A cryptocurrency is a form of payment that can be exchanged online for goods and services. Cryptocurrencies work using a technology called the blockchain. Blockchain is a decentralized technology spread across many computers that manage and record transactions. In order to use cryptocurrency, you’ll need to use a cryptocurrency wallet.
Cryptocurrency wallets are software that makes sending and receiving cryptocurrency easier. But unlike other currencies, cryptocurrencies are digital and use cryptography to provide secure online transactions. The crypto wallet doesn’t exactly “store” the currency as real-world wallets do. Instead, it stores public and private keys which help in sending and receiving money.
Wallets are software that can be used to view cryptocurrency balances and make transactions. Each wallet type is a little bit different, but in general, any given wallet will work with one or more cryptocurrencies and will be able to store one or more cryptocurrency-specific “public addresses.” A wallet lets you view balances associated with an address and lets you move funds around on the blockchain as long as you are the owner of the address.
Public addresses are like cryptocurrency-specific account numbers, they can be used to receive a specific type of cryptocurrency and can be shared publicly.
Proving you own the address is done with a private key (a secret code associated with a public address) in non-custodial wallets. In custodial wallets, the custodian (a third party like an exchange, broker, etc) holds the key for you, and it is just a matter of inputting your password into their wallet app.
Essentially a wallet is like your online bank account platform, your address is like your account number, the blockchain is like the bank’s ledger, and with custodial wallets, the custodian is a bit like your banker.
There are several types of wallets you can use including paper, mobile, desktop, online and hardware. Each “type” refers to what type of medium the wallet is stored on, who is in control of the wallet, and whether or not the data is stored online.
Here is a quick breakdown of the different types of cryptocurrency wallets:
A paper wallet is a piece of paper on which the public address and private address are printed, usually in the form of QR code. The public address is used to receive digital currency, and the private address is used to send or transfer the digital currency stored at that address. The paper wallet should be used securely and not revealed or lost. With this option, you can completely avoid storing digital data about your currency by using a paper wallet.
These are software apps available on mobile phones, desktops, laptops or websites that allow transactions.
● Desktop wallet: A desktop wallet is designed to be downloaded and installed on your desktop. Desktop wallets are handy for managing your cryptocurrency when you’re offline. As they are on one system, they are vulnerable to theft either of the computer itself or through computer hacking. Computer viruses can also impact desktop wallets.
● Mobile wallet: Like a desktop wallet, a mobile wallet is downloaded and installed on your smartphone. There are various wallets available for iOS and Android. Mobile wallets are considered hot as your smartphone is readily accessible via a data connection at most times. A mobile app runs on your smartphone has your private keys and allows making payments directly from your phone. Mobile wallets use simplified payment verification (SPV) technology which works with very small subsets of the Blockchain. In spite of being a convenient on-the-go solution for transactions, mobile wallets are very susceptible to hacker attacks and also if the mobile is lost, others can access the wallet.
● Online Wallet: An online wallet is a web-based wallet. You don’t download an app, but rather data is hosted on a real or virtual server. Some online wallets are hybrid wallets allowing encryption of private data before being sent to the online server. They are accessible from any networked device, computer or phone. However, online wallets are vulnerable to hacking as well and also rely on third-party service providers who themselves may also be vulnerable.
● Hot wallet: A hot wallet is considered one connected to the internet. A hot wallet is extremely useful for making quick payments, trading on crypto-exchanges, and so on. Online web wallets are also considered hot wallets, as they are only accessible via the internet. Hot wallets are connected to the internet and allow for instantaneous transfers online through the blockchain.
It is a dedicated hardware that is specifically built to hold cryptocurrency and keep it secure. This includes USB devices. A hardware wallet is an offline physical device that can go online to make transactions and get data and then can be taken offline for transportation and security. To use these wallets, you connect them to a networked computer, enter a pin, and communicate to send and receive tokens across the web. A hardware wallet is considered a cold wallet.
Cold wallet: A cold wallet, also referred to as cold storage, is an offline wallet that lives on a user’s computer. Cold wallets offer a greater level of security but the transaction process is longer and more cumbersome compared to a hot wallet. Keeping your funds in cold storage is the most secure option. But if you plan to spend your digital currency or exchange them for other cryptocurrencies, you’ll need an easily accessible wallet. That’s where the other wallet choices step in.
Unlike a pure software wallet, hardware wallets can be disconnected and placed offline in a secure physical location like a bank deposit box. For this reason, hardware offers another level of security, that software wallets don’t have.
The public key is the address to which others can send you the money, while the private key is that which you will use to send money to anyone. It is important that ONLY you should know your private key; otherwise, anyone who knows your private key can steal your money. You should not lose or reveal your private key come what may. Otherwise, losing your private key is similar to losing your money. You should use at least two different techniques to save and store your private keys.
Behind every address is a private key. A private key shows ownership of a public key. Then finally, each set of private and public keys is connected to a public address (an encrypted version of the public key). So your wallet is software that stores your private keys, public keys, and public addresses, lets you send and receive coins, and also acts as a personal ledger of balances and transactions.
Cryptocurrency wallets are all built to be secure, but the exact security differs from wallet to wallet. Generally, like your usernames and passwords, the security of your wallet comes from you using best practices. Create a very strong, single-use password. This password will encrypt your wallet and keep it secure. Like your seed, do not forget or lose this password; your funds will be irretrievably lost otherwise. Do not keep more currency than you need at one time in a single wallet that you use frequently. You can also use multi-signature transactions.
It’s smart to backup your wallet and private keys and to encrypt them. At least one backup should be on a CD or thumb drive to ensure that you have a “hard copy” laying around. If you lose your wallet or your keys, then you lose the currency connected to it!
Below are some additional tips for keeping your coins safe and your wallet secure.
The answer is that cryptocurrency is “pseudonymous.” Due to the open-source and public nature of transaction blockchain ledgers, there are little bits of public data that can be used to backward engineer someone’s identity (in theory). For most of us, the answer would be, “it’s pretty darn close to anonymous.”