What is a cryptocurrency wallet?
wallet is a tool which you can use to interact with a blockchain
network. Different wallets can be categorized as; software, hardware and paper wallets. And depending on their operating mechanisms, they may also be referred to as hot and cold wallets.
How does a cryptocurrency wallet work?
A crypto wallet doesn't really store the coins, it is a tool which enables you to communicate with the blockchain. Put differently, those wallets can generate the required information (for ex. public- & private keys) to receive & send transactions.
A wallet holds a so-called address, this is an alphanumeric set which is generated based on the public & private keys. This address contains your balance, you can deposit your cryptocurrency here, and it can be shared with friends to receive funds. Having said that, do NEVER share your private key with anyone, the private key gives access to your wallet.
Cryptocurrencies never leave the blockchain, they are just being transferred from one address to another.
Cold & Hot wallet
Cold wallets require no connection to the internet. Instead, they use a physical device to store the keys offline, making them resistant to online hackers. Cold wallets tend to be a much securer
alternative for storing your cryptocurrencies. This method is particularly prefered for long-term investors, so-called #HODLERS.
On the other hand, hot wallets are connected to the internet. For example, when you create an account on Coinmerce and transfer funds to your wallets, you are depositing into Coinmerce's hot wallet. These wallets are quite simple to set up, and the funds are fast accessible, making them suitable for everyday users.
Coinmerce only stores a small percentage hot, most of the funds are kept cold (offline).
Nobody likes to lose access to their cryptocurrency wallet, so it's essential to frequently back up them. In most cases, this is done by backing up seed phrases. A seed phrase works like a base key, it enables you access to all keys & addresses. In case you used password encryption, do not forget to back up them as well.
Most of the software wallets are somehow connected to the internet, and therefore hot wallets.
Through a web wallet, you can access the blockchain on a browser interface without downloading anything. Most common here is you can create a new wallet and set a personal password to access it.
With a desktop wallet, you need to first download some software on your computer. After you have generated a desktop wallet a ''wallet.dat'' file will be stored locally on your desktop, this contains your private key information. Desktop wallets are considered to be more safe compared to most web wallets. Although it is essential to make sure your desktop/computer is clean and does not contain any malware or viruses.
Mobile wallets are quite similar to desktop wallets. Although mobile wallets are considered to be more convenient as they are easy to use and you can receive/send cryptocurrency through QR codes. So, they are suitable for daily use & stimulate mass adoption.
A hardware wallet is an electronic device which uses a random number generator (RNG) to generate private & public keys. This device isn't connected to the internet but does store your keys. So, this solution is perfect for preventing online attacks as it is offline, a so-called cold wallet.
In case you are a true hodler and hold your coins for an extended period, you should definitely consider a hardware wallet.
Paper wallets, a physical paper printed with QR codes, are considered to be a great alternative to hardware cold wallet storage. Through the QR codes, you can access the address & execute transactions. It is essential to understand the risk of paper wallets, losing the printed paper, fire, etc.