Cryptocurrencies have been a talk of the town for people involved in finance, mostly after the meteoric rise of Bitcoin. They are said to be the future of a decentralized worldwide economy without the interference of centralized authorities like Governments and banks.
Cryptocurrencies are known to be volatile, hence their value keeps changing at astronomical rates, I MEAN!! Look at Bitcoin. When these assets are valued, the risk of frauds, cyber-attacks to illegally gain access to your digital assets are high!! Hence it is a need of the hour to protect your assets from malicious attacks.
Cryptocurrency wallets serve the purpose!!
Let us learn about these Wallets!!
Table of contents
- What are Cryptocurrency Wallets?
- What are Public and Private Keys??
- Private Key
- How does cryptocurrency wallets work?
- Different Types of Crypto Wallets
- Points to consider while choosing cryptocurrency wallets!!
What are Cryptocurrency Wallets?
Cryptocurrency wallets are physical devices or instruments, digital programs or service apps used to store the cryptocurrencies. It interacts securely with the cryptocurrency ledger network using encryption and signing information.
The contents of the wallet are mainly the public and private keys of the cryptocurrency you hold.
What are Public and Private Keys??
When a holder of cryptocurrency initiates a transaction, a unique set of public and private keys gets generated. The network generates a long string of Alphanumerics used to safeguard digital assets.
The public key is a set of alphanumeric letters. A shortened, hash version of the public key can be used as an address. This key facilitates the transactions and also is an indication of ownership of the digital asset
A private key is a sensitive and most important key which has to be secured by the owner. This key is used as a password to sign/authorize the transactions of digital assets securely. The Private key generates the public key.
People who have access to your private key can write in a public ledger by effectively spending the associated cryptocurrency.
The Private key generates the public key. As mentioned above, the public key, in turn, creates an address called Public address. This address can act as a Bank account number. The seller can connect to the public addresses to sell his cryptocurrency.
How does cryptocurrency wallets work?
Cryptocurrency wallets safeguard your public and private keys, and hence no digital assets are present in the wallet. The digital assets are hosted and stored in the distributed public ledger called Blockchain. These wallets are provided by the cryptocurrency exchanges or can be purchased from any other trusted provider.
Let’s consider a scenario where two friends, Jack and Jill are carrying out a transaction using their wallets on which they have registered their accounts.
Jack is the person who is buying the cryptocurrency. Hence, Jack transfers fiat money of $40,000 to the bank account of Jill. Jack also shares his wallet ID with Jill. Once Jill confirms that she has received the funds, she opens her wallet and enters the wallet address/Public Address of Jack, shared earlier with her.
She enters the bitcoin of value $40,000 to be sent to Jack and signs the transaction using her private/secret key. When Jill signs the transaction, it is forwarded to be validated by the Blockchain. Once validated, Jack’s public keys get associated with the bitcoins received. The ownership of the Bitcoin will now be accessible or spent using Jack’s private key only.
Different Types of Crypto Wallets
There are mainly two types of wallets, Hot wallets & cold wallets.
Internet connectivity defines a wallet in terms of hot or cold.
Hot wallets have Internet connectivity, hence are vulnerable to malicious cyber attacks, but are user-friendly. These are more likely to be used for daily transactions. Hot wallets are easy to set up, and the funds are quickly accessible. Traders conveniently use them. As a protection method, only a small percentage should be stored in hot wallets.
Types of hot wallets:
Desktop Wallets- (Hot wallet when connected to the Internet)
These are software apps available for various operating systems and are becoming better with time and increased security protocols. Anti-virus is required because a PC connected to the Internet poses fundamental security issues. Instead of keeping cryptos on an exchange, Desktop wallets are more likely choices for safe-keeping bitcoins.
They are the third most secure way to store cryptocurrencies and the best practices for cold storage in a clean system. They are easy to use, provide privacy, anonymity, and involve no third party. Regular backing up of the computer is needed.
