Cryptocurrency wallet analysis

In short, a cryptocurrency wallet is a Tools for interacting with blockchain networks. Currently, common cryptocurrency wallets are divided into three categories: software wallets, hardware wallets, and paper wallets. Depending on its working mechanism, it can also be classified as a hot wallet or a cold wallet.

Most of the cryptocurrency wallets on the market are based on software, which is more convenient than hardware wallets. However, hardware wallets are more secure than other types. On the other hand, paper wallets in which the "wallet" is printed on paper are outdated and lack security.

How does a digital currency wallet work?

Contrary to common public perception, cryptocurrency wallets do not actually store digital assets. Instead, they provide the tools needed to interact with the blockchain. In other words, these wallets can generate the indispensable information that powers transactions of sending and receiving cryptocurrencies through the blockchain. And this information will contain one or more pairs of public and private keys.

Cryptocurrency wallets also include a public address generated based on a public and private key, which is a set of letters and numbers identifier. Such addresses essentially represent a specific “location” in the blockchain that is used to receive cryptocurrency. Therefore, you can give your address to others in order to receive funds, but you are not allowed to reveal your private key to anyone.

No matter which wallet is used, the cryptocurrency stored in the wallet can be accessed through the private key. Therefore, even if the computer or smartphone you are using is compromised, funds can still be deposited and withdrawn from other devices using the corresponding private key (or mnemonic phrase). Note that the tokens never actually leave the blockchain, they are simply transferred from one address to another.

Do I need a cryptocurrency wallet to trade cryptocurrencies?

The answer is simple: yes. Whether you are a frequent trader or a long-term Bitcoin holder, you need a wallet address to store and trade cryptocurrency. You can use hot wallets provided by cryptocurrency exchanges, mobile wallets installed on your phone, browser plugins, desktop wallets or hardware wallets. A variety of options are available for you to choose from. Here are examples of different wallet types:

1. Hot wallet: Binance Exchange.

2. Mobile cryptocurrency wallet: Trust Wallet or MetaMask.

3. Browser plug-in cryptocurrency wallet: MetaMask, MathWallet or Binance Chain wallet.

4. Desktop cryptocurrency wallet: Electrum or Exodus.

Note: If using Binance Smart Chain (BSC), you must read "Best Cryptocurrency for Binance Smart Chain (BSC)" Currency Wallet 》.

Hot wallet and cold wallet Comparison

As mentioned above, digital currency wallets can also be divided into "hot wallets" or "cold wallets" based on how they operate.

Hot wallet refers to a wallet that is connected to the Internet in any way. For example, when you create an account on Binance and send funds to your personal wallet, you use Binance’s hot wallet. These wallets are fairly simple to set up and funds can be accessed quickly, making them easy for traders and other high-frequency users to use.

In contrast, cold wallets are completely disconnected from the internet. They use physical media to store keys offline, which can effectively resist online attacks by hackers. Therefore, cold wallets are more secure in terms of “storage” of tokens. This method, also known as "cold storage," is ideal for long-term investors or "holders."

In order to protect the safety of users’ funds, Binance only stores a small portion of tokens in hot wallets. Most of the remaining tokens are stored in cold wallets that are disconnected from the internet. It is worth noting that Binance DEX provides a new solution for users who are unwilling to deposit funds into centralized trading platforms. This decentralized trading platform gives users absolute control over their private keys while allowing them to directly trade funds in cold storage devices (hardware wallets).

Software wallet

Software wallets are also divided into many types, each type has unique characteristics. Most of them are hot wallets that are connected to the internet in some way. Here are some of the most common and important wallets: web wallets, desktop wallets, and mobile wallets.

Web wallet

With a web wallet, you can access the blockchain through a browser interface without downloading or installing any software. Web wallets cover exchange platform wallets as well as other browser-based wallet providers. In most cases, you can create a new wallet and set an access password. However, some service providers may hold and safeguard private keys on behalf of users. Although this method provides convenience for new and inexperienced users, the risks behind it cannot be ignored.

Not being able to hold the private key means you are entrusting your funds to others for safekeeping. To solve this problem, many online wallets now allow users to manage their own keys, either holistically or through multi-signature sharing of control permissions. Therefore, before choosing the ideal wallet, you should first check the technical means used by the wallet. Practical protection tools should also be considered when using cryptocurrency trading platforms.

The Binance exchange platform provides a variety of security measures, such as device management, multi-factor authentication, anti-phishing codes, and withdrawal address management.

Desktop wallet

As the name suggests, a desktop wallet is a piece of software that is downloaded to your local computer and run there. Unlike some online wallets, desktop wallets allow users to have complete control over their keys and funds. After creating a new desktop wallet, a file named "wallet.dat" will be saved to your local computer. This file stores the private key information used to access the cryptocurrency, which can be encrypted with a personal password.

