Everyone from the most veteran crypto traders to the guppies just getting started on a CEX with their first few Satoshis needs to consider how to store their cryptos. While it is possible to keep your cryptos on a centralized exchange, it is not advisable to do this due to security concerns. This begs the question: How do I use a crypto wallet?
In short, a crypto wallet stores your cryptocurrency when it is not in transit between wallets or being managed by a smart contract. While CEX have their own wallet systems, this post will explain how you can self-custody your cryptos with a wallet of your own. One of the oldest adages in the crypto space is: not your keys, not your cryptos. This refers to the idea that if you are not the sole owner of your crypto wallet’s seed phrase, you do not own the cryptos in the wallet.
Luckily for you, using a crypto wallet is not really all that complicated. If you can figure out the multi-faceted functionality of the largest CEX platforms, then you should easily be able to set up and use a crypto wallet all on your own.
Uses Of A Crypto Wallet
All crypto traders need their own crypto wallet outside of their exchanges of choice. As we demonstrated in our first Matchup between CEX and DEX, centralized exchanges have experienced devastating security breaches in the past. Therefore, you really should have a cold wallet, hot wallet, or both.
A crypto wallet of your own gives you the ability to finally self-custody your finances. This is arguably the most important use of a crypto wallet. With self-custody, you do not need to rely on a third party actor, such as a bank or an exchange, to hold your cryptos for you. In our opinion, this is the most important use of a crypto wallet.
Another use is for convenience. In some cases, it may simply be more convenient for you to transact cryptos from your own personal wallet. With a crypto wallet, you may not need to login to an exchange account - it may be as straightforward as sharing a QR code or public key to send or receive funds.
Crypto wallets also provide security. Leaving your cryptos on a centralized exchange exposes them to whatever risks the exchange itself is vulnerable to. Historically, such risks have been loss of funds via security breaches, insolvency, and random account lock-outs.
Finally, a personal crypto wallet makes engaging in DeFi protocols possible.
Setting Up A Cold Wallet
A cold wallet is a crypto wallet that is not connected to the internet. This makes it impossible to access without a specialized device or without the seed phrase.
*please note that you should NEVER share your seed phrase or private key with anyone!
Types of cold wallets include devices from Ledger or Trezor, pen and paper, or a QR code. The first two options are from for-profit companies that provide software to make it easier for you to use the device, while the latter two can simply be written or printed. Let’s talk about setting up a Ledger Nano X.
Buy the Device
First thing you’ll need to do is acquire the device. Do yourself a favor and only buy these devices directly from the manufacturer - in this case, Ledger. Here is the link for the official Trezor site as well, in case you prefer to buy a Trezor. If you don’t order directly from the company’s site, you run the risk of receiving counterfeit devices, or worse. When you receive the device, you will need to go through a moderately lengthy process to set it up and generate your first private keys.
You will need to download and install the Ledger Live application on your computer. Then you’ll need to activate the small Ledger device by pressing both the left and right buttons. There you will set up a security pin to unlock the device in the future and your unique seed phrase will be generated. Make sure you store your seed phrase in a safe place.
Connecting to Ledger Live
After your device is unlocked and Ledger Live is installed and running your desktop, connect the Ledger to your computer with the cable provided. When you attempt to connect, or ‘sync’ your device to Ledger Live, you will need to unlock it and verify the device on Ledger Live as well. Once that is done, you will be able to set up public wallet addresses for cryptos and send them to your device.
In Ledger Live, the tab for portfolio displays your holdings in USD/BTC/ETH value per your preference. Then the Accounts tab will switch between your different crypto accounts such as your BTC addresses, ETH addresses, and maybe even LINK or another alt.
Sending and Receiving
To send cryptos, you first need to indicate what will be sent on Ledger Live and then verify it on your Ledger device. The 2-factor authentication ensures the security of your transactions. You will indicate what crypto you want to send and how much. Make sure you enter the recipient’s correct address! Ledger Live will walk you through the final process of deciding how big a fee you want to pay to speed up the transaction, as well. Once all the values are set, just approve it on your device and you’ll be good to send.
WHAT LEDGER LIVE MAY LOOK LIKE ON YOUR DESKTOP COMPUTER.
To receive cryptos, you will either need to unlock your device again to display the public address, or copy it directly from Ledger Live to give to whomever you want. The public address, of course, is the one that you can share with others, unlike the private address.
That’s basically it! This is the safest way to store your cryptos thanks to all the verifications required to access the contents of the device, and because the device is not connected to the internet. Now let’s take a look at how to set up a hot wallet.
Hot wallets function differently than cold wallets, especially considering you don’t need to store your cryptos on a dedicated device to access them. Hot wallets tend to give users greater accessibility to their assets, and make trading on DeFi platforms easier since they connect directly to the platforms.
MetaMask requires only the install of a simple Chrome browser extension, or alternatively the web app. However, for security reasons, using the web app for anything other than P2P transactions is not recommended! For farming on DeFi platforms, you will need to use the browser extension. Install the extension and you’ll be able to set up your first wallet, as shown below.
Click ‘Get Started’ then ‘Create a Wallet’ to generate your first wallet and seed phrase. From there, you just need to create a password and store your seed phrase (which MetaMask now calls the ‘Secret Recovery Phrase’) somewhere very safe, and your wallet is free to use.
You can store cryptos from many different mainnets and Ethereum sidechains on MetaMask quickly and easily. As of yet, you cannot trade coins cross-chain interchangeably on MetaMask.
When you want to use a DeFi platform, it’s really quite simple. Just unlock your MetaMask account by entering your password, visit the site you want to use, and click ‘connect’ when prompted. Then you can enjoy all the functionality of the website.
Anytime you interact with the site to make a transaction such as adding liquidity, staking tokens in a pool, or claiming rewards, the hot wallet will require you to approve the transaction in order to execute and spend gas from your wallet.
In fact, if you use a ledger on DeFi websites, you will need to use a hot wallet to connect since the ledger cannot directly connect to the website.
You should now have a pretty good idea of what a crypto wallet is for and generally how to use it. Having your own personal wallet or wallets is essential if you plan on holding your crypto assets for the long term, since a centralized exchange cannot be trusted to provide safe custody.
As you become more familiar with the inner workings of the wallets you use, you will also improve your operational security measures so that you retain your anonymity and overall security of your assets.
Remember that if you are not the sole owner of the private key or seed phrase for a wallet, you do not own it. Also, cold wallets cannot be hacked! So, trade safely and securely hold your crypto assets.