Education

Cryptocurrency Wallets: What are they and how do I use them?

6 minutes

For anyone interested in cryptocurrency it is important to understand the distinction between what are commonly known as ‘Hot’ and ‘Cold’ wallets. Having a personal wallet, and sending your funds to it, gives you greater control over your holdings, and provides a high level of security.

Hot and Cold Wallets

The most important difference between these is one requires an internet connection and one does not. Both have pros and cons and before picking a wallet you should consider which of these is right for you.

Hot wallets are extremely accessible and fast due to their internet connectivity, for example your CoinSpot account. Hot wallets like exchanges or other applications normally have high levels of security and provide a greater level of convenience. This is due to the applicability to get a mobile application that holds all of your investments that can be checked 24/7. However, as the saying goes, “The only computer safe from attack is one that is turned off”. As such, hot wallets are often more vulnerable to security threats and attacks. Hot wallets are easier to use, but without the right protections can pose additional risks to be aware of. To protect your assets, you may want to look at implementing a layer of protection on your devices, preventing any unwanted parties from accessing your funds.

Cold wallets on the other hand can be disconnected from the internet and as such, can have a higher level of security. Coins stored in these wallets are referred to as being held in ‘Cold Storage’. There are many kinds of Cold wallets and these act as a kind of digital vault or safe with which users can carry out transactions, withdrawing and depositing. These are normally more cumbersome to use but have a higher level of security.

Public and Private keys

Before you choose which wallet you would like to use to store your holding, you will need to understand what digital keys are. Once you have created and signed up for a wallet, you will be provided with a Public and Private key for said wallet.

Firstly, your public key, otherwise known as your ‘wallet address’ is a cryptographic code that is linked to your wallet. You use the public key to receive transactions. Anyone is able to send tokens and coins to your public key.

The private key is then required to unlock the funds and prove you are the owner. The private key is the most important part of a digital wallet. It is always recommended that you never share your private key(s) with anyone. A private key allows the individual to prove ownership as well as transfer any funds sent to a public key (wallet address).

Why are keys important?

Your keys control your cryptocurrency. Meaning, you must make sure that you understand their function. When you are holding coins on an exchange, the exchange is then the caretaker for your private key(s).. If you store the same funds in a private wallet, be it a hot or cold one, you will then be the only one with access to your private keys.

Summary

The choice of holding your funds on an exchange or a private wallet is up to you. When holding on an exchange ensure it is a trusted company. As mentioned above, your keys and the security of your wallet is extremely important and this cannot be understated. When using a Hot wallet, always check what security features are available. At CoinSpot we have a range of security features for customers to choose from in order to keep their investments as secure as possible. You can read more about our security recommendations here. If you do not have a CoinSpot account yet, you can create one here and get to trading today!

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