The rise of cryptocurrencies in the public’s awareness in recent years has been simultaneous with the rise of underlying support technology like the crypto wallet.
You’ve probably heard that to get in on crypto, you need to get a crypto wallet.
But what is a crypto wallet? Why do you need one? How does it work? And how does a crypto wallet differ from your regular bank wallet that you already use for electronic transactions?
What Is a Crypto Wallet?
Cryptocurrency wallets are programs or software that generate the public and private keys you need to access and send your cryptocurrency funds in the real world.
These public and private keys are the means through which you can send, receive, and even monitor your cryptocurrency assets that are stored on the blockchain.
Here’s how this all works:
Public Keys: This is a sequence of figures that you can share with other people to enable them send cryptocurrencies to you for whatever reason, usually payment.
Private Keys: This is a sequence of figures that you DO NOT share with anyone else because that would give them access to your cryptocurrencies, thus putting your funds in danger of being stolen. For this reason, private keys are sometimes known as passwords.
To make this more familiar to you, one can liken your public key to your PayPal email address. Once someone has this, they can send you money. At the same time, one can liken your private key to your PayPal email password: it enables you send money to others, and whoever has this password has unbridled access to your money.
So, a crypto wallet could be defined in the simplest terms as a public key and a private key. How these keys are stored has given rise to the different types of wallets.
What Are the Different Types of Crypto Wallets?
There are different ways to store your public and private keys. These include:
Software Wallets: These wallets are usually online-based and include popular crypto-exchange examples like Binance and Coinbase. Your public and private keys are stored on their servers and you can access them through your account with them.
Hardware Wallets: These are basically USB sticks that store your public and private keys for you. You simply plug them in when you need to access your cryptocurrency funds and unplug them when you’re done so that nobody else gets access to them.
It’s no surprise why anyone would choose hardware keys over software keys since crypto-exchanges technically can gain access to your money through the keys that you stored on their servers.
Hardware wallets, on the other hand, have a very secure process for getting into them. For example, some might require a 24-key phrase to gain access. Forgetting that key would be the equivalent of losing your cryptocurrencies forever.
Paper Wallet: The paper wallet is the most secure type of cryptocurrency wallet and consists of a piece of paper on which are written your public and private keys as well as QR code to ease transactions.
What makes this the most secure out of the three wallet types is the fact that it is pretty much impossible to hack.
However, there is a danger of losing access to your crypto stash if you intentionally or mistakenly lose or destroy this piece of paper. In addition to that, this wallets are less practical than the others. Unless you’re prepared to manually type out your keys whenever you want to make a transaction, they are best reserved for storing large stashes of crypto you’re not planning to access in the short term.
What’s the Difference Between Crypto Wallets and Bank Wallets?
Crypto wallets don’t actually store any crypto—unlike your bank wallet that is actually an account that holds funds electronically.
Your cryptocurrencies are actually stored on the blockchain, while your cryptocurrency wallet stores the blockchain address where the cryptocurrency is stored. This allows you access your funds wherever they are stored on the blockchain.
Are Crypto Wallets Secure?
Crypto wallets are meant to be secure methods for storing, accessing, and sending cryptocurrencies. But there still risks associated with them. To better discuss this, it’s important to visit the notion of hot and cold wallets.
Hot Wallets: This is a wallet that lives and stores information on the internet aka software wallets. These are always susceptible to online attacks from hackers and other bad actors looking to break into your digital hoard.
Cold Wallets: This refers to wallets that exist completely offline or need to be connected to a computer to be accessed, in other words, paper wallets and hardware wallets. The only danger with these is that you might forget the password associated with them or somehow damage the wallet. Hackers can’t get these.
Why is this information useful?
Imagine you were a cryptocurrency miner and needed to quickly and reliably send the cryptos you mine to another wallet: you would need a hot wallet for that purpose.
However, if you’ve invested hundreds of thousands of dollars into buying cryptocurrency and you needed to securely let them sit and appreciate in value, you would need a cold wallet.
Share and Comment!
What surprises you the most about cryptocurrency wallets? Would you consider getting one for yourself and getting in on the action? Share your thoughts in the comment section below and don’t forget to share this information with someone you know would be interested.