Cryptocurrency Wallets: What are they and how do I use them?

For anyone interested in cryptocurrency it is important to understand the distinction between what are commonly known as ‘Hot’ and ‘Cold’ wallets. Having a personal wallet, and sending your funds to it, gives you greater control over your holdings, and provides a high level of security.

Hot and Cold Wallets

The most important difference to be aware of is that one requires an internet connection and the other does not. However, both have pros and cons, and before picking a wallet, you should consider what your priorities are as a trader.

Hot wallets are extremely accessible and fast due to their internet connectivity. For example your CoinSpot account. Hot wallets like exchanges or other applications normally have high levels of security and provide a greater level of convenience. This is due to things like mobile applications that can hold all of your investments which can be checked 24/7. However, as the saying goes, “The only computer safe from attack is one that is turned off”. As such, hot wallets are more vulnerable by default to security threats. Hot wallets are easier to use, but without the right protections can pose additional risks to be aware of. To protect your assets, you will need to implement a layer of protection on your devices, preventing any unwanted parties from accessing your funds. CoinSpot has an article on our help center dedicated to this topic, if you are interested in our security recommendations you can find them here

Cold wallets on the other hand can be disconnected from the internet and as such, have a higher level of security. Coins stored in these wallets are referred to as being held in ‘Cold Storage’. There are many kinds of Cold wallets and these act like a digital vault or safe with which users can carry out transactions, withdraw and deposit into. These are normally more cumbersome to use but have a higher level of security. Some popular types of cold wallets include hardware wallets, which are physical devices that store the user's private keys offline. These wallets are generally considered to be the most secure option for storing cryptocurrencies. Another type of cold wallet is a paper wallet, which involves generating a unique set of keys and printing them on a physical piece of paper for safekeeping. Although paper wallets may not be as convenient for regular transactions, they offer a high level of security by keeping the keys offline.

Public and Private keys

Before you choose which wallet you would like to use to store your holdings, you will need to understand what digital keys are. Once you have created a wallet, you will be provided with a public and private key.

Firstly, your public key, otherwise known as your ‘wallet address’ is a cryptographic code that is linked to your wallet. You use the public key to receive transactions. Anyone is able to send tokens and coins to your public key. However, it is important to note that the public key does not provide access to your funds or allow anyone to make transactions on your behalf. It is merely a way for others to identify and send funds to your wallet. On the other hand, your private key is a secret code that is known only to you and is used to access and control your funds. It is crucial to keep your private key secure and offline to prevent unauthorized access and potential theft of your assets.

The private key is then required to unlock the funds and prove you are the owner. The private key is the most important part of a digital wallet. It is always recommended that you never share your private key(s) with anyone. A private key allows the individual who has it to prove ownership of the wallet, as well as the ability to transfer any funds sent to a public key (wallet address). By keeping your private key secure and offline, you greatly reduce the risk of hackers gaining access to your digital assets. Storing your private key on a hardware wallet or an encrypted USB drive adds an extra layer of protection. It is also crucial to regularly backup your private key in case of loss or damage. Remember, the security of your private key is essential for maintaining control over your cryptocurrencies and safeguarding your financial investments.

Why are keys important?

Your keys control your cryptocurrency. Meaning, you must make sure that you understand their function. When you are holding coins on an exchange, the exchange becomes the caretaker of your keys. If you store the same funds in a private wallet, be it a hot or cold one, you will then be the only one with access to your private keys. This is important because if you lose or forget your private keys, you will lose access to your cryptocurrencies permanently. Additionally, private keys are also used to verify and authorise transactions, ensuring the secure transfer of funds. Therefore, understanding the importance of keys and taking the necessary precautions to protect them is crucial in the world of cryptocurrencies.

Summary

The choice of holding your funds on an exchange or in a private wallet is up to you and your needs as an investor. When holding on to an exchange, ensure it is a trusted company. As mentioned above, your keys and the security of your wallet are extremely important, and this cannot be understated. When using a hot wallet, always check what security features are available. CoinSpot has a range of security features for customers to choose from in order to keep their investments as secure as possible. Some of these features include two-factor authentication, encryption technology, and cold storage for funds not actively being traded. Additionally, CoinSpot regularly conducts audits and penetration tests to identify any vulnerabilities in their security systems. Ultimately, the choice of whether to use an exchange or a private wallet comes down to personal preference and risk tolerance. However, for those looking for peace of mind and enhanced security measures, CoinSpot provides a reliable option for storing and protecting their investments. You can read more about our security recommendations here. If you do not have a CoinSpot account yet, you can create one here and get started trading today!