Definitions vary and will probably adapt as financial technology evolves. Here is one attempt that captures the potential digital economy:
Digital wallet | noun - A digital compartment for digital articles, including:
- Fiat currency
- Central bank digital currency (CBDC)
- Personal papers
- Non-fungible tokens (NFTs)
- Digital art
- Metaverse resources
Based on this definition, there are many digital wallets that people use on an everyday basis.
- Online bank accounts
- Online brokerages
- Gift cards
- Apple wallet
- Google pay
- Crypto wallets
When a trader sends funds to a brokerage, the account that stores the funds acts as a compartment for the trader’s money. This transfer is digital. Our current financial environment allows someone to withdraw physical cash from the bank. However, most of the time, we interact with our money from a digital perspective.
What is a crypto wallet?
Distinct from the aforementioned digital wallets, crypto wallets manage purely digital assets. Thus, crypto wallets are a form of digital wallets. The birth of bitcoin has opened a gateway for many other forms of digital currencies and assets. Regulators argue over semantics as they attempt to understand the complex nature of this new class.
There are different types of crypto wallets. Typically, they classify as either hot or cold wallets.
Hot wallets are popular in the crypto ecosystem as they easily connect to the internet. They are convenient and easier to use. The tradeoff is that they are more vulnerable to attacks.
Some examples include:
Exchanges act as hot wallets unless they claim they offer cold wallet storage. Users will have to trust the provider that this claim is a fact. In essence, storing funds with a reputable crypto exchange is no different than holding funds with a reputable brokerage.
Third-party wallet providers such as Metamask and Jaxx offer more control to the user. The tradeoff is these wallets are less convenient since wallet owners are responsible for their security.
Some cryptocurrencies or tokens offer their own branded wallets to store the native asset. These wallets are necessary as some digital assets are not compatible with others. Branded wallets utilize the same infrastructure as their digital token.
Cold wallets offer much more security than hot wallets. However, they require more diligence from users. Cold wallets, or hardware wallets, have a physical element. There is a USB or USB-like hardware that stores the digital asset.
Popular cold wallets include:
It requires a connection to the internet when making transactions. When it is offline, the digital assets are stored only on the hardware. Malicious actors cannot access it.
You can carry this digital wallet in your pocket (although this is highly not recommended). The downside is that cold wallets are vulnerable to user error and other physical calamities. You can lose the hardware or the security phrase to unlock it. Natural elements like fire and water can damage it. Even your dog can chew it up. These downsides are no different than what your regular wallet is exposed to right now.
Digital Wallets: Bottom Line
The financial industry is evolving rapidly. Fintech, cryptocurrencies, and other novel platforms disrupt the way finances have operated for so many decades. Digital wallets are one of the mainstay components in this ecosystem.
There are many options for users. Types of digital wallets balance between convenience and security. You can choose which digital wallets you use based on your needs.
So what will you store in your digital wallet?
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