You may wonder why you need a cryptocurrency “wallet” since cryptocurrencies are not physically held. However, just as a regular wallet organizes and affords you easy access to your valuables, crypto wallets do the same and more. Cryptocurrency wallets act as vaults that help us store and secure our cryptocurrencies.
According to a Chainalysis study, over 460 million Bitcoin wallets have been created to date. Do people carry these wallets all around with them in their pockets? Walk with us as we demystify the intricacies of cryptocurrency wallets.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a physical or virtual safe box that secures public and private keys. These keys give access to your virtual currency. Both keys comprise a lengthy random combination of alphanumeric characters (in an encrypted form). Contrary to the traditional idea of having your credit card or physical cash in your wallets, cryptocurrency wallets do not store virtual currency in them. Instead, cryptocurrency wallets carry keys that give access to your digital assets.
With this access, cryptocurrency wallets may serve as an exchange platform for sharing and receiving virtual currency.
How Does a Cryptocurrency Wallet Work?
Cryptocurrencies are not stored in your cryptocurrency wallet. The wallet only gives you access to a blockchain where your cryptocurrencies, account balances, and transactions exist. A crypto-wallet stores private and public keys, monitors your balances and interacts with the blockchain so that you can send and receive cryptocurrency.
Your Public key is also known as your wallet address. You can liken your wallet’s public key to your regular checking account number, which lets a third party send money into your account but does not give them any access other than that. It is safe to share your public key with anyone. On the other hand, your private key gives personal access to your virtual currency. This means that your virtual funds can be transferred, used to make transactions, or managed.
It is important to know that when you’re sending and receiving cryptocurrency, you can only send the same type of currency to a public key/wallet address that supports that cryptocurrency. For instance, you can only send Bitcoin to a Bitcoin wallet address.
Types of Cryptocurrency Wallets
So, what types of cryptocurrency wallets are there? Let’s find out:
Software Wallets
These wallets are usually online-based services offered by exchange platforms like Independent Reserve, Coinbase, Binance, etc. Both public and private keys are stored on their servers, meaning they can spend your cryptocurrency with your approval, of course. Are you looking to buy and sell cryptocurrency as an investment channel? A software wallet is the best option for you. If you are uncomfortable with a third party having access to your digital assets, the next few options may be the best for you.
Hardware Wallet
Hardware Wallets are usually USB sticks that store your public and private keys.
Hardware wallets give you that physical reassurance of your digital assets as you can hold them and feel them. The downside is that while they are usually very secure, they do not have a recovery process. Once you forget your credentials, it is almost impossible to recover your assets. They are also very pricey.
Paper Wallet
It is a physical wallet that has your public and private keys on a paperback. It may also contain a QR code that can be scanned to give access to your digital assets.
It is usually adopted when large figures are involved, and there is no need to frequently access the funds. The paper wallet is then kept in a safe or anywhere it cannot be compromised or damaged. The disadvantage of a paper wallet is its susceptibility to damage and ease of compromise if breached.
Are Wallets Secure?
The topic of the security of cryptocurrency wallets is relative. By default, measures have been put in place to ensure that your digital assets are safe and available for use whenever you need them. However, we will explain the vulnerabilities you are susceptible to with regard to the categories of crypto-wallets.
Cryptocurrency wallets can be categorized into Hot and Cold wallets.
- Hot wallets are connected to the internet and can be accessed online. Hot wallets will always be vulnerable to internet attacks. Hackers will always continue to search for vulnerabilities in the network. So, you’d always have to be extra careful with your credentials.
- Cold wallets must be connected to a computer before being accessed. They are offline wallets. Therefore, physical security must be provided for them. They are usually more secure than hot wallets.
Why Do You Need a Cryptocurrency Wallet?
A cryptocurrency wallet helps you to store and monitor your digital currencies. In a conventional bank, it can be related to a tool to save some money and monitor your account balance. Crypto wallet uses include:
- They hold your digital assets
- Helps you monitor your assets
- Keeps your assets safe
- Makes your crypto transactions easier and faster
- Help you keep track of your transactions.
How to create a cryptocurrency wallet?
Since you have come this far, you may need help creating a cryptocurrency wallet. Fortunately, Australian laws approve the use of cryptocurrency for local and international transactions. In a few other countries, their local laws do not permit cryptocurrency transactions as their legitimacy is still under review.
The following steps should help you create a crypto-wallet:
- Choose the category and type of wallet that suits you. You must decide whether you want a hot wallet or a cold wallet.
- You must research to find the best cryptocurrency wallet available for you.
- Once selected, the next step is to create an account and transfer your funds.
While choosing a crypto-wallet, it is pertinent to note that:
- Procurement of wallets and other fees can vary between different providers.
- Each wallet has a list of supported currencies. Hence, you must choose a crypto-wallet that supports the currency you wish to hold.
- There is always a risk of hardware failure when using hardware wallets, which may lead to loss of keys.
Conclusion
For whatever reasons you want to invest in digital assets, it is advised that owning a cryptocurrency wallet should come before you commence investment.
Cryptocurrency wallets are relatively safe and easy to use. Nonetheless, you need to be security conscious. When using hot wallets, do not disclose your private keys on suspicious sites. In the case of cold wallets (especially paper wallets), keep them in safe spots and out of sight. Finally, when using cryptocurrency wallets, it is safer to use multiple wallets to mitigate the risks associated with a breach or loss of private keys.