Ex: Exodus, Bitcoin core, Electrum, etc.
Mobile wallets are just like desktop wallets made for smartphones. They are quite convenient as they use QR codes for transactions. They are suitable for daily operations but are vulnerable to malware infection. Encryption of mobile wallets is necessary. They are practical and are easily accessible, provided internet connectivity, but open to viruses.
Ex: Coinomi and Mycelium.
As the name suggests, these wallets are accessible by Internet browsers. The private keys stored in web wallets are prone to DDOS attacks. They can be hosted or non-hosted. Non-hosted is preferred as funds are always in control. They are the least secure wallets. They are ideal for small investments and allow quick transactions.
Ex: MetaMask and Coinbase.
Cold wallets, on the other hand, are stored offline and require no internet connectivity. Thus, improved security and less risk. Cold wallets are suitable for long-term holdings. Cold wallets are hack resistant, unlike hot wallets. Hence the cold wallet is ideal for HOLDers.
Types of cold wallets
Hardware wallets are by far the best kinds of wallets for storing your public and private keys. They resemble USB sticks but with a screen and a pair of buttons to operate them.
It is a battery-less device and can be connected to a PC and accessed by native desktop apps. It cost up to 70-150 US dollars, but it is worth it. They have received a mixed response. These are more secure than hot wallets and robust than paper wallets but not as user-friendly as web and desktop wallets.
Hardwallets are available in different forms and offer reasonable amounts of control. They are difficult for beginners to use when the investment is significant.
Ex: Ledger Nano S and Trezor.
Paper wallets are nothing but papers with QR code, public and private keys printed on them. Some wallets allow downloading the code to generate new addresses offline. They are not prone to hacks, but the number of flaws has made them not so desirable.
A major flaw is the inability to send partial funds. They were used to be very popular as cold storage wallets, but not anymore, as hardware wallets are great alternatives. All in all, if stringent security precautions are taken care of, then paper wallets can become more useful.
There is also a fear of losing or damaging the paper wallets. It is a fragile wallet to handle.
Types of Wallets based on Authority
Multisig wallets, short for Multisignature wallets, as the name suggests, are wallets that require not one, but two or more private keys for authentication and access! This can be a good security feature and can be used by a group of people who share the assets, for a common goal.
These are the types of wallets which are usually provided by Centralized cryptocurrency exchanges. In such cases, the exchange has the authority to access private keys to use your funds. You have partial ownership over the assets in the wallet.
These wallets are used not only to store your digital assets but also to hold a copy of Blockchainlocally, used to validate transactions. These are useful for tech-savvy miners who hold a significant amount of digital assets.
Points to consider while choosing cryptocurrency wallets!!
The wallets mentioned above have their own set of advantages and disadvantages. Hence it can be advised to choose the wallets based on your personal preferences.
If you are a crypto trader who executes many transactions, Hot wallets will serve the purpose. They are user-friendly and allow easily executable transactions. Though, it is also sensible to keep only the assets that are required.
Web wallets, Desktop wallets, and mobile wallets make up this space. There are many providers of hot wallets who offer features like 2-factor authentication. Hence acts as an additional layer to the existing security features.
If you are in the crypto-markets for long-term investments, it makes sense to use Hardware wallets as they are best suited for the same. You need not worry about cyber attacks and can access them only when you want to sell them off!!
A cryptocurrency wallet is a software/hardware platform used to store the private keys(Password) to your digital assets.
A crypto hash (or the tx/transaction ID) is a unique address of your transaction in a blockchain.
The recipient’s address is the cryptocurrency wallet address of the person receiving the assets.
It depends on the type of cryptocurrency you are using. Some wallets are currency-specific, meaning they can only store the cryptocurrency that they are designed for.
If the cryptocurrencies are hosted on the same blockchain and have similar operational functions, it is possible to use the same wallet. There are multi-currency wallets that support storing different cryptocurrencies.