What is a Digital Wallet? Is wallet Private and Secured?
Table of contents
- What is a Digital Wallet?
- How does Digital Wallet Works?
- Digital Wallet – Hot Wallet
- Digital Wallet – Cold wallet
- What is a Paper Wallet?
- Digital Wallet – Hosted wallets
- Setting up hosted Digital Wallet?
- Self-Custody Digital Wallet
- Benefits of having a Non-Custodial?
- How to Set up Non-Custodial ?
- Hardware Wallet
- Setting up Hardware wallet
- Are Hardware Wallets Private and Secure?
- Unveiling the Vulnerabilities of Hardware Wallets
- The Importance of Vigilance and Extra Security Measures
- What is the best one?
- Why do you need it?
- Which you should use
- Top 8 Best Hot Digital Wallets
- Top 3 Cold Digital Wallets
What is a Digital Wallet?
There are many different types of crypto wallets. But the most popular ones are hosted wallets, non-custodial wallets, and hardware wallets.
Which one is right for you depend on what you want to do with it and what kind of safety net you are looking for.
How does Digital Wallet Works?
Crypto wallets also support cryptocurrency transfers through the blockchain. Some wallets even allow users to perform certain actions with their crypto assets.
Such as buying and selling or interacting with decentralized applications (dApps).
It is important to remember that cryptocurrency transactions do not represent a “sending” of crypto tokens from your mobile phone.
When you are sending a token, you are actually using your private key to sign in to the transaction and broadcast it to the blockchain network.
The network will then include your transaction to reflect the updated balance in your address and the recipients.
So, the term “wallet” is actually somewhat of a “misnomer” as crypto wallets do not really store cryptocurrency. In the same way, physical wallets hold cash.
Instead, they read the public ledger to show you the balance in your addresses. And also hold the private key that enables you to make transactions.
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Digital Wallet – Hot Wallet
Hot wallets are connected to the internet. Examples of hot wallets include :
a. Web-based wallets
b. Mobile wallets
c. Desktop wallet
Private keys are stored and encrypted on the app itself. Which is kept online.
Using it can be risky because computer networks have hidden vulnerabilities.
That can be targeted by hackers or malware programs to break into the system.
This risk can be reduced by using a hot wallet with stronger encryption, or by using devices that store private keys in a secure place.
Usually, Crypto investors have both hot and cold wallets to store their cryptocurrencies.
Digital Wallet – Cold wallet
A cold wallet is entirely offline. While they are certainly not as convenient as hot wallets. They are far more secure.
Examples of Cold Wallets are
a. Paper Wallets
b. Hardware wallets
What is a Paper Wallet?
A paper wallet is a physical location where the public keys are written down or printed. In many ways, this is safer than keeping funds in a hot wallet.
Since remote hackers have no way of accessing its keys. On the other hand, it opens up the potential risk of the piece of paper getting lost. Which may result in losing your funds.
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Digital Wallet – Hosted wallets
The most popular and easy-to-set-up crypto wall is hosted wallet. When you buy crypto using a crypto app, your crypto is automatically held in the hosted wallet. It’s called hosted because the third party keeps your crypto for you.
Similar to how a bank keeps your money in a checking or savings account. You may have heard of people “losing their keys” or “losing their or “losing their USBs “. But with a hosted wallet you don’t have to worry about any of that.
Benefit – Even if you forget your password, you won’t lose your crypto.
Drawback – You can’t access everything crypto has to offer.
However, this may change as hosted wallets start to support more features.
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Setting up hosted Digital Wallet?
- Choose a Platform You trust – Your main consideration should be security, ease of use, and compliance with government and financial regulations.
- Create Your Account – Enter your personal information and choose a secure password. It is also recommended to use-2- step verification for an extra layer of security.
- Buy or Transfer Crypto Most crypto platforms and exchanges allow you to buy crypto using a bank account or credit card. If you already own crypto, you can also transfer it to your new hosted wallet.
Self-Custody Digital Wallet
Most web-based wallets are custodial wallets. These wallets are especially popular with newcomers in the crypto world. A self-custody wallet puts you in complete control of your crypto.
Non-custodial wallets do not rely on a third party or a “custodian” to keep your wallet safe. While they provide the software necessary to store your crypto.
