A wallet is an application that allows you to send, receive and store the access keys to your cryptocurrencies. It is an interface that makes it possible to interact with your balance and history in a simple way.

We refer to virtual wallets, although there are also physical and even paper wallets. Depending on the different possible uses, each format focuses on one or another feature.

What types of digital wallets are there?

There are different types of wallets to interact with your cryptocurrency balance, send and receive funds and store your private keys for access.

According to the criteria used, we distinguish:

  • Custodial and non-custodial wallets.

  • Virtual and physical wallets

  • Hot and cold wallets

It is important to consider how a wallet actually works. Unlike the most common concept, they do not store cryptocurrencies: a wallet stores the tools needed to interact with the blockchain.

To execute a transaction on a blockchain, such as Bitcoin, not only is it necessary to have a "public key" that identifies the wallet and makes it possible to generate addresses for receiving, but also a "private key" that only the person who owns the funds possesses.

In a traditional bank there is an account number to which funds can be sent, and at the same time login data, such as a PIN, so that the holder can interact with the balance deposited in the bank. In this case the functioning is similar.

  • Custodial and non-custodial wallets

As the private key is what guarantees you the ownership and access to your cryptocurrencies, safeguarding or not that key is what will distinguish a custodial from a non-custodial (or self-custodial) wallet.

While a custodial wallet keeps the private key safeguarded by a third party and provides a simple interface to access balance management, a non-custodial wallet allows the users to keep custody of their private key, and therefore full control of their funds.

  • Virtual and physical wallets

A wallet can be virtual or physical, with each format focusing on one or other feature.

On the one hand, a software that makes it possible to visualize and interact with your cryptocurrency balance through a simple interface, which may or may not safeguard your keys. It can be a mobile wallet, as an extension in web browsers, or as a desktop application.

On the other hand, physical wallets (or hardware wallets) offer the possibility of storing your keys on a device disconnected from the internet. They are usually preferred by users who store their balances for the long term and seek to prioritize security.

  • Hot and cold wallets

Virtual and physical wallets are closely related to the last criterion. In this case, the difference is the connection or disconnection from the Internet. A hot wallet is one that is somehow connected to the Internet. The funds can be accessed easily, so they are used by frequent users.

A cold wallet is not connected to the Internet. It is preferred for "cold" storage of balances, prioritizing the protection of private keys against possible attacks or vulnerabilities.


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