is a crypto wallet?
wallets are an integral part of using Bitcoin
and other cryptocurrencies. They are one of the basic pieces of infrastructure
that make it possible to send and receive funds through blockchain networks.
Each wallet type has its advantages and disadvantages, so it's crucial to
understand how they work before moving your funds.
do cryptocurrency wallets work?
Contrary to popular belief, crypto wallets don't truly store
cryptocurrencies. Instead, they provide the tools required to interact with a
blockchain. In other terms, these wallets can generate the necessary
information to send and receive cryptocurrency via blockchain transactions.
Among other things, such information consists of one or more pairs of public and private keys.
The wallet also includes an address,
which is an alphanumeric identifier that is generated based on the public and
private keys. Such an address is, in essence, a specific "location"
on the blockchain to which coins can be sent to. This means you can share your
address with others to receive funds, but you should never disclose your
private key to anyone.
The private key gives access to your
cryptocurrencies, regardless of which wallet you use. So even if your computer
or smartphone gets compromised, you can still access your funds on another
device – as long as you have the corresponding private key (or seed phrase).
Note that the coins never truly leave the blockchain, they are just transferred
from one address to another.
vs. cold wallets
As mentioned, cryptocurrency wallets
may also be defined as "hot" or "cold," according to the
way they operate.
A hot wallet is any wallet that is connected somehow to the
Internet. For example, when you create an account on Binance and send funds to your wallets, you
are depositing into Binance's hot wallet. These wallets are quite easy to set
up, and the funds are quickly accessible, making them convenient for traders
and other frequent users.
Cold wallets, on the other hand, have no connection to the
Internet. Instead, they use a physical medium to store the keys offline, making
them resistant to online hacking attempts. As such, cold wallets tend to be a
much safer alternative of "storing" your coins. This method is also
known as cold storage and is particularly suitable for long-term investors or
As a way to protect users' funds, Binance only holds a small
percentage of coins in its hot wallets. The remaining is kept in cold storage,
disconnected from the Internet. Noteworthy, Binance DEX provides an
alternative for users that prefer not to keep their funds in a centralized
exchange. It's a decentralized trading platform that allows you to have total
control of their private keys, while also being able to trade directly from
their cold storage devices (hardware wallets).
Software wallets come in many
different types, each with its own unique characteristics. Most of them are
somehow connected to the Internet (hot wallets). The following are descriptions
of some of the most common and important types: web, desktop, and mobile
You can use web wallets to access
blockchains through a browser interface without having to download or install
anything. This includes both exchange wallets and other browser-based wallet
In most cases, you can create a new wallet and set a
personal password to access it. However, some service providers hold and manage
the private keys on your behalf. Although this may be more convenient for
inexperienced users, it's a dangerous practice. If you don't hold your private
keys, you're trusting your money to someone else. To address this problem, many
web wallets now allow you to manage their keys, either entirely or through
shared control (via multi-signatures). So it's important to check the technical approach of each
wallet before choosing the most suitable for you.
When using cryptocurrency exchanges, you should consider
making use of the protection tools available. The Binance Exchange
offers several security features, such as device management, multi-factor authentication, anti-phishing code, and withdrawal address
As the name implies, a desktop
wallet is a software you download and execute locally on your computer. Unlike
some web-based versions, desktop wallets give you full control over your keys
and funds. When you generate a new desktop wallet, a file called
"wallet.dat" will be stored locally on your computer. This file
contains the private key information used to access your cryptocurrency
addresses so you should encrypt it with a personal password.
If you encrypt your desktop wallet,
you will be required to provide your password every time you run the software
so that it can read the wallet.dat file. If you lose this file or forget your
password, you will most likely lose access to your funds.
Therefore, it's crucial to backup
your wallet.dat file and keep it somewhere safe. Alternatively, you can export
the corresponding private key or seed phrase. By doing so, you will be able to
access your funds on other devices, in case your computer stops working or
becomes inaccessible somehow.
In general, desktop wallets may be
considered safer than most web versions, but it's crucial to make sure your
computer is clean of viruses and malware before setting up and using a
Trust Wallet is a
prominent example of a mobile crypto wallet.
A paper wallet
is a piece of paper on which a crypto address and its private key are physically
printed out in the form of QR codes. These codes can then be scanned to execute
Some paper wallet websites allow you
to download their code to generate new addresses and keys while being offline.
As such, these wallets are highly resistant to online hacking attacks and may
be considered an alternative to cold storage.
Owing to the numerous flaws,
however, the use of paper wallets is now considered dangerous and should be
discouraged. If you still want to use it, it's essential to understand the
risks. A major flaw of paper wallets is that they aren't suitable for sending
funds partially, but only its entire balance at once.
For example, imagine that you
generated a paper wallet and sent multiple transactions to fund it, summing a
total of 10 BTC. If you decide to spend 2 BTC, you should first send all 10
coins to another type of wallet (e.g., desktop wallet), and only then spend
part of the funds (2 BTC). You can later return the 8 BTC to a new paper
wallet, though a hardware or software wallet would be a better choice.
Technically, if you import your
paper wallet private key into a desktop wallet and spend just part of the
funds, the remaining coins will be sent to a "change address" that is
automatically generated by the Bitcoin protocol. If you don't manually set the
change address to one that you control, you will likely lose your funds.
Most software wallets today will
handle the change for you, sending the remaining coins to an address that is
part of your wallet. But the important thing to remember is that your paper
wallet will be empty after sending its first transaction out – regardless of
the amount. So don't expect to reuse it later.
importance of backups
Losing access to your cryptocurrency
wallets can be quite costly. So it's important to back up them regularly. In
many cases, this is achieved by simply backing up wallet.dat files or seed
phrases. Essentially, a seed phrase works like a root key that generates and
gives access to all keys and addresses in a crypto wallet. Also, if you opted
for password encryption, remember to back up your password as well.