Learn & Understand What Is A Cryptocurrency Wallet And How Does It Work
Understanding the basic concept of what is a cryptocurrency wallet with its function is necessary before conducting any transaction. It is one of the key components to find out the role that they play in crypto transactions.
Crypto wallets are software programs that allow you to access, store, and transfer cryptos. It does so with the help of private and public keys. Via these keys, it interacts with the blockchain for transferring crypto from one wallet to another.
To help you choose a wallet, we have categorized these wallets based on different criteria along with the pros and cons. After reading this article, you should be able to decide what type of crypto wallet would be the best for you.
Cryptocurrency Trading Explained
All information on cryptocurrency is impossible to warp up in a single phase. Though, we will mention a brief explanation here, for an entire concept, you can check our article what is crypto.
Cryptocurrencies are digital assets that work as a medium of exchange. It is named so because it uses cryptography to secure and verify transactions in a public distributed ledger known as the blockchain.
The first cryptocurrency, Bitcoin, was developed in 2008, and since then, there have been over 2500 cryptocurrencies in the market. Besides, the virtual coins have gained crazy popularity and adoption because of the unique features it brings to the title.
Unlike the fiat monetary system, crypto is not regulated or centralized. It is neither supplied or controlled by any central government or bank. No single entity controls its price or supply. You cannot just issue more crypto into the market as per your wish.
Its supply is limited, and its price depends on the supply and demand of the asset. If you were thinking of storing bitcoin or any other crypto in a real leather wallet, you need to read this article.
We are now going to explain the basics of a crypto wallet.
What Is A Crypto Wallet?
In real life, neither it is safe to display nor to attract potential muggers to steal money. You, therefore, use wallets to store money safely and conveniently.
But the same analogy can not be applied to crypto wallets. Digital assets are unthinkable to store anywhere, not even in the blockchain.
Let us understand the link between the wallet and the blockchain. Consider blockchain as a database that contains all the transactional data. Blockchain also indicates which private and public key has access over specific funds.
Every wallet has a public and a private key. There is no compromise of security when you share a public key with someone. People cannot access the funds stored in your wallet through the public key.
Think of it as a bank account number. Usually, people give account number to someone when they want to receive funds. Similarly, you will need to share your public key to receive crypto from another person.
But sharing a private key can bring bad luck for your account. By using this key, anyone can access and transfer funds in your wallet. We will explain more about the public and private keys in the section below.
For now, we have established that crypto wallets are software programs that store your public and private keys. It allows you to communicate with the blockchain to send and receive cryptocurrencies.
How Does Crypto Wallet Work?
The blockchain is the distributed public ledger that contains all the transactional records and stored in it. With the help of a crypto wallet, you get to interact with the blockchain. Also, you can instruct to send and receive cryptos in and out of your wallet.
As we mentioned earlier, two particular keys usually use in transferring cryptos from wallet to wallet. When you send crypto to someone, you signing off your ownership from that specific amount of crypto to their wallet address.
Notably, the role wallet plays here is to indicate the transfer of ownership of a specific amount of crypto from one wallet address to another. Also, the transactional information enters the blockchain where it is verified, confirmed, and added.
It will be best if we define the process with the help of an example. The example will explain how crypto funds transfer between two wallets.
For Example:
Consider two friends Adam and Daniel. Adam wants to send bitcoin to Daniel. Both own bitcoin wallets to accomplish this task.
Adam decides to send 0.2 BTC to Daniel for a payment. The first thing Adam does is acquire the public address of Daniel’s wallet that looks something like this:
1A1zP1eP5QGefi2DnPTfTL5SLmv7DivfNb
Addresses are long and compress of lower-upper case letters and numbers. They are all unique which usually start at 1 or 3.
Adam then logs into his wallet and clicks on the send bitcoin button. He then inputs the public address of Daniel and enters the amount (0.2 BTC), before clicking the send button.
With the help of miners, the transaction will varify in the blockchain by solving complex mathematical problems. After confirmation, it will be added to the blockchain permanently.
If Daniel logs on to his wallet, his private key allows him to access the funds that were sent to him by Adam. Remember, the private key and the public key have to match for Daniel to access the funds.
How Public Key & Private Key Is Interlinked:
The public key is linked to your wallet address and hashed version of it. Hashing allows encryption of a series of numbers and alphabets to a new set of numbers and letters. It encrypts the input string to a hashed output string.
