What is a Cryptocurrency Wallet?
Before you start dabbling into the world of cryptocurrency and blockchain, you must have a cryptocurrency wallet(s) of some sort.
A crypto wallet, or digital wallet is essentially a software program that stores private and public keys, and interacts with various blockchains to enable users such as yourself to send and receive digital currency and monitor your balance.
DISCLAIMER: This is for educational purposes only and should not be considered investment advice. Crypto users select multiple wallets for different purposes, so please make sure you select the wallet that is most appropriate for your needs. For more information cybersecurity awareness relating to blockchain technology, please click here.
Debunking Myths Surrounding Crypto Wallets
Every cryptocurrency wallet has a public key, and a private key
Unlike traditional billfold wallets, digital wallets don’t actually store currency. In reality, the wallet simply stores the records of transactions which are stored on the blockchain. When a person sends you bitcoin or any type of digital currency, they are not sending you physical currency, but signing off ownership of that currency to your wallet’s address. For this reason, every crypto wallet has a public key and a private key.
Your public key is used to receive funds, identifying your account on the blockchain network. It can be publicly searched for in the ledger (think of searching Facebook for someone’s account).
Your private key, on the other hand, is only used to sign transactions and prove you own the related public key. This is like your social security number on the blockchain--never share this key to anyone, even if they ask for it. You will only come to regret it later.
To be able to then spend that currency and unlock access to those funds, the private key stored in your crypto wallet must match the public address the currency is assigned to. If those private and public keys match, the balance in your digital wallet will increase, while the sender of the currency’s balance will decrease. What you need to understand is that there is no actual exchange of real coins--this is a transaction record on the blockchain and a change in your wallet’s balance. That’s it.
Types of Wallets
In your ongoing education of crypto, there are three distinct categories of crypto wallets--software, hardware, and paper. Let’s explore each.
#1 - Software Wallets
Software wallets, or hot storage wallets can be broken down into desktop, mobile, or online. These are wallets that are accessible via an internet service such as Coinbase, one of the world’s largest crypto exchanges.
These wallets are downloaded and installed on a PC or laptop. They are only accessible from a single computer in which they are downloaded--meaning, you cannot access them from anywhere else but the one computer it was installed on.
Desktop wallets offer one of the highest levels of security, but in the event your system is hacked, it’s possible that virus or intrusion could compromise the balance contained in your wallet, simply because it’s on the infected computer.
Online wallets are “cloud wallets”, which as you might guess, run on the cloud and are accessible from any computing device, regardless of where you are.
However, convenience trumps privacy here, where your private keys online are stored and controlled by a third party--making it vulnerable to possible thefts or cybersecurity attacks.
Mobile wallets run on an app on your phone or smart tablet, and are useful because they can be used anywhere, including retail stores. These wallets are much smaller than desktop wallets, because of the limited space that is available on the mobile or smart tablet device.
#2 - Hardware Wallets
Hardware wallets, or cold storage wallets, store a user’s private keys on a separate device, like a USB or flash drive, and are not connected to the internet. This makes it very easy to conduct transactions, by simply plugging the device into any internet-enabled device, enter your pin, and send the currency.
Depending upon the type of hardware wallet you’re using, you may/may not be able to utilize it with other web interfaces. These types of wallets are considered to be more secure than hot wallets, due to the fact that they aren’t connected to the internet. In most crypto attacks, where an online wallet has had funds transferred out of it without the owner’s permission, the internet was the instrument.
#3 - Paper Wallets
Paper wallets are a printed piece of paper which contain keys and QR codes, that can be scanned to enable any given blockchain transaction. As they aren’t connected to the internet, paper wallets are considered to be more secure than other storage methods. However, many in the industry advise not to use these types of wallets. For more information, please click here.