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What is a cryptocurrency wallet?

Simply put, a cryptocurrency wallet is a tool for interacting with a blockchain network.

Currently, common cryptocurrency wallets are divided into three categories: software wallets, hardware wallets, and paper wallets.

According to its working mechanism, it can also be divided into hot wallet or cold wallet.

Most of the cryptocurrency wallets in the market are based on software, which is more convenient than hardware wallets.

However, hardware wallets are more secure than other types.

On the other hand, paper wallets that print “wallets” on paper are outdated and lack security.

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How does a digital currency wallet work?

Contrary to popular belief, cryptocurrency wallets do not actually store digital assets.

Instead, they provide the tools needed to interact with the blockchain.

In other words, these wallets can generate the indispensable information to power transactions that send and receive cryptocurrencies over the blockchain.

And such information will contain one or more pairs of public and private keys.

Cryptocurrency wallets also include a public address, which is a set of alphanumeric identifiers, generated based on public and private keys.

Such addresses essentially represent a specific “location” in the blockchain used to receive cryptocurrency.

Therefore, you can tell others your address in order to receive funds, but you must not reveal your private key to anyone.

Regardless of the wallet used, the cryptocurrencies stored in the wallet can be accessed through the private key.

Therefore, even if the computer or smartphone in use is compromised, funds can still be accessed via the corresponding private key (or mnemonic) in other devices.

Note that the coins never actually leave the blockchain, they just move from one address to another.

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Do I need a cryptocurrency wallet to trade cryptocurrencies?

The answer is simple: yes.

Whether you are a frequent trader or a long-term Bitcoin holder, you need a wallet address to store and trade cryptocurrencies.

You can use hot wallets provided by cryptocurrency exchanges, mobile wallets installed in your phone, browser plugins, desktop wallets or hardware wallets.

A variety of options are available for you to choose from.

The following are examples of different wallet types:

  • Hot wallet: Binance Exchange
  • Mobile cryptocurrency wallet: Trust Wallet or MetaMask
  • Browser plugin cryptocurrency wallet: MetaMask, MathWallet or Binance Chain Wallet
  • Desktop cryptocurrency wallet: Electrum or Exodus

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Comparison of hot wallet and cold wallet

As mentioned earlier, digital currency wallets can also be classified as “hot wallets” or “cold wallets” depending on how they operate.

A hot wallet is a wallet that is connected to the internet in any way.

For example, Binance’s hot wallet is used when creating an account and sending funds to a personal wallet.

These wallets are fairly simple to set up and funds can be accessed quickly, making them easy for traders and other high-frequency users to use.

In contrast, cold wallets are completely disconnected from the internet.

They use physical media to store keys offline, which can effectively resist online attacks by hackers.

Therefore, cold wallets are more secure in terms of token “storage”. This method, also known as “cold storage” is ideal for long-term investors or “holders.”

To keep users’ funds safe, Binance only stores a small percentage of tokens in hot wallets.

Most of the remaining tokens are stored in cold wallets disconnected from the internet.

Notably, Binance DEX offers a new option for users who are reluctant to deposit funds on centralized exchanges.

The decentralized trading platform gives users absolute control of private keys while allowing them to directly trade funds in cold storage devices (hardware wallets).

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Software wallet

There are also several types of software wallets, each with unique characteristics.

Most of them are hot wallets connected to the internet in some way.

Here are some of the most common important wallets: web wallets, desktop wallets, and mobile wallets.

Web wallet

With a web wallet, you can access the blockchain through a browser interface without downloading or installing any software. Web wallets cover exchange platform wallets as well as other browser-based wallet providers. In most cases, you can create a new wallet and set an access password. However, some service providers may hold and keep private keys on behalf of users. Although this approach provides convenience for inexperienced new users, the risks behind it cannot be ignored.

Not being able to hold the private key means that you entrust your funds to someone else for safekeeping. To solve this problem, many web wallets now allow users to manage their own keys, either globally or through multi-signature sharing to control permissions. Therefore, before choosing the ideal wallet, you should first check the technical means adopted by the wallet. Practical protection tools should also be considered when using a cryptocurrency trading platform.

Binance Exchange provides various security measures, such as device management, multi-factor authentication, anti-phishing codes, and withdrawal address management.

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Desktop wallet

As the name suggests, a desktop wallet is a piece of software that is downloaded to and run on your local computer. Unlike some web wallets, desktop wallets allow users to fully control keys and funds. After creating a new desktop wallet, a file called “wallet.dat” will be deposited on your local computer. This file stores private key information for accessing cryptocurrencies, which can be encrypted with a personal password.

If the desktop wallet is encrypted, the password is required every time it is run before the wallet.dat file can be read. If you accidentally lose this file or forget your password, you will most likely lose access to your funds.

