When it comes to storing cryptocurrency, the concept of a wallet can be a bit daunting for the uninitiated. There are software wallets (online/mobile/desktop), hardware wallets, and paper wallets. The “best” type of wallet will be different for everyone – it all depends on an individual’s particular needs.
Wallets don’t exactly store your cryptocurrency directly. It’s more accurate to think of a wallet as storing your private keys. Public-key cryptography is what allows cryptocurrency to function in the first place, and uses specific algorithms to generate pairs of keys. Your public key is the address to which anyone can send cryptocurrency. The corresponding private key is what allows you to spend funds from that address. Without a private key, a public address becomes a bottomless pit that you can only check the balance of; money can still be sent there, but it’s lost without the private key.
The different types of wallets simply represent the various ways a person can secure their private key. The two main types of wallets, hot and cold, refer to a wallet’s level of internet connectivity. Hardware wallets and paper wallets aren’t actively connected to the internet and are considered cold storage. A hot wallet is an internet connected wallet, which is easy to spend from but is also vulnerable to cyber-attacks. Cold storage protects from cyber-crime, but it’s still the owner’s responsibility to physically secure their property.