How it works …
The responsibility of remembering and safeguarding your password falls entirely on you. If you lose or forgot your password, often referred to as a “private key” or “seed phrase” there is no way to access your crypto.
And if someone else discovers your private key, they will get full access to your assets.
Custodial wallet: Private keys are held by a third party… not your keys–not your crypto. For example, crypto stored on FTX was custodial, so holders can’t retain control.
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Benefits of having a Non-Custodial?
In addition to being in full control of the security of your crypto, you can also access more advanced crypto activities like yield farming, staking, lending, borrowing, and many more.
But if all you want to do is buy, sell, send, and receive crypto, a hosted wallet is the best option.
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How to Set up Non-Custodial?
a. Download a wallet app.
b.Create your account – Unlike a hosted wallet, you do not need to share any personal information, not even an email address.
c. Be sure to write down your private key- it is a random 12-word phrase. If you lose or forget it you won’t be able to access your crypto.
d. Transfer crypto to your wallet – It is not always possible to buy crypto using traditional currencies (like US dollars or Euros) with a non-custodial wallet, so you will need to transfer crypto into your non-custodial wallet from elsewhere.
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A hardware wallet is a physical device: About the size of a thumb drive, that stores the private keys to your crypto offline. Most people don’t use hardware wallets because of their increased complexity and cost.
But they do have some benefits too. For example, they can keep your crypto secure even if your computer is hacked.
However, this advanced security makes them inconvenient to use compared to a software wallet and they can cost upwards of $100 to buy.
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Setting up Hardware wallet
a.Buy the hardware –The 2 most well-known brands are Ledger and Trezor.
b. Install the software – Each brand has its own software that is needed to set up your wallet.
c. Transfer crypto to your wallet – Similar to a non-custodial wallet, a hardware wallet typically does not allow you to buy crypto using traditional currencies (like US dollars or Euros), so you will need to transfer crypto to your wallet.
Are Hardware Wallets Private and Secure?
Generally, Hardware wallets, while largely secure, are not completely invulnerable to attacks, with threats ranging from supply chain tampering to physical coercion.
Therefore, you must exercise vigilance and take additional security measures, such as securely storing recovery phrases and being wary of phishing attempts.
Notably, the security of hardware wallets is a balance between convenience and security, and staying informed about potential vulnerabilities is essential.
Chiefly, crypto hardware wallets are often touted as the most secure means of storage.
These physical devices are designed to protect digital assets from online threats and have been the go-to for crypto investors seeking safety for their investments.
Additionally, they offer the allure of cold storage, where private keys and cryptographic proof of ownership are held offline.
Thereby, rendering them impervious to cyber-attacks. Still, recent revelations challenge the invulnerability of these “impregnable fortresses”.
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Unveiling the Vulnerabilities of Hardware Wallets
Contrary to popular belief, hardware wallets are not infallible. They have exhibited vulnerabilities that attackers could exploit, putting investors’ funds at risk.
Even the most sophisticated hardware wallets can be compromised by hackers through various means.
One significant vulnerability stems from the very process of manufacturing the wallets.
Ledger’s Nano X, a popular hardware wallet, had a supply chain vulnerability. Additionally, it could allow rogue actors to tamper with the device during production.
Further, this enabled them to steal your private keys when generated.
Another security issue lies in the recovery seed phrase, a series of words that can restore access to digital assets in case of a digital wallet loss or damage.
Therefore, the crypto community has heavily criticized Ledger’s controversial feature that allows cloud backup of seed phrases.
The feature, designed for convenience, compromises security by storing seed phrases in a less secure environment where unauthorized parties could access them.
Further, Ledger exposed a striking instance of crypto hardware wallet vulnerability when it identified potential security issues in its competitor’s wallets.
Additionally, side-channel attacks pose a risk to Trezor’s wallets. This could allow an attacker to guess the PIN by monitoring power consumption patterns during the PIN entry process.
In all aspects of cybersecurity , the weakest link in the chain determines a hardware wallet’s security.
While crypto hardware wallets take steps to protect against online threats, they can not fully guard against physical threats or human error.
They provide a robust line of defense but not an unassailable one.
