There already are more than 1000 cryptocurrencies circulating in the world. Whatever is the one we decide to hold, setting up a wallet is a mandatory step.
A wallet is a digital instrument where cryptocurrencies can be stored. It also allows for transactions to be completed, being able to send and receive cryptos. This is done through addresses, which identify a wallet and must be specified everytime a transaction is made. Also, each cryptocurrency in a wallet has its own specific address and it is possible to store it only if the wallet is compatible with that currency. It is important to note that typing a wrong address may result in funds being lost, therefore checking addresses and wallets’ compatibility is crucial in dealing with cryptocurrencies.
An important feature of every kind of wallet is represented by the so called private keys, which are data strings enabling the disposal of cryptocurrencies inside it. Without those, coins cannot be transfered or exchanged. Basically, private keys constitute the one and only way to access a wallet: if your wallet’s private keys are not safe, neither are your cryptos. Usually, private keys are stored by the owner of the wallet online or offline. However, it is also possible that a third party holds those on behalf of the owner, as it is often the case for exchanges.
Directly linked with private keys’ location is the concept of “hot” and “cold” wallet. A so called “hot” wallet is one whose currencies and private keys are stored online and/or linked to the internet. On the other hand, a “cold” wallet is not directly linked to it, obviously resulting in more safety and resiliency to hacking attempts.
Keeping in mind the different features outlined above, it is possible to categorize wallets as online, mobile, desktop, hardware and paper ones.
Online wallets are web-based. Basically, for this kind of wallet all data and currencies are stored on an online server, whit the clear advantage of being accessible anytime from any location. The major disadvantage is given by the relative lack of safety, given that online data are always susceptible of hacking. There are several degrees of safety for online wallets, depending on encryption techniques used by servers in order to manage data. An important feature of online wallets is that private keys can be not only stored online but also controlled by service providers. This means that the user is actually not in control of its own private keys and of its funds in turn. An important example of this are wallets provided by exchanges, whose private keys are not held by users. While these kind of wallets can be convenient for quick transactions, it is advisable to resort to a different kind of instrument in order to achieve a better level of safety.
Desktop and Mobile wallets are based on software dowloaded and installed on a device ( an app in the latter case). Users can access their wallets and funds only from the device where the software is installed and are in control of their private keys, resulting in a higher level of safety with respect to online wallets. However, devices are still connected to the internet and so susceptible of hacking. On the other hand, given their nature device based wallets are not as easily accessible as online ones but still offer a high degree of fruibility.
One of the best solutions in terms of safety is represented by hardware wallets, which are constituted by USB devices and are an example of cold wallet. These devices are designed in order to be immune to viruses, only running the program for holding private keys. Usually, there is also a display allowing the user to manage its funds, basically resulting in an effective impossibility to hack them. While not being the most suitable solution for users looking for quickness and accessibility, they should be absolutely considered in order to store a huge amount of cryptocurrencies.
The last kind of wallet is represented by paper wallets. These are based on the principle that it is actually possible to print addresses and private keys, as a string of data or under the form of a QR code. Directly removing every link to the net, in doing so it is possible to store funds without any risk of hacking. Storing currencies in this way, Private keys are only needed when the necessity of managing funds occur and exploiting an appropriate software. The higher level of safety is obtained at the cost of lesser fruibility and quickness.
Each of the above outlined kind of wallets has its own strenghts and weaknesses and is more suitable to different kinf of owners. However, the higher degree of hacking attempts in the world of cryptocurrencies leads to a strong preference for any kind of cold wallet in order to store a large amount of funds.