Therefore, the wallet.dat file must be carefully backed up and kept safe. In addition, the relevant private key or mnemonic can also be derived. In this way, you can access funds from other devices if your computer is not working or you cannot log in for some reason.

In general, desktop wallets may be more secure than web wallets, but only if the personal computer is clean and free of any malware installed before creating and using a digital currency wallet.

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Mobile wallet

Mobile wallets function much like desktop wallets and are tailored for smartphones. Such wallets are easy to use and allow sending and receiving funds via QR codes.

As such, mobile wallets are ideal for everyday transactions and payments, as well as a viable option for real-life spending with Bitcoin, Binance Coin , and other cryptocurrencies. Trust Wallet is a prime example of a mobile cryptocurrency wallet.

However, like computers, mobile devices are also highly susceptible to malicious apps and malware. We recommend that you encrypt your mobile wallet with a password and back up your private key (or mnemonic) in case your smartphone is lost or damaged.

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Hardware wallet

A hardware wallet is a physical electronic device that uses a random number generator (RNG) to generate public and private keys. The generated key is then stored inside the device, which is not connected to the Internet. Therefore, hardware storage constitutes a kind of cold wallet and is seen as one of the safest alternatives.

While such wallets can provide a higher level of security against online attacks, they can also be at risk if the firmware scheme is not implemented properly. In addition, the convenience of hardware wallets is not good. Funds access is more difficult compared to hot wallets.

In order to solve the problem of poor deposit and withdrawal functions, personal devices can be directly connected to the trading platform through Binance DEX. This is a safe and secure way to deposit and withdraw funds as the private key never leaves the device. Some web wallet service providers are also starting to offer similar services, allowing hardware wallets to be connected to their browser interfaces.

If you plan to be a long-term or large holder of cryptocurrencies, you should consider using a hardware wallet. Currently, most hardware wallets allow the setting of a PIN to protect the device, as well as a recovery mnemonic so that the wallet can be retrieved if it is lost.

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Paper wallet

The essence of a paper wallet is to print the cryptocurrency address and its private key on a piece of paper in the form of a QR code. Thereafter, cryptocurrency transactions can be conducted by scanning these QR codes.

Some paper wallet websites allow you to download their code to generate new addresses and keys offline. Therefore, these wallets can effectively resist online attacks by hackers and are regarded as an alternative to cold wallets.

However, paper wallets have many flaws and are highly dangerous and are not recommended. If you still want to use this wallet, be sure to understand the risks. One of the major drawbacks of paper wallets is that they are not suitable for sending partial funds, the entire balance must be sent at once.

For example, you create a paper wallet and deposit 10 bitcoins into it through multiple transactions. If you decide to spend 2 of these bitcoins, you should first send those 10 bitcoins to another type of wallet (such as a desktop wallet), and then spend part of the funds (ie 2 bitcoins) through the new wallet. The remaining 8 bitcoins can be transferred to a new paper wallet, although it would obviously be more desirable to transfer them to a hardware/software wallet.

From a technical point of view, if you import the private key of the paper wallet into the desktop wallet and spend some of the funds, the remaining tokens will be sent to the “change address” automatically generated by the Bitcoin protocol. If you forget to manually set up a change of address, the remaining funds are likely to be lost entirely.

Today, most software wallets handle the change process for the user, sending remaining funds to an address belonging to the user’s wallet. Don’t forget, the account balance of the paper wallet is immediately reset to zero after the first send transaction (regardless of the amount). Therefore, the same paper wallet cannot be reused.

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The importance of backup

Losing access to a cryptocurrency wallet can cause serious financial damage, and it is critical to regularly back up important information. In many cases, we backup wallet.dat files or mnemonics. Essentially, mnemonics work like a root key, generating and granting access to all keys and addresses in a cryptocurrency wallet. If a password is used for encryption, the password should also be backed up.

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Which cryptocurrency wallet should I use?

There is no clear answer as to which crypto wallet should be used. If you trade frequently, a web wallet allows you to quickly access your funds and conduct transactions with ease. Assuming you take extra steps to secure your account using a two-factor authentication (2FA) method, your passwords are generally safe. However, if you hold a large amount of cryptocurrencies for a long time and do not plan to sell them, cold wallets are ideal. This type of wallet is not connected to the Internet, is more secure, and can effectively defend against online phishing attacks or scams.

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Cryptocurrency wallets are an integral part of using Bitcoin and other cryptocurrencies. One of the fundamental elements of this infrastructure is the infrastructure that users need to send and receive money over the blockchain network. There are pros and cons to different types of wallets, and it is important to understand how they work before transferring funds.

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