‘Crypto wallets’ should be relatively easy to comprehend as it is self-explanatory! But there is much more to it than the name suggests.
Since there are no physical coins or bills, cryptocurrency does not exist in anything you could hold in your hand. It is stored on the blockchain and, as we all know, it exists only virtually.
A cryptocurrency wallet is a tool for customers to verify their account balance to see how much cryptocurrency they own. These wallets are conceptually similar to how a typical bank account works for fiat currency. A cryptocurrency wallet allows users to send and receive cryptocurrencies. It is often the main tool used by consumers to control and maintain their cryptocurrency balances.
What are wallets?
Crypto wallets hold users’ public and private keys while providing an easy-to-use interface to manage their balances. Similar to a password, a private key is a secret number that is used in cryptography. Private keys are also important in cryptocurrencies to validate ownership of blockchain addresses and sign transactions. A private key resembles a safe deposit box key and anyone with access to a wallet’s private key can take control of the funds stored within.
However, unlike a safe deposit box, users of cryptocurrencies who manage their private keys and conduct transactions through non-custodial wallets are, in essence, acting as their banks while using it.
How does it work?
A crypto wallet doesn’t store cryptocurrency; instead, it keeps the private keys that allow access to a given cryptocurrency’s blockchain.
The wallet itself stores addresses and allows its owners to move currencies elsewhere while also letting other parties see the balance held at any given address. It is not controlled by a third party or any exchange.
Let us consider a traditional bank. Customers will have bank accounts with account numbers through which transactions can be done. With a blockchain, the public key serves the same purpose as the bank account number. But unlike how a bank works, a complete set of transactions with just a public key will not do the work.
Blockchain works with both a public key and a private key needed to access and transfer cryptocurrency. Crypto wallets hold users’ private keys and information where the public keys are located on the blockchain. With the combination of both public and private keys, a crypto wallet can enable a secured operation to validate a balance and send or receive cryptocurrency transactions.
Types of crypto wallets
Broadly, there are two types of crypto wallets: hot wallets and cold wallets. Hot wallets are connected to the internet whereas cold wallets are not. They are typically disconnected and only connect online as needed. Let us look at each of them more closely.
Cold wallets in itself are of two types: hardware wallets and paper wallets.
Hardware wallets: A hardware wallet is a type of wallet that stores the user’s private keys in a secure hardware device, typically a USB drive. The hardware wallet ensures a type of isolation when the user pulls the key out because it isn’t always connected.
Paper wallets: A paper wallet is a printed piece of paper containing keys and QR codes used to facilitate cryptocurrency transactions. Keys are written on a physical medium like paper and stored in a safe place.
Online wallets: Online wallets, also known as software wallets, are your hot wallets. It is perhaps the most common and widely used form of crypto wallet. Typically used in desktop, mobile, or web-based applications, these wallets require an internet connection and are both more accessible but also more prone to hacking than cold wallets. With an online wallet, an online service, such as a crypto exchange, holds the user’s public and private keys. Users access the wallet by logging in to the online service.
In addition to the wallets mentioned above, crypto wallets can be further separated into custodial and non-custodial types.
A non-custodial wallet means that you are the sole keeper of the keys to your crypto assets whereas in a custodial wallet you have a third party helping you log in and manage your crypto accounts.
Getting a crypto wallet is not difficult, no matter which cryptocurrency you want to use. An online cryptocurrency wallet is available on several exchanges while you can purchase a cold wallet straight from the manufacturer online, including at Amazon.
Factors like customer service, fees, security, types of cryptocurrencies supported, reputation, compatibility, etc. must be considered while choosing a crypto wallet.
Since cryptocurrencies are valuable targets for hackers, wallet security is crucial. Some safeguards include encrypting the wallet with a strong password, using two-factor authentication for exchanges, backing up the wallets often, and storing any large amounts you have offline should be
executed.
