Many new users are interested in cryptocurrencies but do not know much about crypto wallets. Crypto wallets mainly include hardware crypto wallets (also called “cold wallets”) and software crypto wallets (also called “hot wallets”). There are considerable differences between the two wallets. Today, we take this opportunity to explain the different types of crypto wallets.
Crypto Wallet’s Definition
Crypto wallet is a software program with addresses and private keys. On the one hand, distributed ledgers rely on public and private key pairs to sign transactions and ensure authenticity. On the other hand, crypto wallets can track keys that require digital signatures for cryptocurrency transactions on distributed ledgers. It is thanks to such encryption and decentralization mechanisms that the security of crypto wallets is ensured.
As an important tool, the crypto wallet keeps track of our exclusive account on the blockchain network. It does not store any digital assets such as cryptocurrencies but keeps the user’s keys (public and private keys) on record. This key is then placed on a specific blockchain. When we use cryptocurrency in our crypto wallet, it means that the address of the crypto wallet and the private key must be matched before the operation is allowed.
For example, if someone wants to transfer cryptocurrency to your crypto wallet, you only need to provide your crypto wallet’s address to the other party. Please note that your private key should never be disclosed to the other party. As the private key is the only password to enter your crypto wallet assets, whoever obtains the wallet key can have full access to your funds.
Hot Wallets VS Cold Wallets
Software encrypted wallets, also known as hot wallets, can be connected to the Internet directly. For example, when you create an account on MEXC Exchange and deposit funds, you are actually depositing funds into MEXC Exchange’s hot wallet. MEXC Exchange will then transfer most of the user’s funds into cold wallets for safekeeping.
A cold wallet is a wallet that is not connected to the Internet and can be used offline. Cold wallet only uses physical media to store keys, which means there is no way to transfer money if there is no internet connection. This greatly increases the difficulty of hacking and theft of digital assets. Cold wallets are a safer way to “save” digital assets such as users’ cryptocurrency.
As such, the cold wallet is more suitable for long-term investors, and for beginners who only want to buy a small amount of cryptocurrency, the hot wallet is more convenient. If there is a large amount of cryptocurrency (with more than a few million USDT), it is still recommended to use cold wallets.
Closing thoughts
As a first step into the blockchain space, it is necessary to have a crypto wallet. In the blockchain world, as long as users back up their wallets and secret private keys, they will not endure the unbearable experience of losing funds. “Hot wallets” are more common in the exchange market and “cold wallets” are more secure and better. It is very important for the users to have a comprehensive understanding of the principles and functionality of crypto wallets before using them.
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