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Cryptocurrencies are and will be one of the major financial assets of the future. Therefore, it is essential to find a way to store them safely and efficiently. For this purpose, Stelareum will share with you everything you need to know about cryptocurrency wallets so that you can understand what they are, how they work, what they offer, and whether they really fit your needs or not.

What is a cryptocurrency wallet ?

Unlike the vast majority of traditional currencies, cryptocurrencies are virtual currencies, so handling them is totally different and digital, especially when it comes to buying and storing them.

Cryptocurrencies do not exist in a physical form, which means that technically they cannot be stored in any physical place. That is why one of the most important elements in the cryptographic world are hardware wallets or virtual wallets. They are fundamental tools that allow cryptocurrencies to be managed. Wallets, also known as portfolios or virtual wallets, are pieces of software or hardware that can be used to receive and send cryptocurrencies through the blockchain network. They are designed to store and manage the public and private keys of cryptocurrencies.

On the one hand, private keys serve as the PIN number of a card, which should not be disclosed to anyone, and are used to access an account and spend the cryptocurrencies contained in an address. Whereas public keys are the closest thing to a bank account. They can be shared with anyone to send money to, without the risk of them being able to withdraw the funds.

Why you should use a wallet for cryptocurrency ?

The main and most important point is safety. The different ways of storing cryptocurrencies on exchanges today cannot guarantee 100% security, our digital assets must be stored in a more secure place, owning a wallet will improve the overall security of our cryptocurrencies . Most people are unlikely to use a wallet, but they should understand that their cryptocurrencies are in constant danger on centralized exchanges.

Types of crypto wallets and the advantages/disadvantages of each type

1. Mobile wallets

Mobile wallets have become increasingly common in the cryptomobile world - and that's no accident! With more and more people accessing the Internet through a smartphone, it is only natural that this type of wallet is gaining more and more importance. This type of wallet is recommended for users who want to make everyday transactions or store small amounts of crypto. For instance, if you want to buy BTC, you’ll need to create a Bitcoin wallet, and the same for ETH and more. One of the main advantages of this type of wallet is undoubtedly its QR code payment system, which makes it easy to send money from one party to another using only the smartphone camera.

Smartphone wallets are quite secure. If you keep your 12 seed words and don't share them with anyone, it's unlikely that anyone will be able to steal your funds. The only weak point is that, if someone breaks into your cell phone and steals your password, then you can lose your funds. Therefore, it is recommended that you keep your cryptocurrencies in more than one wallet. Also, some wallets offer more security with two-factor authentication (2FA).

Some of the best mobile wallets are :

2. Computer wallets

Computer wallets are another popular type of cryptocurrency wallet. They are stored on the hard drive of your CPU, which makes them very secure.

On one hand, computer wallets are relatively more difficult for everyday transactions, as you need to be in front of a computer to make transactions. On the other hand, they are the most recommended type for people who do trading, because they facilitate the various transactions between cryptocurrencies. In addition, for those who wish to integrate their wallets into decentralized applications (dApps), computer wallets are usually simpler. As with mobile wallets, it is recommended to split funds among more than one wallet, which increases security. Wallets with 2FA offer greater peace of mind to their users.

Some of the best computer wallets are :

3. Internet (or cloud) wallets.

For those who don't want to be trapped to a single device, internet (or cloud) wallets can be an interesting option. With them, you can access your funds from any device with an Internet connection.

However, you have to be very careful with that type of wallet. Your cryptocurrencies will not be stored on a owned device, but on the hardware of the company that is in charge of the wallet. As these companies store large amounts of crypto, hacking attempts are not uncommon. In the past, there have been cases of hacks in the crypto world. Nowadays, events like these are rarer, as there is greater knowledge of the technology, as well as more refined security procedures. For all that, it is important to choose your internet wallet well.

Some good options are :

4. Hardware wallets

Hardware wallets are the most secure and modern type of cryptocurrency wallet available on the market. They look like pen drives, but have state-of-the-art cryptography, and are therefore very secure.

As this type of wallet has no connection to the internet, it is practically impossible for someone to access your account and steal your funds. Therefore, hardware wallets are the most recommended for storing large amounts of crypto. If you want to transact, hardware wallets are usually integrated with hot wallets, which makes handling cryptocurrencies simple. The only drawback to this type of wallet is the price, which can be a bit restrictive for cash-strapped users. Currently (June/2021), the simplest models start at $59 USD.

Some of the most popular hardware wallets are :

5. Paper wallets

Incredibly, paper wallets are one of the most secure ways to store cryptocurrencies, although they are becoming less and less common.

In this type of wallet the keys are stored in a simple piece of paper. However, to create one, you need some technical know-how: generate a key, own a secure device and print it on a printer without an Internet connection. In addition, handling your crypto is much more laborious. As long as no one steals this paper or hacks your computer while creating your wallet, your crypto is safe. However, the technical difficulties and lack of versatility of this wallet make it not recommended for most users.

