A cryptocurrency wallet is a software application that stores private and public keys, giving a user access to their crypto funds on the blockchain. To put it simply, if you want to trade Bitcoin or any other cryptocurrencies, a digital wallet is a prerequisite to begin.
A common misconception about cryptocurrency wallets is that they “store” your cryptocurrencies. At face value, a crypto wallet is similar to your everyday wallet used to store cash and debit/credit cards, but you may be surprised to know that BTCs are never actually separated from the chain, therefore are not stored in the wallet.
Each wallet user has a private key, enabling them to access only their BTCs on the blockchain. Thus, each user needs a wallet to secure, send, and receive cryptocurrencies.
The private key supplied by each wallet allows the user to create public addresses for sending and receiving crypto with others on the blockchain. If you own a Bitcoin wallet, you only have access to funds associated with the private key you possess.
How to use a BTC (Bitcoin) wallet?
Most BTC wallets are user-friendly and allow you to generate a new address in no time. Depending on your choice of wallets, you may not even need to understand technicalities of BTCs as wallets make your trading process easy.
To send BTC, all the sender needs is the receiver’s public address. The sender inputs the public address into the send form of the wallet and confirms the address is correct before sending. To receive Bitcoins, the receiver copies the address from their wallet and provides it to the BTC sender.
Each transaction is broadcasted across the Bitcoin network. A network of specialized computers confirms transactions on the Bitcoin network called “miners”. These miners analyze each block of transactions. Once miners have reached a consensus, the block is added to the chain.
Other cryptocurrency wallets
The decentralized nature of Bitcoin has brought about a plethora of unique wallets, all interacting across the same network. Of course, Bitcoin’s success has led to the birth of countless other cryptocurrencies, resulting in a deluge of more wallets. In most cases, the technology is quite similar to that of a Bitcoin wallet. Today, many existing Bitcoin wallet providers have begun integrating new cryptocurrencies into their existing platforms.
Types of crypto wallets
Today the cryptocurrency industry utilizes two types of wallets: hot and cold. However, there are also desktop wallets which can be either hot or cold. Each wallet has its positive and negative characteristics.
Let’s discuss them one by one.
An online wallet or a web-based wallet is a service that a website offers. Though some consider it a secondary function, some exchanges only deal with this type of wallet.
Web-based wallets allow you to access cryptocurrency through various devices. No matter where you are, you can access the funds on your wallet using an internet-connected device.
You may be compromised on the security level as web-based wallets are less secure than the alternatives. Relying on a web-based wallet means you are trusting a centralized company to remain solvent and protect your account. You need to know that a wallet service provider has access to all the accounts on their website. Trading becomes difficult when a service provider sets a limit how much digital currency you can trade. Seek out secure and reliable wallets with proven track records.
This type of wallet allows you to carry your cards information, credit or debit, on your mobile device, untethering you from your plastic cards.
Now you can find a wide variety of mobile wallets for BTC, ETH, LTC, and other cryptocurrencies on popular app stores such as Microsoft Store, App Store, and Google Play.
You don’t have to copy/paste addresses as mobile wallets let you use your phone’s camera to scan QR codes to quickly and easily send and receive BTC.
You need to have a strong and secure internet connection to stay connected to your mobile wallet, which is not always possible. If you are using an old version of Android or Apple OS, you run the risk that the latest mobile wallets won’t be supported by your smartphone.
Hardware wallets are handheld products, using robust hardware encryption to store, send and receive the digital currencies. Though the competition in the space is growing, few companies manufacture hardware wallets.
Storing cryptocurrency on a hardware wallet is extremely easy and secure. The wallet remains offline and, thus, secure until the device is plugged into an internet-connected device. A comprehensive decentralized experience is what you get through hardware wallets as compared to web-based wallets, which do not give you complete control over your private keys.
If you are new to hardware wallets, recovering the stored coins can be a complex technical process for you in case you lose coins or your wallet breaks. You can recover the funds only if you have the private key or seed phrase to your wallet.
A paper wallet is a cold storage technique to generate public and private keys while storing them offline on paper. This is a great way for users to store their cryptos without machines.
If you decided not to touch a portion of your portfolio for a long period of time, then a paper wallet is an excellent option. Paper wallets are offline, out of hackers’ reach.
After all, it is still a paper: you can damage and tear off it easily. Multiple backups are always important.
Desktop wallets involve downloading software directly to your computer. Many newer desktop wallets have begun embedding coin mixing functionality in their programs, allowing the user to trade without the use of a conventional crypto exchange.
Desktop wallets allow you to access your wallet and private keys in a secure way. Desktop wallet users typically enjoy a highly decentralized experience. A wide variety of desktop wallets for many different cryptocurrencies are available today.
There are a few reasons for why a user may not choose a desktop wallet. One major pitfall with many cryptocurrencies’ desktop wallets is the user must download the entire blockchain, which, in the case of Bitcoin, is over 150GB of data. Some desktop wallets become entirely unfunctional if the computer does not have enough free disk space to download the entire blockchain. Also, users refrain from using this type of wallet as they have to synchronize it with blockchain every time they want to use the wallet.
How to protect your wallet?
No matter what type of wallet you choose, security is always important; therefore, you must implement the best security practices to keep your crypto safe from scammers.
- Your wallet’s security is similar to data protection on your computer. Whatever you do online, from browsing online to sending email attachments, stay alert.
- If you want to get access to an online exchange, take advantage of Google authenticator with a single IP, and use it as your VPN to trade through mobiles.
- Select a reliable exchange that provides ease of use, flexibility for trade and maintains a good reputation. Walk through the latest industry trends on Crypto Exchange Ranks to know what crypto exchange is the best. Repeated technical problems should always be a red flag.
- Backups can save you. Hardware failures and human slip-ups can put your data in danger, but a backup can restore your wallet in no time.
- Passwords and encryption are not end-all solutions as they do not prevent scammers or another malware. Why not install leading antivirus software to secure your wallet?
- Choose a powerful password. Switch to two-factor-authentication both for login and transaction procedures. Refrain from exposing your wallet or exchange to social media sites.
- Keeping all BTCs in one wallet is not a good idea. Stealing money from several wallets at once becomes tough for hackers, especially when you use different email accounts for all wallets you use.
Wrapping up: The crypto industry is widening its boundaries with new cryptocurrencies going live every day. A mining pool helps miners divide the reward equally, which further makes the crypto exchange ethical. Wallet security varies from wallet to wallet; choose wisely.
Read also about 2 types of crypto exchanges
About the author: Harsha Goel is a crypto enthusiast who believes crypto can revolutionize the world.