What is a crypto wallet?
Many companies in the market are incorporating Cryptocurrencies into their businesses these days. Adopting new technologies is a way of being ready for the future. Having crypto like Bitcoin or other currencies allows us to perform international trading as well. Now where do you store your crypto?
Just like a conventional pocket wallet, crypto wallets hold our coins (cryptocurrencies). You don’t have to spend them, but it comes in handy for holding them together.
It is an application that lets you store and withdraw your digital assets. Crypto currency isn’t physical, it’s like a group of codes. These codes are stored on the blockchain with a specific address. Simply put, a cryptocurrency wallet is a tool you can use to interact with the blockchain network.
How does it work?
A wallet is created by generating a few pairs of public and private keys using an Elliptical Curve Digital Signature algorithm (mostly for Bitcoins and Ethereum). I know it sounds complicated; we’re not here to discuss about the algorithm. These private and public keys are mathematically linked to each other.
So, in a crypto wallet, the software helps stores your private and public keys while interacting with various blockchains. We can take the private key and derive the public key from it. But we can’t take the public key and derive the private key. The public key becomes your wallet’s address, kind of like a bank account number.
The private key is your way of proving that you’re the owner of the wallet and thus you can spend the coins inside it. In summary, the public keys can be shared with everyone whereas private keys should be kept to yourself. A public key allows other users to send your crypto, a private key unlocks your crypto to you.
Some crypto exchanges let you leave your crypto assets on their platform where you bought it. This means you’re actually using the platform’s wallet, and most exchanges are custodial wallets. That is, they don’t allow access to your private keys, it’s in their “custody”. Using crypto wallets, your private keys are owned and maintained by you.
Types of Crypto wallets
There are several types of wallets that you can use to store and manage your digital currency. These can be broken into three categories namely Software, Hardware and Paper wallets. Depending on their method of operation, they may also be referred to as Hot and Cold wallets.
Software wallets come under Hot wallets whereas hardware and paper wallets are classified as Cold crypto wallets. Many businesses use both hot and cold wallets. Hot for regular transactions and cold ones for long-term investments.
Software/Hot wallets work when they are connected to the internet. These wallets are convenient for traders and are frequently used because they are easy to set up and the funds are quickly accessible. Software wallets are wallets that enable you to access your crypto assets from any browser that is connected to the internet.
These are again divided into three types. Online wallets, Desktop wallets and Mobile wallets.
- With an online wallet, you can access your crypto from any browser that’s connected to the internet. You don’t have to download or install an app on your PC but rather the data is hosted on a real or virtual server. Online wallets are also known as web wallets, these are cloud based, which makes them notably unsecure compared to other wallets.
- But you’ll continue to have control over your private keys without letting a third-party in. Quoting Elon Musk’s recent tweet “Any crypto wallet that won’t give you your private keys should be avoided at all costs”.
- For Desktop wallets you need to install the application on your computer. These wallets have programs to maintain your private key on your system hard drive. Desktop wallets are easy to access from any computer with an internet connection. This is also their biggest disadvantage as they can become targets to hackers.
- Just like desktop wallets, Mobile wallets also need apps to be downloaded on the device for accessing the crypto and private keys. Mobile wallets have made crypto storage and accessibility hassle free. These wallets are compatible to both iOS and Android.
- A Mobile wallet is your friend to access your crypto on the go, they’re convenient and the apps come with many user-friendly features and high-level security.
- The major set back for these wallets are that your mobile contains all the crucial information about your crypto, misplacing or losing your mobile may result in losing access to your funds.
On the other hand, cold wallets are a much safer alternative. These wallets have no access to the internet. The keys are stored offline through a device. This makes them resistant to hackers. This method is also known as cold storage and is particularly suitable for long term investors with large number of coins/currencies.
Hardware wallets are different from software wallets. These wallets store the user’s private keys in a secure hardware (USB thumb drive like) device. These are considered the most secure way to store your crypto because of their offline storage options. The devices can be connected to the internet, make transactions, and then disconnected.
Basically, it can go online and offline which helps with better security. Since your private key is stored on the device, you can also use it to verify the transactions, so the funds never leave your wallet without confirmation. With your hardware wallet stored offline, it is kept away from potential hackers, which delivers increased security.
Paper wallets are another option for storing your crypto. As the name suggests, the process involves printing the private keys and its corresponding public address onto a piece of paper and storing it, usually as QR codes.
This is a simple way of storing your keys offline, but it will require you to pay a lot of attention to this bit of paper. You can permanently lose access to your funds if your paper wallet gets lost. Also processing a transaction to a paper wallet can be slightly long-winded and possibly unsafe.
And in this method, you’ll also need to manually enter your keys into a transaction tool typically using a browser which could expose the keys to a cyber attack. Using paper wallets may consist numerous flaws and is discouraged.
In this article we got a complete picture about what crypto wallets are, how they work and the types of crypto wallets available in the market. Also, we learnt about role of Private and public keys in Cryptocurrency. Crypto can be complicated and confusing, so if you’re new to this, slowly ease yourself into it.