Are cryptocurrencies more secure on a wallet than on an exchange platform ?

When it comes to the question of where to keep cryptocurrencies, many people would probably say, without thinking twice, that exchanges are the safest place to keep them. Just like we are more comfortable putting our money in a bank, exchanges are seen by many as "banks" that specialize in digital currencies. They have dedicated cybersecurity officers, state-of-the-art risk control systems, and the backing of big money, and generally they have their own user safety asset funds to ensure that every user's money is protected. So, it is definitely safer to keep cryptocurrencies on an exchange than to keep them in your own hands.

But is this really the case? Here is a detailed analysis of the features of exchanges and cryptocurrency wallets with some real-life examples to see which storage method is safer.

Centralized Cryptocurrency Exchanges

A cryptocurrency exchange is a place where cryptocurrencies are traded centrally. Each cryptocurrency on each exchange you are on has a wallet address that is dedicated to you, and this address exists so that you can transfer in and out freely. Just like every bank card you open has a card number, this card number is your address, transfers to others are transferred through this card number, and others transfer to you are transferred to this card number.

Advantages:

One of the biggest advantages of storing cryptocurrencies on exchanges is the ease of trading. If all your cryptocurrencies are stored in the official wallet, when you need to make a transaction to the platform, you will have to transfer from the official wallet to the exchange first, and if you encounter block congestion, it may take several hours or even days to arrive. And you have to pay a fee for each transfer out. Cryptocurrencies do not have this problem if they are placed on an exchange, and you can quickly trade your cryptocurrency holdings with other cryptocurrencies and fiat currencies.

Disadvantages:

First, it is easy to be a target of hackers. Like banks will have a lot of cash, exchanges will no doubt generally store a lot of cryptocurrency, which makes them easy targets for hackers. And unlike a typical stock brokerage or commercial bank, cryptocurrency exchanges are not subject to many legal constraints. In the event that an exchange is hacked and suffers serious losses leading to bankruptcy, it will be very difficult for users to recover their funds.

For example, Mt. Gox was once the world's number one bitcoin exchange, handling over 70%% of all bitcoin transactions. However, between 2011 and 2013, a total of 850,000 bitcoins were stolen, causing Mt. More than 100,000 users suffered significant losses, and to this day most of the funds have yet to be recovered. Second, potential risks within the exchange. In addition to external attacks, centralized exchanges also face potential internal risks to the security of their assets.

For example, the sudden death of the founder of the Canadian exchange QuadrigaCX in 2021 caused the loss of $190 million in user assets because the private key of the platform was kept by the founder alone, the accident of the founder made it difficult to recover user assets.

What about the security of official cryptocurrency wallets ?

We know that cryptocurrency wallets are used to store addresses and private keys. They can be simply divided into two categories based on whether they are networked or not: cold wallets and hot wallets.

1. Cold wallets

Cold wallets are wallets where the private key is stored offline and the physical medium must be obtained when accessing the funds. Cold wallets mainly include computer wallets, paper wallets and hardware wallets. Among them, hardware wallets are the most used, which refers to hardware devices used for cryptocurrency storage, usually about the size of a USB flash drive, and must be connected to a computer with a USB port in order to transfer money. The hardware wallet keeps the private key in the hardware, and the transaction is not leaked throughout.

The advantage of cold wallets :

They are effective against malware. Even if your computer is poisoned, you can still use it to transfer money safely. Cold wallets are considered one of the most secure ways to store digital currencies today and are generally used to store larger amounts of digital assets.

Disadvantages of cold wallets :

Expensive. For example, the current best-selling Ledger Nano S supports a variety of cryptocurrencies such as bitcoin, ethereum, and litecoin and retails for about $59. Similarly, Trezor at $159 and KeepKey cost about $49. It is troublesome to use and the process of importing and exporting private keys is rather tedious and not suitable for daily use. Not only do you need to configure special software, you also need to make backups of helper words and random number seeds, otherwise you cannot recover your assets in case you lose your wallet or if the hardware fails.

2. Hot wallets

A hot wallet is a wallet that stays connected to the Internet, also known as an online wallet. Hot wallets include computer client wallets, mobile app wallets, browser wallets, etc.

The advantages of hot wallets :

Free and open source, and easy to use.

Disadvantages of hot wallets :

Easy for malware to steal data. Whether you use it on a desktop computer or a cell phone, you need to ensure the security of your operating environment. Never use it on a public computer. Once you get a virus or Trojan virus, your digital assets are in danger. So, taking the above analysis into account, the security of cryptocurrency wallets is generally higher than that of exchanges. Because your private key is in your own hands, your cryptocurrency assets are basically not at risk as long as you keep your private key in your pocket.