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The Ultimate Guide to Cryptocurrency Wallets

Written by: Qadir AK

September 1, 2021

Cryptocurrencies have been the talk of the town for people involved in finance 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 volatile; hence their value keeps changing at astronomical rates- You would especially know this to be true if you have been keeping up with the news recently. 

However, when these assets are so highly valued, the risk of fraud and cyber-attacks is high, which attempt to gain access to your digital assets illegally. While the authorities attempt to enforce stricter rules and regulations, there’s a lot you can do from your end to protect your assets. 

Cryptocurrency wallets serve this exact purpose- Read on as we uncover everything that there is to know about them! 

What are Cryptocurrency Wallets?

Cryptocurrency wallets are physical devices, instruments, digital programs, or service apps used to store cryptocurrencies. 

It interacts securely with the cryptocurrency ledger network using encryption and signing information.

The wallet’s contents are mainly the public and private keys of the cryptocurrency you hold.

What are Public and Private Keys??

When a cryptocurrency holder initiates a transaction, a unique set of public and private keys gets generated. In addition, the network generates a long string of Alphanumerics used to safeguard digital assets.

Public Key:

The public key is a set of alphanumeric letters. The public key’s shortened hash version can be used as an address. This key facilitates the transactions and also is an indication of ownership of the digital asset.

Example: 958ikZuaAbGkzXuFL9sfGHYj9ethop8qMh

Private Key

A private key is a sensitive and the most critical key that the owner must secure. This key is used as a password to sign/authorize the transactions of digital assets securely. In addition, the Private key generates the public key. 

Example: N2nGYRCBbs6ZRs8w5LHam4r85ikxBzhRNgpNJjqk7D5vrpuaVJB

People with 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 a Public address. This address can act as a Bank account number. The seller can connect to the public addresses to sell his cryptocurrency.

How Do Cryptocurrency Wallets Work?

Cryptocurrency wallets safeguard your public and private keys; hence, no digital assets are present in the wallet. Instead, they are hosted and stored in the distributed public ledger called Blockchain. These wallets are provided by 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 transactions using their wallets on which they have registered their accounts. 

  • Jack is the person who is buying cryptocurrency. Hence, Jack transfers fiat money of $40,000 to Jill’s bank account.
  • Jack also shares his wallet ID with Jill. Once Jill confirms that she has received the funds, she opens her wallet and enters Jack’s wallet address/Public Address, shared earlier with her.
  • She enters the Bitcoin worth $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– defined by Internet connectivity.

Hot Wallets

Hot wallets have Internet connectivity, making them susceptible to malicious cyber attacks, but they are user-friendly. As a result, 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 software apps are available for various operating systems and are improving 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 and anonymity, and involve no third party. Regular backing up of the computer is needed. 

Ex: Exodus, Bitcoin core, Electrum, etc.

Mobile Wallets

Mobile wallets are just like desktop wallets made for smartphones. They are convenient as they use QR codes for transactions and 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.

Web Wallets

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, ideal for small investments, and allow quick transactions. 

 Ex: MetaMask and Coinbase.

Cold wallets

On the other hand, cold wallets are stored offline and require no internet connectivity. Thus, improved security and less risk. Cold wallets are suitable for long-term holdings. In addition, cold wallets are hack-resistant, unlike hot wallets, making them ideal for HOLDers.

Types of cold wallets

Hardware 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 costs 70-150 US dollars but is definitely considered worth it. However, 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.

Hard wallets are available in different forms and offer reasonable amounts of control. However, they are difficult for beginners to use when the investment is significant. 

Ex: Ledger Nano S and Trezor.

Paper wallets

Paper wallets are nothing but papers with QR codes and 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 undesirable. 

A major flaw is the inability to send partial funds. They 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

Multisig wallets, short for Multi signature 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.

Custodial wallets

These are the types of wallets that are usually provided by Centralized cryptocurrency exchanges. 

In such cases, the exchange has the Authority to access private keys to use your funds. As a result, you have partial ownership over the assets in the wallet.

Full-Node wallet

These wallets are used to store your digital assets and hold a copy of Blockchain locally, used to validate transactions. 

These are useful for tech-savvy miners who hold a significant amount of digital assets.

Points To Consider While Choosing A Cryptocurrency Wallet

The wallets mentioned above have their own set of advantages and disadvantages. Hence, choose the wallets based on your personal preferences, requirements, and research. 

Hot wallets will serve the purpose if you are a crypto trader who executes many transactions. This is because they are user-friendly and allow easily executable transactions. However, it is also sensible to keep only the required assets. 

Web wallets, Desktop wallets, and mobile wallets make up this space. In addition, there are many providers of hot wallets that offer features like 2-factor authentication. It 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.

Also Read: Smart Contract- A Computer Protocol Explained in Depth

FAQ

What is a cryptocurrency wallet?

A cryptocurrency wallet is a software/hardware platform used to store the private keys (Password) to your digital assets.

What is a hash?

A crypto hash (or the tx/transaction ID) is a unique address of your transaction in a blockchain.

What’s the recipient’s address?

The recipient’s address is the cryptocurrency wallet address of the person receiving the assets.

Do we have to use different cryptocurrency wallets for different crypto-coins?

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.


Qadir AK

Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

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