May 25, 2021

DIGITAL ASSETS GLOSSARY

(Crypto) Wallet

A wallet is a system that allows you to send, receive, and store cryptocurrency. Wallets keep your private keys safe.
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A Crypto wallet is a system that allows you to send, receive, and store cryptocurrency.

Technically, because cryptocurrencies are completely digital and live on the blockchain, you can’t own the coins themselves. What you own are the private keys that grant access to them — secret numbers that point to the digital addresses of the coins they correspond to.

Wallets keep your private keys safe, while also facilitating cryptocurrency transactions, whether it’s paying for goods or services or speculative trading. They can be digital or physical.

There are three main types of cryptocurrency wallet:

Hot wallets

These are apps that store your private keys in the cloud, such as Coinbase Wallet.

Because they’re always connected to the internet, it’s quick and easy to access your keys when you need them. But that convenience comes at a cost: hot wallets are more vulnerable to attacks by cybercriminals.

It’s helpful to think of hot wallets as the digital equivalent of the physical wallet you carry around with you.

Chances are, you use it to store your debit card, your credit card, and maybe some cash for day-to-day purchases. But you wouldn’t keep all your life savings in it. You’d store those somewhere safer, like a special savings account.

The same goes for hot wallets. While you might want to store some private keys in a hot wallet for practical reasons, it should only ever be a small portion of your overall holdings. You should store the bulk of your holdings more securely.

Cold wallets

If a hot wallet is like the wallet you carry around with you so you can pay for your day-to-day purchases, a cold wallet is like a savings account that doesn’t have a debit card. Or a bulletproof safe in a bunker built of reinforced concrete.

Cold wallets are always offline, so they can’t be hacked. The flipside is that they’re not practical. Where a hot wallet lets you transact instantly, with a cold wallet you’ll need to transfer your private keys to a wallet that can connect to the internet before you can use them. There’s also the danger that you could lose or misplace your private keys.

A cold wallet can be as simple as a piece of paper on which you’ve written down your private keys. At the other end of the spectrum, there are specialized air-gapped servers — standalone servers that aren’t connected to the internet or an unsecured network.

Warm wallets

Warm wallets are half-way between hot and cold wallets. They can be connected to the internet, but only when you need them.

The rest of the time, your private keys are stored offline. Typically, you’ll also need a password, a code, or some other form of authentication to access it.

Warm wallets are very secure when they’re offline. But they’re at risk of getting attacked by cybercriminals when you’re online.

AtoZ-Digital Assets Glossary-Definitions-Crypto Wallet

 

Some facts

Apple have a chequered history when it comes to hot wallets. In 2014, they banned all Bitcoin wallets from the App Store, only to reverse course a few months later. The issue reared its head again in 2016, when they banned Ether wallets, reportedly because they didn’t consider Ether an ‘approved’ currency.

More recently, in February 2021, a man named Phillipe Christodoulou accused Apple of ‘enabling a scam’ after he downloaded a fake hot wallet. The app was listed on the App Store as a companion app to Treznor, who manufacture cold wallets. Except Treznor don’t make apps. And when Christodoulou realised his mistake, it was too late — he’d already transferred Bitcoin worth $600,000 to the scammers.

The first cryptocurrency wallet was the Satoshi Client, which eventually became Bitcoin Core, software which allowed you to create your own crypto wallet. But as Bitcoin started growing in popularity, larger exchanges popped up.

One of these, Mt Gox, would go on to handle almost 70% of the Bitcoin in circulation. It went bust in 2014, after announcing $450 million worth of Bitcoin had disappeared from its servers. Ironically, their tagline was “Trade with confidence”.

Around 200,000 Bitcoin that Mt Gox lost have since been ‘found’. It’s still unclear how they went missing, but it’s likely that most were stolen from MT Gox’s hot wallets over several years.

 

Want to know more?

This video runs you through the basics of crypto wallets in 5 minutes.

The “best cryptocurrency wallets” are a topic of much discussion… and list-type blog posts. This one from TechRadar has fairly comprehensive, unbiased reviews and a good mix of hot, warm, and cold wallets.

 

The METACO view

Hot and cold wallets have equally important roles in cryptocurrency transactions. We’ve built SILO with this in mind. As the first hot-to-cold asset management platform, SILO is designed to strike a seamless balance between liquidity and security.

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