It is the way how the private and public key is interrelated. Mainly, the public key is a hashed version of your private key. They look completely different but, co-related as the public key derived from the private key.
Once they match, it proves that you are the owner of the wallet. Also, it allows you to access the funds and transfer them.
Types Of Crypto Wallet
There are many types of crypto wallet that exists. Every wallet offers the same function of accessing and transferring of funds, but each wallet is fundamentally different from one another, including pros and cons.
If you are confused about what kind of wallet to get, read this section to find out the best option for you.
Crypto wallets can be of many types such as hot wallet, cold wallet, mobile, a desktop wallet, paper, hard wallet, custodial, full node, online, multi-coin, and single-coin.
Here, we will classify the wallets based on the features.
1. On The Basis Of Connectivity
Some wallets require connectivity to the internet, and some don’t. Based on the internet connection, there are two types of wallets:
- Cold Wallet
- Hot Wallet
Cold Storage Or Wallet:
These wallets operate without an internet connection. They operate in offline mode and don’t accept as many currencies as hot wallets, But cold storage is far more secure than hot wallets.
Cold wallets can be of two types:
- Hardware Wallet
- Paper Wallet
Cryptocurrency Hardware Wallet:
Hardware wallets store the private and public keys in a secure hardware device. It supports multiple cryptocurrencies. They are of the size of a USB-stick. Some even come with tiny displays showing balance and other important information.
Through a USB-port, you can connect them to your computer. Moreover, these wallets are safe from any computer viruses and also consider the safest, among all wallets. You only need to connect it to the internet when transferring funds.
Even then, it requires a pin code for verification. Hence, it is safe from all online hacking attempts. If you never lose your hardware wallet and keep it safely, your crypto will be stored safely.
Crypto Paper Wallet:
Hardware wallets store the private and public keys in a secure hardware device. It supports multiple cryptocurrencies. They are of the size of a USB-stick. Some even come with tiny displays showing balance and other important information.
Through a USB-port, you can connect them to your computer. Moreover, these wallets are safe from any computer viruses and also consider the safest, among all wallets. You only need to connect it to the internet when transferring funds.
Even then, it requires a pin code for verification. Hence, it is safe from all online hacking attempts. If you never lose your hardware wallet and keep it safely, your crypto will be stored safely.
Hot Wallet:
Hot wallets are wallets that are connected to the internet. There are 3 main types of hot wallets, such as desktop, mobile, and web/online wallets.
We will describe these wallets here.
Desktop Wallet:
Desktop wallets are a software program that you download and install in your computer. Through the software, you get to transfer and access your crypto funds.
Any hot wallet is always vulnerable to internet attacks, and desktop wallet is no exception. These wallets support multiple operating systems, so it does not matter if you are windows, MAC, or a Linux user.
Some desktop wallets also come with a similar mobile app, allowing you to access your wallet on the go. Mainly, the private and public keys stores in the hard-disk of the computer. So, the only way your wallet could access by someone else.
If your computer gets stolen or if a hacker gains remote access to your desktop. This type of wallet is safe, compared to mobile and web wallets.
Mobile Wallet:
Mobile wallet is similar to a desktop wallet. It comes in the form of a mobile app, but with fewer features as it’s smaller and lighter in size.
The edge it has over desktop wallets is that you can use for payments in retail stores. Also, these wallets accept crypto as a form of payment.
You can complete the payment process by scanning a QR-code. Mobile wallet is great for those who use crypto daily to make small payments. Sadly, it is not as secure as desktop wallets and is a popular choice for hackers to steal from.
But the security features are being updated and beefed-up constantly to make them as a reliable wallet choice.
Web/Online Wallet:
Mobile wallet is similar to a desktop wallet. It comes in the form of a mobile app, but with fewer features as it’s smaller and lighter in size.
The edge it has over desktop wallets is that you can use for payments in retail stores. Also, these wallets accept crypto as a form of payment.
You can complete the payment process by scanning a QR-code. Mobile wallet is great for those who use crypto daily to make small payments. Sadly, it is not as secure as desktop wallets and is a popular choice for hackers to steal from.
But the security features are being updated and beefed-up constantly to make them as a reliable wallet choice.
2. On The Basis Of Control
The ability to control private keys fully gives the user peace of mind. Some wallets don’t offer that control to the users.
We can classify wallets into two categories based on control:
- Custodial Wallets
- Non-custodial wallets
Custodial Wallets:
These wallets don’t give you access to your private keys. Instead, they store in the servers of the wallet provider. In case, these servers get hacked, you lose your wallet balance. Example of custodial wallets includes wallets provided by exchanges.
