2 min read.Updated: 21 Dec 2020, 06:42 AM ISTNeil Borate
Hot wallets are connected to the internet and can be accessed anytime and cold wallets are not connected to the internet and let you store your crypto offline
Following the Reserve Bank of India’s judgment lifting the ban on cryptocurrency payments, they have gained traction in India. We explain some key concepts in a series of explainers by talking to experts. We start with cryptocurrency wallets and how they work.
What are cryptocurrency wallets? As the name suggests, these wallets help you store crypto assets and tokens. A wallet can be a separate device or a software programme on your phone. They utilize blockchain technology to safely and securely store your crypto assets, as well as facilitate the sending and receiving of cryptocurrencies.
Types of wallets: These can broadly be categorized into hot and cold wallets. Hot wallets are connected to the internet and can be accessed anytime. They include online cloud wallets, most mobile wallets, software wallets, and crypto exchanges.
Cold wallets are not connected to the internet and let you store your crypto offline. Funds can be received anytime, but you only sign the transaction with your private key once the cold wallet is disconnected from the network so that you don’t show your private key to the internet. Cold wallets include hardware and paper wallets.
A hardware wallet provides the perfect balance between safety and convenience when storing crypto. Hardware wallets are designed to protect your private keys from online methods of storage, such as on computers and phones, which can be accessed by a hacker. Since your private key never leaves the device, it cannot be hacked. If your hardware wallet is lost or breaks, you can access your bitcoin from a new device as long as you know your recovery seed words.
Paper wallets are stored on printed sheets of paper and are one of the safest options available. Crypto can be transferred by entering the private key or scanning the QR code on the paper. They cannot be hacked or stolen digitally since they are not stored on a computer or mobile. You also do not need to rely on a third-party server. Crypto owners must never take a photo of their paper wallet or seed words using their phone. That will expose them to the network and defeat the purpose.
When should you hold crypto in a wallet? Cold wallets are undoubtedly the safest method to store your cryptocurrency. They are immune to online viruses and hackers and ensure that you are not dependent on a third party for storing your data. However, unless you are storing large amounts of crypto that you don’t require on a day-to-day basis, most crypto investors can find them to be an unnecessary expense.
Beginners can consider a hot wallet like an exchange as they are more user-friendly.
What are the risks? Online or web wallets are the most susceptible to online attacks and scams. If you use crypto exchanges, you need to be sure that you can trust them with your assets. Do your research and look out for instances of past security breaches. Cold wallets are safer from online attacks and hacking, but put the responsibility entirely on you. If you damage or lose your hardware cold wallet and don’t remember or have another copy of your paper wallet containing your recovery seed words, you may lose your crypto forever.
As told to Neil Borate by Vikram Rangala, chief marketing officer at ZebPay.