Cryptocurrency wallets: What are they and how do they work?

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A crypto wallet is a software programme or hardware device that enables you to securely store your cryptoassets. The aim of these wallets is to add an extra layer of security and keep your crypto safe. With a crypto wallet, you can typically send and receive cryptoassets to and from other wallets and convert one cryptoasset to another cryptoasset.

There are two main types of crypto wallets:

  1. hot wallets
  2. cold wallets.

Hot cryptocurrency wallets

Hot wallets are connected to the internet and are typically software-based. An example is Coinbase’s hosted wallet. The advantage of hot wallets is that they make it easy to trade or spend your crypto. The downside to hot wallets is that they are more vulnerable to online attacks.

Cold cryptocurrency wallets

Cold wallets are not connected to the internet and are typically hardware-based. An example of a cold wallet is the Ledger Nano S. The advantage of cold wallets is that they are more secure than hot wallets. The disadvantage of cold wallets is that they are less convenient. To make a purchase with a cold wallet, you need to find a device in which to plug your cold wallet, then move your cryptocurrency to a hot wallet, and then make your purchase.

If you purchase cryptocurrency from a centralised exchange such as Coinbase or Binance, you should consider moving it off the exchange to your own crypto wallet. Transferring your crypto to a wallet could protect you if your exchange gets hacked.

How does a cryptocurrency wallet work?

When you set up a crypto wallet, you are provided with a private key and a public key that is unique to your wallet. The public key is the address that others can use to send crypto to you. Meanwhile, the private key is the password to your wallet.

It’s very important to keep your private key secret. If someone gets access to your private key, they could access your investments, and you could end up having your cryptoassets stolen.

If you lose your private key, you can no longer access your wallet to spend, withdraw, or transfer cryptoassets. It’s therefore very important to save the private key in a secure location.

How much does a cryptocurrency wallet cost?

The cost of a crypto wallet depends on the type of wallet you want and the provider of the wallet.

The cost for a high-quality hardware-based cold crypto wallet such as a Trezor Model T or a Ledger Nano S tends to be around $75 to $200. By contrast, hot wallets, such as those provided by exchanges, are usually free.

While some exchanges offer hot wallet services free of charge, many charge to transfer crypto from the exchange to a wallet. For example, eToro currently charges 0.5% of the transaction value (capped at $50) to send Bitcoin from its platform to a wallet.

Other wallet fees to be aware of include fees to buy and sell or send and receive crypto, and crypto-to-crypto conversion fees. These vary from exchange to exchange and can be a flat fee or a percentage of the total transaction value.

Are cryptocurrency wallets safe?

Keeping your cryptoassets in a wallet is generally safer than keeping them on an exchange. If your exchange is hacked, you may be protected.

However, there are still risks associated with crypto wallets. One risk is having your private keys stolen. If someone steals your private keys, they could steal your cryptoassets. Another risk is losing your private key. If you lose this key, you can no longer access your investments.

Some crypto wallets are safer than others. For example, cold wallets, which are not connected to the internet, are generally regarded as safer than hot wallets, which are connected to the internet.

It’s worth noting that crypto wallets are not regulated in the UK. This means that if you have your cryptoassets stolen, no one is responsible for helping you get your money back.

What is the difference between a crypto exchange and a crypto wallet?

A crypto exchange is a platform that lets you buy and sell cryptoassets such as Bitcoin, Dogecoin, and XRP. By contrast, a crypto wallet is a software programme or piece of hardware that enables you to securely store your cryptoassets.

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