If you encrypt your desktop wallet, you will need to enter the password every time you run it before reading the wallet.dat file. If you accidentally lose this file or forget your password, you will most likely lose your fund access rights.

Therefore, the wallet.dat file must be backed up carefully and kept properly. In addition, the relevant private key or mnemonic phrase can also be exported. This way you can access funds from other devices if your computer doesn't work or you can't log in for some reason.

Generally speaking, desktop wallets may be more secure than online wallets, but only if the individual first creates and uses a digital currency wallet. The computer must be clean and free of any malicious software.

Mobile wallet

Mobile wallets function very similarly to desktop wallets and are tailor-made for smartphones. This type of wallet is easy to use and allows funds to be sent and received via QR codes.

Therefore, mobile wallets are an ideal choice for daily transactions and payments, and are an ideal way to use Bitcoin, Binance, etc. in real life. A viable solution for spending coins and other cryptocurrencies. Trust Wallet is a prime example of a mobile cryptocurrency wallet.

However, like computers, mobile devices are also highly susceptible to infection by malicious apps and malware. We recommend that you encrypt your mobile wallet with a password and properly back up your private key (or mnemonic phrase) in case your smartphone is lost or damaged.

Hardware Wallet

A hardware wallet is a physical electronic device that uses a random number generator (RNG) to generate public and private keys. The generated key is then stored inside the device without the device being connected to the internet. Therefore, hardware storage constitutes a type of cold wallet and is considered one of the most secure alternatives.

While this kind of wallet can provide a higher level of security protection against online attacks, it may also face problems if the firmware solution is not implemented properly. Certain risks. In addition, hardware wallets lack convenience. Compared to hot wallets, it is more difficult to deposit and withdraw funds.

In order to solve the problem of poor deposit and withdrawal functions, personal devices can be directly connected to the trading platform through Binance DEX. This is a safe and secure way to access funds as the private keys never leave the device. Some web wallet service providers have also begun to offer similar services, allowing hardware wallets to be connected to their browser interfaces.

If you plan to be a long-term or large holder of cryptocurrency, you should consider using a hardware wallet. Currently, most hardware wallets allow you to set a PIN code to protect the device, and you can also set a recovery mnemonic phrase to retrieve the wallet if it is lost.

Paper wallet

The essence of a paper wallet is to print the cryptocurrency address and its private key on a piece of paper in the form of a QR code. Thereafter, cryptocurrency transactions can be carried out by scanning these QR codes.

Some paper wallet websites allow you to download their code to generate new addresses and keys offline. Therefore, these wallets can effectively resist online attacks by hackers and are regarded as alternatives to cold wallets.

However, paper wallets have many flaws and are highly dangerous, so their use is not recommended. If you still want to use this kind of wallet, be sure to understand the risks. One of the major drawbacks of paper wallets is that they are not suitable for sending partial funds and the entire balance must be sent at once.

For example, you create a paper wallet and deposit 10 Bitcoins into it through multiple transactions. If you decide to spend 2 of those Bitcoins, you should first send the 10 Bitcoins to another type of wallet (such as a desktop wallet) and then spend part of the funds (i.e. 2 Bitcoins) through the new wallet. The remaining 8 Bitcoins can be transferred to a new paper wallet, but obviously transferring them to a hardware/software wallet would be a more ideal option.

From a technical point of view, if you import the private key of the paper wallet to the desktop wallet and spend some of the funds, the remaining tokens Will be sent to a "change address" automatically generated by the Bitcoin protocol. If you forget to set up a manual address change, all remaining funds may be lost.

Nowadays, most software wallets can handle the change process for the user and can send the remaining funds to the address belonging to the user's wallet. Don’t forget that after executing the first send transaction (regardless of the amount), the account balance of the paper wallet will return to zero. Therefore, the same paper wallet cannot be reused.

Importance of backup

Losing access to your cryptocurrency wallet can cause serious financial losses, and regular backup of important information is crucial. In many cases, we back up the wallet.dat file or mnemonic phrase. Essentially, a mnemonic phrase works like a root key, generating and granting access to all keys and addresses in a cryptocurrency wallet. If a password is used for encryption, the password should also be backed up.

Which cryptocurrency wallet should I use?

There is no clear answer as to which crypto wallet you should use. If you trade frequently, a web wallet allows you to quickly access your funds and conduct transactions conveniently. Assuming you take the extra step to secure your account using a two-factor authentication (2FA) method, your cryptocurrency is generally safe. However, cold wallets are ideal if you hold large amounts of cryptocurrency for the long term with no plans to sell. This type of wallet is not connected to the Internet, is more secure, and can effectively defend against online phishing attacks or scams.

Summary

Cryptocurrency Wallet is for Bitcoin and other crypto An integral part of the currency usage process. Users need infrastructure to send and receive funds through blockchain networks, and cryptocurrency wallets are one of the basic elements of this infrastructure. Different types of wallets have their own pros and cons, and before transferring funds, you must first have a thorough understanding of how they work.