Today, it is very difficult to avoid the conversation about cryptocurrencies due to the incredible growth that has occurred in the past year. This is what happens when something crazy grows and brings profits to the chosen few, as happened with the most famous bitcoin in 2017 when we were bombarded from all sides with new digital financial assets. The significant market growth brings with it an increasing interest from the public, and this year the story from the aforementioned 2017 has repeated itself. Bitcoin has reached its peaks, surpassing an incredible $60,000, pulling along other cryptocurrencies, which led many to want to quickly board that profit train. However, as is usually the case, by the time ‘Average Joe’ learns about it, it is already too late, but still, the fear of missing out or the so-called FOMO becomes stronger day by day. When you finally succumb and buy your first ‘coin’, the journey begins for which no one knows how it will end.
Block Openers
For the inexperienced, entering this world can be quite complicated and exhausting, full of new terms that you have no idea what they mean, as well as many questions about how the whole thing actually works. We will not talk about how ‘blockchain’ technology works because we wouldn’t have enough pages no matter how big they were, but for beginners, the basic thing to think about is where to keep and store the ‘crypto coins’ they have decided to buy. Just as a wallet, sock, or mattress is needed to hold paper money, cryptocurrencies have their wallets in which digital values can be securely stored. More precisely, digital wallets do not store ‘coins’ as such, but the wallet is defined as a software program that stores private and public keys (cryptographic keys) and interacts with the ‘blockchain’ to allow users to receive or send cryptocurrencies. This means that, unlike traditional wallets, digital wallets do not store cryptocurrencies, but are used as means that open a block in which cryptocurrencies are stored on the ‘blockchain’. It should also be noted that if you lose your key, you have lost your cryptocurrencies forever.
Three Types
Digital wallets are divided into two types, namely the so-called ‘hot’ and ‘cold wallets’. The term ‘hot wallet’ refers to wallets that are constantly connected to the internet, i.e., always have access to the internet, while ‘cold wallets’ imply storing private keys on a medium that is not connected to the internet, except when a transaction needs to be made. Of course, ‘cold wallets’ are a better choice as they reduce the possibility of breaches and theft of such valuable private keys. These two types of wallets are further divided into subtypes, depending on where you want to store your digital assets. According to this division, there are online, mobile, and desktop ‘hot wallets’ as well as paper and hardware ‘cold wallets’.
Hot Hot Wallets
Internet, mobile, and desktop wallets are typically ‘hot’ wallets linked to some ‘third-party’ services or applications such as exchanges or trading platforms. Although they are the simplest when it comes to trading crypto, they are also the riskiest and most susceptible to hacking attacks, meaning they are the least secure. Among them, ‘web’ wallets are the least secure, although all crypto hot wallets are vulnerable to ‘online’ attacks.
The advantage of hot wallets is their ease of use. Since they are always online, there is no need to switch between ‘offline’ and ‘online’ to carry out cryptocurrency transactions. For example, many people use mobile hot wallets for trading or purchasing cryptocurrencies. Doing this with a cold wallet would be inconvenient. You would need to find a device (usually a computer) to plug in your cold wallet, then transfer the required amount of cryptocurrency to the hot wallet and then make the purchase. Users with large amounts of cryptocurrency usually do not keep much in hot wallets. Although a hot mobile wallet is not the same as a traditional analog wallet, one similarity holds: it is a bad idea to keep a lot of funds or, God forbid, all funds in such a wallet because just as you can withdraw cash from an ATM when you need it, you can also transfer funds to a ‘hot’ wallet when the balance becomes low.
Cold Wallets
In general, cold wallets are quite secure, and most of them ‘live’ on devices that look like USB ‘sticks’, so stealing such wallets would actually require physically stealing the cold wallet as well as all associated pins and passwords that must be used to access the funds in the cold wallet. Hardware wallets are designed to be immune to hacking. Even when a hardware wallet is connected to a computer or linked via Bluetooth, depending on the storage method, the funds stored on the disk cannot be stolen. While technically connected to the internet, signing transactions is done ‘in-device’, and only then is it broadcast to the network via the computer’s internet connection, and since your private keys never leave the device, even if malicious software, i.e., a virus on your computer tried to steal your funds by maliciously ‘signing’ a transaction initiated in your hardware wallet, it would not be a valid signature, so the transaction would not go through. Hardware wallets are less convenient than hot wallets because they must be powered on and then connected to the internet. Additionally, you have to pay for such wallets, and some can be quite expensive, while hot wallets are usually free. However, if you hold larger amounts of funds, it may be wise to invest in a ‘cold’ wallet to ensure that your favorite assets are safe.
