In our first blog post from the series dedicated to digital wallets, we discussed what are digital wallets, how they work and what are the benefits of using one. The speed with which technologies evolve is unforeseeable. The same goes for the evolution of digital wallets.
Last month we spoke about fiat digital wallets, now it’s time to pay attention to their futuristic relatives – the cryptocurrency wallets.
What is a crypto digital wallet?
The crypto wallet allows users to securely store their cryptocurrency. When they create an account, a matching pair of private and public keys are issued together with a seed phrase. The length of the seed phrase depends on the wallet and is usually between 12 to 24 words.
What is a public key?
The public key is similar to the bank account number. It is a string of randomly generated numbers and can be shared with others without compromising the security of the crypto wallet. This way, the user can receive digital assets in their crypto wallet.
Why is the private key important?
The private key acts as a password and consists of randomly generated words and numbers. It gives the user access to their digital assets and allows them to perform different operations.
What is a seed phrase used for?
The seed phrase is of the utmost importance. It is used for recovery purposes only, and once lost, it is extremely difficult, if not impossible, to restore the crypto wallet. In other words, the cryptocurrency and other digital assets stored in the wallet are lost forever.
Storing crypto in a wallet is a must. The difficulty comes when choosing what type of crypto wallet will fit the users’ goals the best.
Types of crypto wallets
Whether the user wants to take full responsibility for their private key, they can choose between a custodial or non-custodial wallet. The difference here is that custodial wallets (usually centralized crypto exchanges) take care of the user’s private key for them and minimize the risks of lost accounts.
On the other hand, non-custodial wallets are less prone to hacker attacks as they do not store their customers’ private keys. However, if the user loses the key, they may not be able to restore their wallet.
Another categorization of crypto wallets is based on whether or not the wallet is connected to the internet. This classification defines two big groups – hot and cold wallets.
Hot wallets are connected to the internet and comprise online, mobile and desktop wallets, while cold wallets are the opposite and have no access to the web. They include hardware and paper crypto wallets.
Hot crypto wallets
Online, web or also known as browser wallets, allow the user to access their cryptocurrency through their browsers. They do not need to download and install any software on their PCs and can access the wallet from everywhere.
Most online wallets are custodial wallets, as the service providers are crypto exchanges that offer custody of the user’s private key. The advantage of online crypto wallets is that lost wallets can be recovered in most cases.
The desktop wallet is software that the user installs on their personal computer. As the device is connected to the internet, it is a must to have antivirus software installed on it as well.
With the installation of the desktop crypto wallet, a wallet.dat file is stored on the computer. The user must encrypt it with a secure password and back it up in case the device stops working or is inaccessible.
Desktop wallets are considered to be more secure than web and mobile wallets, as the user has full control of their private key. However, as people have said, it is better not to put all your eggs in one basket.
Mobile wallets are apps that can be installed on the user’s smartphone. They are suitable for daily operations and transactions made face-to-face. All the user needs to do, is scan a QR code, and the payment is done. However, the users must be aware that as these wallets are connected to the web, they are vulnerable to hacker attacks.
Cold crypto wallets
These wallets resemble a lot a USB stick and are probably the most secure way to store cryptocurrencies. The private keys never leave the device even if the device is connected to the internet, and hackers cannot access it unless they get their hands on the USB.
As their name suggests, paper wallets are pieces of paper with the wallet’s address and private key printed on them in the form of QR codes. Although paper wallets are hacker-proof, they are considered inconvenient and dangerous.
They are not suitable for partial transactions as the difference between the sent amount and the amount left in the wallet is sent to a changed address which should be set in advance, otherwise, the money is lost.
Do Millennials and Generation Z use digital and crypto wallets?
One thing is for sure, even without specially conducted research, it is quite obvious – the younger the person, the more tech-savvy they are. This trend can already be seen among generation Z and Millennials.
It has been estimated that 65% of Millennials have used digital wallets in 2021, and generation Z is not falling much behind with 57%. Together they will comprise 72% of the world’s workforce by 2029.
What is more important is that according to the Mastercard New Payments Index from 2021, 67% of Millennials globally have agreed that they are more eager to use cryptocurrency than they were a year ago.
This means that businesses should take into consideration the digital needs and preferences of these two generations. Of course, boomers and generation X are still playing an important role in the payments industry, but very soon, this will change.
It is expected that crypto and digital wallets will become even more popular among the younger generations and probably will be the most preferred payment method. Just wait and see.