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The Importance of Vigilance and Extra Security Measures
Despite the vulnerabilities, hardware wallets remain among the safest cryptocurrency storage option.
They provide a significant barrier to many common types of attacks. However, this does not eliminate the need for vigilance and additional security measures.
You can not overstress the importance of securing your recovery phrase and PINs.
Ideally, you should store these securely, and offline and keep them out of potential attacker’s reach.
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What is the best one?
The best crypto wallet should be easy to use and support a large number of coins and tokens. Hot wallets should include strong security tools.
Like two or multi-factor authentication and multi-signature support. While charging minimal or no fees.
Cold wallets should be available at a reasonable price point and supported by a variety of hot wallets to facilitate trading.
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Why do you need it?
Your cryptocurrency is only as safe as the method you store it. While you can technically store crypto directly on the exchange,
it is not advisable to do so. Unless in small amounts or if you plan to trade them frequently.
For larger amounts, it is recommended that you withdraw the majority to a crypto wallet, whether that be a hot wallet or a cold wallet.
This way, you retain ownership of your private keys and have full power and control over your finances.
These are wallets that require two or more private key signatures to authorize transactions.
a. If you are using this wallet, you can prevent losing access to the entire wallet in a case scenario where one key is lost. There will be two other keys that are able to sign transactions.
b. These wallets can prevent the misuse of funds and fraud, which makes them a good option for hedge funds, exchanges, and corporations.
Each authorized person will have one key. And a sign-off requires the majority of keys. It becomes impossible for anybody to unilaterally make unauthorized transactions.
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Which you should use
There is no perfect solution. Each type of wallet has a different purpose, uses, and trade-offs. So it’s really up to you to weigh up what works best for you, and your specific needs.
If you are with a high-risk tolerance and want to make regular, quick online payments, the convenience of a hot wallet would suit you best.
But if you are a little more gun-shy and intend to hold coins for the long term, then a secure offline device might make the most sense.
What factors you should look for while choosing a crypto wallet?
a. Software vs hardware
b. Security features
c. How user-friendly it is
e. Platform compatibility
f. Supported coins
g. Whether the wallet has backup option
h. If you need dApp and DEX integration
i. The wallet’s reputation and longevity in the market.
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Top 8 Best Hot Digital Wallets
1. Crypto.com Defi wallet
It is specifically tailored for use in what is known as decentralized finance (Defi). Which is a sector of the crypto world focused on lending, saving, and other financial products that don’t rely on central brokers.
If you are a user of crypto. com Defi wallet you can use your crypto holdings to interact with Defi products.
Both on a mobile app and in a browser extension. It also has a desktop app that integrates with Ledger hardware wallets.
It is a free, all-purpose crypto wallet whose users can access their crypto via mobile, desktop, or browser extension. It says it supports more than 400,000 digital assets.
If you are a user of this wallet, you can move crypto in cold storage through an integration with the hardware wallet Ledger.
Guarda also has staking programs available.
It offers a solid set of software tools, including a mobile app, a desktop app, and browser extensions. Its products allow you to buy, trade, or stake cryptocurrency directly from their wallets.
As well as it has an integration with the Trezor cold wallet intended to help you easily.
To move crypto from hot to cold storage. It also has a solid library of explanatory content for people who are learning about crypto.
It supports 260 cryptocurrencies. Including many of the most popular assets.
However, that number is smaller than some of its competitors who say customers can store tens of thousands of different types.
4. Coinbase Wallet
The company operates the largest US-based crypto exchange. But Coinbase wallet is a separate product that allows you to store cryptocurrency for yourself rather than keeping it in the custody of Coinbase.
Because the Coinbase wallet was created by the Coinbase exchange. It integrates easily with its company’s exchange.
It is a good introduction for you if you have not used a non-custodial wallet before.
If you are a regular user of applications on the Ethereum blockchain, chances are you have come across Metamask.
Free and open source, it can store any digital asset that’s built on Ethereum (there are more than 700,000).
Metamask also integrates many of the “Web3 “ applications that exist on the internet and require crypto transactions to work.
It has mobile and browser wallets, though it does not have to stake directly in its app. You can, however, easily stake tokens. Using the apps that connect to Metamask on the web.
