The world of wallets is a completely new one for many entering the crypto space. With a lifetime of being used to traditional checking and savings accounts, it can sometimes be hard to wrap your head around the concept of crypto wallets.
One of the innovations of cryptoassets, particularly cryptocurrencies, is the ability to easily self-custody assets. In traditional banking and investment, rarely do you hold your own assets. Typically, a bank will custody your cash and large investment institutions will custody assets like stock, bonds, etc. However, with cryptoassets, there is the option to completely control all the assets that you own. This is done in the form of private wallets. Private wallets are extremely secure and only the person with the unique cryptographic key (i.e. secret password), can access these assets.
Now, self-custody is not always the preferred option for investors. There are more tradition models of custody available, too. Trading on centralized exchanges, such as Coinbase or Bittrex, means that those platforms have complete custody of the assets. Trading on platforms like these may be a better fit for some investors, but it is important they understand the difference between those and private wallets.
Another important concept to understand is the difference between a hot wallet and a cold wallet. Both differ in the type of security and liquidity that they offer. We’ll talk in terms of bitcoin for simplicity’s sake.
A wallet that is constantly connected to the Bitcoin network. It is connected to the internet and bitcoin can instantly be traded in and out of the wallet. Hot wallets can be both privately controlled, such as My Ether Wallet, or controlled by a third party, such as Coinbase.
A wallet that is not connected to the internet. While bitcoin cannot be sent out of it, it can still receive bitcoin to its address. Cold wallets are used for online storage. Common examples include hardware wallets, such as a Ledger Nano S, and a paper wallet, which is a piece of paper with the bitcoin address printed on it. Cold wallets are considered the most secure way to store bitcoin.
These concepts also apply across for other currencies, as well. However, it is important to remember that, in many cases, different cryptoassets must be stored in different wallet addresses. For instance, a wallet built for Ether is not compatible with a wallet built for Ada, the native currency of Cardano. Likewise, if you sent bitcoin to an EOS address, it could result in losing that bitcoin forever.
While crypto wallets may seem more complicated and tedious than moving around traditional fiat, they offer a slew of benefits, such as security, autonomy, and financial privacy. So, after learning how to navigate around the wallet landscape, users can take easily take advantage of the unique benefits of cryptocurrencies.
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