A Bitcoin wallet is a type of digital wallet. Unlike how physical wallets store physical currencies, digital wallets store users’ information such as a public address and private key for accessing the Bitcoin address and making Bitcoin transactions. Since it is a digital wallet like your bank account, there is no physical money inside your wallet. How much you have in your wallet is recorded in a distributed ledger – the Bitcoin blockchain.
Types of Bitcoin Wallets
There are two primary types of Bitcoin wallets: hot and cold.
Hot wallets are wallets that are connected to the Internet. Being connected to the Internet means that the cryptocurrency holdings in the hot wallet are transferable. Bitcoin holders can use hot wallets to transfer Bitcoins directly with other wallets. On the other hand, hot wallets may encounter more security issues since they are Internet-connected and there is the possibility that they could be accessed and drained by another party.
The safety and security of a hot wallet are largely dependent upon the user’s behavior. Any items stored in a hot wallet are vulnerable to attack because the public and private keys are stored on the Internet. You can lose your Bitcoin if someone gains access to your device or if they get a hold of your private key. It is also advisable to frequently back up certain types of hot wallets as problems with the wallet software on your computer or mobile device could erase your holdings.
Types of Hot Wallets
Full wallets. A full bitcoin wallet, like Bitcoin Core, is a wallet that runs a full node and implements all the functionalities of a specific cryptocurrency and blockchain. In other words, a Bitcoin Core wallet is a node on the decentralized Bitcoin blockchain, and each of these full nodes separately follows the exact same rules to maintain the validity of the Bitcoin blockchain.
Light wallets. A light wallet, like Electrum, is a wallet connected to a server that contains a full node. Light wallets are often found in desktops, mobile and online formats, such as websites and applications. Light wallets are downloadable but not linked or affiliated to any exchanges. However, your cryptocurrency is still vulnerable to hacking because a hacker that gains access to your computer could theoretically drain your wallet via the software application if they can also access your private key.
Centralized wallets. A centralized wallet, like a Huobi Exchange Account, is a wallet supported by a centralized crypto exchange. The centralized exchanges play the role of a trusted third party that monitors and secures the assets on behalf of the buyer and the seller. Instead of keeping the private key to your Bitcoins directly, centralized wallets do that for you, and you hold the key to utilizing the centralized wallets to access your assets. Centralized exchanges like Huobi offer 2FA security, account recovery, and in some cases it may be possible to reverse some kinds of losses.
What is a Cold Wallet?
A cold wallet is disconnected from internet and is the safest option for cryptocurrency storage. Cold wallets can be paper wallets or hardware wallets. A paper wallet is a generated Bitcoin wallet address (it is a very technical process not suitable for beginners), and you usually write down your keys on a piece of paper. There are also stored value cards or coins with pre-generated addresses and keys that you can buy.
A hardware cold wallet like the Ledger Nano S or Trezor is much easier to use. Your crypto addresses and keys can be kept in a USB drive device or even printed out on a piece of paper stored in a bank or a safe; and only the person who possesses the USB drive and the private key (usually printed on paper) can access the assets. Many large Bitcoin investments are stored in cold wallets.
Due to the risks that hot wallets present, experienced investors only keep a small amount of assets that will be spent or traded in the near future in their hot wallets and keep the other portion of their bitcoin in more secure cold wallets, or even spread out among several cold wallets. Read our next guide to learn how to keep your crypto assets secure!
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