Non-custodial Wallets:
Non-custodial wallets give users full access to their private keys that stores in the user’s wallet device. So, as long as the device is safe, the keys will remain safe.
The wallet provider will be unable to reset or recover your funds in case the user loses the recovery phrase. Any hardware wallet is an example of a non-custodial wallet.
3. Based On Coins
Based on the number of coins offers, wallets can be classified into:
Single Wallets:
Some cryptocurrencies offer wallets for currency only. You cannot access and use other coins in that wallet.
For example, Bitcoin Core Wallet allows transactions of bitcoin only.
Multi-coin Wallets:
These wallets hold addresses of several cryptos in the wallet seamlessly. It is convenient to hold multiple cryptos in one single wallet. Users who have a diverse portfolio can benefit from these wallets.
Which Cryptocurrency Wallet Is The Best?
The truth is, there is no definite answer here. Each wallet is different from the other and offers unique benefits to the user.
It depends what your specific requirement is, whether you trade single crypto or multiple, have a large number of coins or just want to hold a small amount, your budget, whether you can use it on the go.
These are the questions you need to ask yourself before you invest in a wallet. Here are some of the factors and our suggested wallet for that factor:
- Security: For security, go for a hardware wallet hands down. It is the most secure wallet out of all the options.
- Cost: For cost reduction, hot wallets the best option because they are free. Unlike cold wallets that can cost up to $150 or more.
- Convenience: You can go for online wallets as they are cloud-based wallets. Also, you can access from anywhere.
- Payment on the go: Mobile wallet is a great option for retail purchase. All you need to do is scan a QR-code from your mobile wallet, and your payment is done.
- Investment: If you are looking to store a large amount of crypto, then a hardware wallet is the best bet. They are secure and you can hold your coins, as long as you wish.
- Ease of use: You can go for a mobile wallet as they are the easiest to use. A desktop wallet contains many features and can be intimidating for new users.
- Storage: A full node wallet occupies a lot of space up to hundreds of GB at times. If space is your concern, you might want to
To summarize, there is no ‘best’ crypto wallet. The best crypto wallet varies from person to person. It depends on your preference.
How To Secure My Crypto Wallet?
Security is of the utmost importance when it comes to choosing a crypto wallet. You wouldn’t keep your leather wallet containing fiat lying around without any supervision.
Similarly, your crypto wallet is a valuable asset as it contains virtual coins. Here are some tips you can consider as best practice for using a crypto wallet:
- Use cold storage for holding crypto long term. On the flip side, use hot storage to transfer crypto easily and conveniently.
- Enable additional layers of security for hot wallets such as 2FA, alphanumeric passwords, Google authenticator, and pin codes.
- Watch out for any rogue browser extension when using online wallets. They steal information from your browser data.
- Consider accessing your online wallet in a private tor browser session. This will protect your identity from being traced.
- It is better to use the ‘official’ wallet issued by the GitHub team of the crypto. For example, bitcoin core for bitcoin.
- Don’t put all eggs in one basket. Use multiple wallets to thin out your chances of a loss.
- Go for a well-reputed wallet that has a large user base and positive reviews.
- Don’t store your private keys or pin codes online. Their privacy will be compromised.
- Knowing how hackers hack your wallet is crucial to protecting your wallet. The different methods they use are malware, Trojans, viruses, scripts, phishing, remote access, etc.
- Update your wallet software regularly for the latest patch and bug fixes.
- Backup copies of your software wallet in case of a failure.
- Write your private key on a piece of paper and store it safely. Memorizing it or storing it online is not a safe option.
These were some tips to secure your wallet and ensuring your privacy is not compromised. The most important tip is to never share your private key with anyone. It is yours and meant to be known to only you.
Final Words
Finally, It is important to secure your crypto wallet to prevent any unauthorized access and possible theft. We have listed some best practices to prevent your wallet from being hacked, stolen, or compromised. It starts with never sharing your private key with anyone.
There is no single best wallet. It depends on what your requirement is. For some, security is of the utmost importance.
Many prefer speed and convenience over everything else. While some prefer simplicity and ease-of-use. We have given our suggested wallet for each requirement.
Cryptocurrency has changed the way we perceive money. In the future, they might even replace the existing money system. And the medium through which you access your crypto is a crypto wallet.
Hence invest in a reliable and secure wallet and store your crypto with ease of mind.
