Crypto Storage Options: As the world of cryptocurrency has grown, so too has the threat from hackers, scams, and thieves. With large sums involved, keeping funds safe is paramount. In order to fend off attacks, blockchains use crypto wallets to store the private keys needed to access funds
Here, we’ll take a look at these crypto storage options and explore the benefits and downsides of each type of crypto wallet.
What are crypto wallets?
Crypto wallets (https://learn.swyftx.com/cryptocurrency/how-to-store-cryptocurrency/) allow users of a blockchain to send, receive trade, and “store” digital assets, including NFTs. While cryptocurrency always remains on the blockchain, crypto wallets can be considered a form of storage just like a real-world wallet.
Crypto wallets come in 3 forms:
- Software wallet
- Hardware wallet
- Paper wallet
These different crypto storage options carry their own benefits and downsides regarding security and convenience. On the whole, crypto users tend to opt for software solutions as they are considered the most convenient. Those with substantial funds, however, tend to opt for hardware or paper solutions that are more secure, but at the expense of convenience.
How do crypto wallets work?
Crypto wallets keep track of private and public keys as well as that wallet’s associated funds. Each wallet has a unique address that is a long string of alphanumeric characters.
A crypto wallet is comprised of 3 elements:
- Public key: comparable to a bank account number.
- Private key: a way of verifying access and transactions, similar to a pin code or password.
- Wallet address: a hashed version of your public key that can be shared freely to receive or exchange assets.
Upon creating a crypto wallet, you will be issued something called a “seed phrase.” While there are some technical differences, a seed phrase is essentially a human-readable version of your private key. Typically this is a 12-word phrase that must be inputted in the correct order to access a wallet.
Keeping these seed phrases private and secure is vital to accessing your funds should you lose access to your wallet. Your seed phrase allows a wallet to derive the private keys from the blockchain.
An important distinction is between “hot” and “cold” crypto wallets. Hot wallets access the internet and are often integrated with exchanges. Cold wallets are not connected to the internet and store private keys on a physical device or medium. These are safer but typically less convenient.
Software wallets are generally considered “hot,” but are more accessible in that they are all connected to the internet in some way. This is considered less secure but is preferred by some users for the sake of convenience.
The types of software wallets include:
- Desktop wallets: software installed on a computer with more control over funds.
- Hosted web wallets: used to interact with blockchains through a browser with keys and assets “stored” by a third party.
- Non-custodial web wallet: used to interact with blockchains through a browser or plugin, with users in full control of their assets.
- Mobile wallets: designed specifically for smartphones, mobile wallets make sending and receiving crypto a lot more convenient making use of technology such as QR codes.
Hardware wallets are devices designed to prevent private keys from being exposed to the internet. Instead, private keys are stored offline, on the device itself. These are sold by companies such as Ledger and Trezor.
Looking and behaving like a USB flash drive, hardware wallets are the most convenient form of cold storage. When it comes time to access funds, users simply need to connect the device to a computer with the device itself signing off on transactions before accessing the blockchain, acting as a “bridge”.
While hardware wallets are a good compromise between security and convenience, they are the most expensive option.
A paper wallet is the most basic but also, potentially the most secure storage option. They involve simply storing your private keys, seed phrases, or a suitable QR code on a physical medium such as a piece of paper.
Paper wallets exemplify the fact that crypto is never really stored like real cash but is, instead, simply accessed through relevant information. This makes paper wallets highly secure in that they never access the internet but are also vulnerable to destruction and loss through events such as house fires.
All 3 forms of crypto wallet are proven safe and effective ways of storing digital assets. Which type of wallet you use depends largely on how often you interact with the blockchain. For those who trade regularly such as NFT collectors or crypto traders, software and hardware wallets offer the best solution. For those who are looking to store a considerable sum of crypto for a long period of time, paper wallets are a good solution.
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