to pieces of paper with the keys written on it.
👍 Pros of cold wallets
👎 Cons of cold wallets
Without a doubt! Exchanges get hacked so regularly in 2019 that they often don't make the front page news anymore. Phishing and scams are rampant enough to justify the trouble or cost of using a cold wallet to store your cryptocurrency - especially if you're planning on having a lot of it!
Even if you're using your TenX Card to spend your crypto, we recommend that you store most of your crypto holdings or savings in a cold wallet.
Store most of your crypto holdings in a cold wallet. Back up your private keys and never share them with anyone else!
Store only amounts you're willing to lose in hot wallets such as your spending wallet (i.e. TenX Card) or trading wallet (i.e. exchange). Where possible, only move your cryptos to an exchange when you are planning to trade or sell them.
Just follow these two rules, and you'll be much safer than most of the crypto holders today.
Finally, if there's just one thing you take away from the guide, remember this:
Not your keys, not your crypto.