What is a Cryptocurrency Wallet and why do I need one…or several?

What is a Cryptocurrency Wallet and why do I need one…or several?

When I first began researching cryptocurrency and blockchain technology, I quickly realized the incredible potential for profits as well as the chance to invest in something that would benefit all mankind. I, like most people, began making small purchases of a few main stream crypto currencies from a big well known and trusted exchange (a site where one may purchase cryptocurrency and tokens).  As my investing progressed, I researched deeper into newer coins and token which I felt had good use case and potential for growth.

I found that these “smaller cap” (having a smaller market capitalization and ranking than main stream crypto projects) coins and tokens could be somewhat elusive, only being available on certain exchanges .  This meant that I quickly ended up with more than half a dozen exchange accounts with asset values that were growing in size.  I felt spread rather thin.  I had money all over the place and it was difficult to keep track of it all.  I began trying to remedy  this by keeping a good record of my accounts and credentials.  But that only fixed a third of the problem.  I was still all spread out and was beginning to worry about the safety of my increasing asset portfolio.

In my continued research I began reading story upon story of exchange hacks, and government account freezes.  It was really making me nervous and a bit compulsive about checking my assets.  This was only compounded over time as, when I would login to certain exchanges the account balance would state “$0.00” until it propagated my information and updated the amount.  Terrifying to say the least.  There had to be a better way.

One day I heard about a crypto currency wallet.  Now I had heard this term before, but I couldn’t distinguish between a crypto wallet and the exchange wallets that I had been keeping my assets in.  So after about 10 hours or so of research, I had it all broken down.

Exchange wallets are wallets that are assigned to you by the exchange when you sign up.  You can have several accounts for each exchange and therefore several wallets for each exchange.  These exchange wallets don’t actually hold any crypto in them.  What they are rather, is a “promise of crypto”.  Should the exchange get hacked or go out of business for whatever reason, you could be left with nothing.  There is a well known saying in the crypto world, “Not your keys, not your crypto”.  What they are referring to is the blockchain keys for the address where your funds are located.  When you purchase crypto on an exchange, it is technically the exchange which is buying or has the crypto.  They have the “keys”.  The amount in your wallet simply reflects the exchange’s “promise” that the portion you paid for belongs to you when in actuality, those funds are in the exchange’s account for that particular crypto currency.

Ok, now we know that we want the keys to our own crypto, and that we want our purchased crypto off and away from the dangers of exchange wallets (unless we are buying or selling).   So, what are our choices?  Well,  there are (at the time of this article) basically two types of wallets, hot wallets and cold wallets.

Lets start with hot wallets.  Hot wallets mean that your wallet (and keys to that wallet) are stored on your phone, computer, tablet or browser.  It gives you a reasonable amount of security, especially if you have advanced security such as 2FA connected to it.  We will try to post and article that covers 2FA, but for now the take away is that you want it.  Now this security is important incase anyone were to steal your device, gain unauthorized access to it, or try tries to hack into it.  Examples of hot wallets are: Metamask browser wallet, Trust Wallet app, Keplr Wallet, Avalanche Wallet, Xverse Wallet, Yoroi Wallet.  These wallets are great and useful for storing non-lifechanging amounts of crypto assets and NFT’s.  You never want to store more crypto in a hot wallet than you could survive emotionally and physically losing.  Hackers get smarter everyday, and their equipment more sophisticated.  Most hot wallet hacks that occur are through phishing scams (Hackers try to convince you to give them the keys or password to your wallet with fake websites that look legit).  Even crypto pros have fallen for this scam so don’t think you’re above it.  Always check and be sure of the URL that you are visiting.  Be cautious of misspellings in the address or incorrect extensions such as .io vs. .com and vice versa.  Know where you are and where you are supposed to be at all times.  It’s probably a good idea to not keep more than you would want to spend or trade in a day, week or month (depending on your risk tolerance) in any one wallet.  Also create several wallets with different passwords to help spread the risk.  And as always, keep those wallet keys and password written down in several locations that are safe away from peering eyes and camera phones.  Someone gets a glimpse even for a second and it could be bye bye crypto.

Lastly there are cold wallets (or also known as air-gapped wallets).  These are wallets whose keys (or permissions) are completely isolated from devices with a signal or internet which means that they are extremely difficult to steal from without access to the actual device.  With these wallets transactions are performed from a phone or desktop app or browser, then the actual signing of the transaction is done from a separate cold wallet device (or vault).  The crypto keys never leave device and only the signature passes from the cold wallet to the app completing the transaction.  The only ways to hack these types of wallets is to have 1. Physical access to the device  2. Have the password or proper biometrics for accessing the data on the device or 3. Getting access to your 12 or 24 word seed phrase, entering it into a new device and then accessing the account by creating a clone (keep your seed words safe!).  These wallets are a little more tedious for conducting transactions but provide a high level of security.  You can keep oodles of money in them because they are so safe.  It is still a great practice not to place all your eggs in one basket and spread your wealth over several cold wallets and types of hardware.  Why take a chance?

I have included a video from one of my favorite YouTube people on the subject.  Please note that his opinions are not necessarily those of this news station.  Enjoy!




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