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Crypto Wallets

Learning about Crypto wallets is the first step you can take toward true decentralization. To unlock the essential benefits of cryptocurrency, you must begin to use your crypto in a peer-to-peer fashion.

Purchasing Bitcoin on a centralized exchange, such Coinbase or Binance, is only the gateway toward crypto freedom; to unlock true decentralization, you will need a means to store and exchange your crypto free of third-party control, meaning free of any bank, broker or exchange. This was Satoshi Nakamoto’s original vision for a free-market currency and is your next step toward financial sovereignty. 

Firstly, it’s important to understand why exchange wallets are not decentralized and personal crypto wallets are. Decentralization in crypto often refers to the need for an institution, such as a bank, to foster the settlements of your transactions.  Banks, brokerages, exchanges, they custody value for us in a centralized manner in a traditional account. You “trust” your bank, for example, with your funds to settle transaction either through checks, wires or ACH transactions on your behalf. The breakthrough that cryptocurrency offers is that blockchain technology offers a way for you to transact without the need for such third parties to conduct the transaction. Cryptocurrency is said to be “trustless” for this reason. Unlike exchange wallets, personal crypto wallets do not rely on third parties and are therefore decentralized.

When you buy crypto on an exchange, it is automatically placed within an exchange wallet. The exchange that you purchased the cryptocurrency from, now harbors your cryptocurrency as a custodian, much like a bank. Exchange wallets seem similar to personal crypto wallets in some regards. For example, when you send crypto from your exchange wallet, you will be sending from your exchange wallet to a public address. The crypto address is between 26 and 35 alphanumeric digits and looks something like the following:

1B1zP1eP5QFe4fi2DMPTfTL5SLmv7DXvfNa (note: do not send to this made-up address, it will be lost in crypto space forever).

Each wallet address has a private key linked with an address. If your cryptocurrency is stored on an exchange, though you may have a crypto address such as the one above to receive crypto, what you do not have is the private keys to unlock the wallet. Exchange wallets hold the private keys to these wallets. Although the Bitcoin network has never been hacked, exchanges have been hacked because the keys to these wallets may not be so private. Therefore, to protect yourself from exchange hacks and also to participate in the revolutionary new crypto economy, it is important to store your cryptocurrency in a personal crypto wallet. With a personal crypto wallet, you control the private keys to unlock the wallet. Though this comes with a level of responsibility, as will be explained further on… once you are operating your personal crypto wallet, you are in full control of your crypto wealth and taking part in the crypto revolution. The different types of personal crypto wallets are discussed below.

Hardware Wallet

A hardware wallet is an offline wallet operated through a USB cord or NFC (near field communication) that connects to your computer or mobile device. Hardware wallets are extremely secure and the recommended way to store your cryptocurrency for the long term (cold storage). The Ledger Nano X and Trezor model T are two popular hardware wallets and are both safe options for long term storage of crypto. Below is a synopsis of how a hardware wallet works.

Crypto assets are stored on the blockchain and not on the wallet itself.  Unlike your personal wallet, where your cash is stored in the wallet… the crypto asset is locked on the blockchain through cryptography. To access your crypto, you need the private key to access your crypto which is stored in the crypto wallet.  If you are the only one to own and have access to the private key, this means that you alone own the crypto asset and are the only person that will be able to buy, sell, exchange and earn interest using the application. Unlike the various types of hot wallets, with a hardware wallet your private key is stored in the device offline.

When setting up your hardware wallet, you will be prompted to set up a recovery phrase, which is a secret list of 12 to 24 words that backs up your private keys. Your recovery phrase is unique; if you lose your recovery phrase you will not be able to access your crypto if you lose it. Let me repeat, you will not be able to access your crypto if you lose your recovery phrase. The stories that you hear about people losing crypto are usually centered around this recovery phrase—so be sure to store it carefully. Some go so far as to keeping a recovery phrase in a safe to ensure that it is never lost or store.

