Digital Wallet

A digital wallet is defined as any mechanism relating to an electronic device, online service, or software program that allows one party to make electronic transactions with another party.

Digital wallets have become extraordinarily popular with the rise of cryptocurrencies as viable and mainstream investment instruments.

Fiat currency or other cryptos can be deposited in the digital wallet prior to any transaction, which also includes an individual's bank account that is linked to the digital wallet.

Of note, this construct can include more than just digital currency, but also credentials such as a driver’s license, a health card, or other forms of ID.

Understanding Cryptocurrency Digital Wallets

With regards to the ever-growing crypto space, digital wallets have developed into a necessity and are relied upon as the de-facto method for exchanging crypto or engaging in transactions.

In order to own crypto, a user must be in control of the specific coin’s private keys. Private keys represent long strings of alpha-numeric characters.

A digital wallet simply functions as the place where these private keys are stored.

There are three types of digital wallets: hardware, software, or paper. A cryptocurrency wallet can also be characterized as either “hot” or “cold”.

A hot wallet is a wallet that is connected to the internet. These include wallets that are stored on web-connected devices such as computers or mobile phones.

Certain hot wallets allow you to store your cryptocurrency on your own device. Other hot wallets store your cryptocurrency for you on their own devices or depositories.

By extension, cold wallets are devices that are not connected to the Internet. These include encrypted storage devices and paper wallets.

Both hot and cold wallets have their own positives and negatives. Security of a digital wallet is paramount as a breach can threaten the security of all its contents.