The atomic wallet allows you to store more than 1,400 cryptocurrencies. And it also provides options for people who want to buy, exchange, or stake digital assets directly from their digital wallets.
You can buy a paid membership, which allows you to earn rewards when you carry out a transaction using its platform. Unlike some other hot wallets, however, It does not offer a browser extension.
Which can be a big help in using cryptocurrencies to interact with decentralized applications.
7. Trust wallet
It is another storage product that operates in partnership with a major crypto exchange. It is the official digital wallet of Binance, the international digital asset firm. And that partnership gives you the ability to buy, sell and trade directly from your wallet.
It supports more than a million types of digital assets. However, it does not have an obvious way of converting assets from hot to cold storage.
It is, however, fully open source. A distinction that only a handful of competitors share.
It is an outlier among wallets reviewed by NerdWallet, in that it only works with one cryptocurrency. That cryptocurrency, however, is Bitcoin.
Far and away the most valuable crypto on the market. What Electrum lacks in altcoins, offerings.
However, it makes up for security and transparency. It offers only a desktop app, but the tools it offers to Bitcoin, power users make it a standout.
Top 3 Cold Digital Wallets
These are usually gadgets that help you store sensitive crypto information on a device that is not routinely connected to the internet.
While there are ways to do this yourself, hardware wallets come preloaded with software and other security features that make the process smoother.
These wallets cost more than hot wallets in part.
Because you are buying an actual physical product. When you are comparing crypto wallets, you may want to consider details such as price and security measures.
If you also use a hot wallet, you should check to make sure the hardware you are considering will work with your software wallet.
Ledger is one of the best-known names in crypto wallets. Its prices range from around $79 to $149. And Ledger can integrate with many popular software wallets such as Crypto.com.
And Guarda. It has a highly-rated mobile app. And its developers are in the process of rolling out a browser extension.
It has a two-factor authentication available. And a library of educational content for users.
Trezor offers some of the highest-end hardware available in crypto storage.
While its entry-level model costs around $70. It also has a more expensive model with a touch screen and additional cryptos available for storage.
It has integrations with other crypto firms. Such as Exodus, though it also provides built-in services such as staking and crypto purchases through its software products.
It does have a desktop offering but Trezor does not offer a mobile app.
SafePal is something of a hybrid wallet, with both offline and online elements. It stores your crypto on a hardware device.
Which costs a relatively affordable $50. You can then use that device to interact with SafePal’s software products.
Such as mobile applications and browser extensions that facilitate services like buying, selling, and trading. It is supporting 30,000 digital assets.
Which is the most among hardware wallets reviewed by Nerdwallet. It does not, however, have a dedicated desktop app.
Contrary to popular belief, crypto wallets, do not physically hold cryptocurrencies like the wallet in your pocket.
Instead, they store the public and private keys required to buy cryptocurrencies and provide digital signatures that authorize each transaction.
There are several types of crypto wallets including physical devices, software, and even paper.
Determining which crypto wallet is best for you depends entirely on your individual trading needs.
Safety of Digital Wallets
Just as there are many ways to store cash in a bank account, in a safe under the bed, there are many ways to store crypto.
You can keep things simple with a hosted wallet. And have full control of your crypto with a non-custodial wallet.
You should take extra precautions with a hardware wallet, or even have multiple types of wallets with crypto.
As storing large quantities of coins in a single wallet is risky. A combination of hot and cold wallets is usually ideal. And can help you strike the right balance between security and convenience.
Finally, you decide as per your requirement.
The safest crypto wallet is a cold (offline) hardware wallet. Like Trezor or Ledger.
The security benefits of the two crypto wallets are comparable.
Though Trezor’s easy-to-use touchscreen and insurance against forgotten passphrases are big benefits.
Your cryptocurrency will continue to grow while stored in your wallet.
Yes, the IRS can track cryptocurrency. Including Bitcoin.
Ether and a huge variety of other cryptocurrencies.
The IRS does this by collecting KYC data from centralized exchanges.
Short-term capital gains tax, If you have held cryptos for less than a year, your disposals will be subject to short-term capital gains tax.
Taxes are due when you sell, trade, or dispose of cryptocurrency. If you dispose of cryptocurrency and recognize a loss there will be some tax deduction.