As the adage goes, “With great power comes great responsibility!” By owning crypto in a decentralized manner on a wallet, you become the sole proprietor of your own crypto wealth. You are set free from many of the dark elements of capitalism, such as surveillance, government manipulation of currency through money printing, and even some of the inflationary aspects of currency depending on which cryptocurrencies that you choose to own.

Once you’re finished setting up your hardware wallet, you can connect the wallet to an app, which will let you transfer your crypto into the wallet, and all the other functionality that your hardware wallet software allows… such as purchasing crypto or earning interest on your crypto. The hardware wallet simply holds your private key that allows you to manage your crypto once connected online.

Hot Wallet

Hot wallets are much like hardware wallets, with the exception that your private key is stored on a computing device that is connected to the internet. Ease of use is the main benefit of a hot wallet so you can spend and use your crypto online to buy NFTs for example. The general recommendation is not to store too much crypto on a hot wallet, as there is less security with such a wallet. Many crypto users use both a hot wallet and hardware wallet, keeping a lesser amount of crypto in their hot wallet (for everyday use), and then cold storing the bulk of their crypto assets on a hardware wallet for additional security.

There are many different types of hot wallets out there, as there are many different ways for computing devices to connect to the internet. Exchange wallets, that have already been discussed earlier is technically a type of hot wallet, since your private keys are stored online through exchange. An exchange wallet may be one the least safe hot wallet options since you do not hold the private keys to such a wallet (and as stated before, exchange wallets are also not decentralized). The other hot wallet options include mobile wallets, desktop wallets, paper wallets, and there are even hybrid options which combine different aspects of the aforementioned wallet types. These generally are decentralized because you will hold sole access to the private keys when setting these wallets up, but because they are on a device connected to the internet… the wallet can be vulnerable because if a hacker accesses your computing device, they could drain your wallet through the application. Below is a brief description of each type of hot wallet and some best-in-class examples.

Mobile Wallet

Mobile wallets are run on your smart phone operating system, such as Apple’s IOS or Google Android. They will allow for quick, on the go access to your crypto currency.

Desktop Wallet

Desktop wallets will run on your PC operating system such as Windows and Mac OC. If you choose to run a desktop wallet, be sure to have protective anti-virus and anti-hacking software to prevent attacks.

Browser Wallet 

These wallets can be either on your mobile device or your desktop; they are able to attach to your browser as an extension and integrate both surfing the internet and managing cryptocurrency seamlessly. For example, you can download a Metamask wallet (an example of a browser wallet), attach it to Brave browser (a type of browser like Chrome or Explorer) and navigate to a site such as OpeaSea that sells your favorite digital art or trading card. You can then purchase the item you choose thought the Metamask wallet extension on your browser.

Paper Wallet

Paper wallets is a means of printing the private key to your crypto wallet and storing it offline. This approach requires a greater amount of responsibility as your keys are not stored on any sort of device, and it will take a high degree of tech savvy, to interact with the blockchain to manager your cryptocurrency.

The main point to remember with crypto wallets is… your keys, your cryptocurrency. You may never actually see your private keys, the recovery phrase (aka seed phrase) is yours alone to access your private keys. Just know that if you are not given a recovery phrase to access your private keys, then you are not decentralized, and you do not have full control of your Bitcoin or other cryptocurrency. Many are comfortable with having their cryptocurrency custodied by an exchange wallet hosted by Coinbase.

There is a level of safety to this, as many exchanges are now insured, and the frequency of exchange hacks is trending downward. But the insurance that exchanges hold is not the same as a bank or credit union, which insures your fiat for up to $250,000 by the Federal Government; however, federally insured banks are mired in a moribund system and will not offer you the flexibility and sovereignty of crypto. To truly take advantage of this decentralized revolutionary economy that blockchain and cryptocurrency offer, finding a wallet that is right for you is the next step to unlocking this door.

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