Cryptocurrency wallets: the best way to store digital assets!
Cryptocurrency is a form of digital currency that is encryption enabled, which in turn allows funds transfer. Popular examples in use today are Bitcoin and Ethereum. It is not physical cash or legal tender, and so it cannot be stored in physical wallets or pockets that hold our IDs, cash, credit and debit cards.
Crypto cannot be stored in a particular spot and does not exist physically. Its basis is blockchain, which is a running ledger of transactions distributed round the world. A key aspect of owning and using cryptocurrency is the use of a cryptocurrency wallet.
This article will discuss what a cryptocurrency wallet is, its types and how to choose the best one that suits your needs.
What are Cryptocurrency Wallets?
A cryptocurrency wallet is a digital wallet that allows its owner to manage, send and receive funds in crypto. Each wallet has some software that stores public and private keys of its owner. It also interacts with the blockchain, monitors your account balance, and allows cryptocurrency transactions.
In order to send, receive and manage cryptocurrency, one needs to be in possession of a cryptocurrency wallet. Now, this wallet is akin to a key that allows its owner access to funds. Here, the crypto is assigned to your private key, then the wallet gives access to the funds assigned to your account.
How do these cryptocurrency wallets work?
A simple analogy is a similar process of how traditional bank apps work. Now, think of the bank of your choosing as the blockchain, your account number as the public key, the cryptocurrency wallet as your online banking app, and your online banking information (credentials) are your private key.
The bank records and tracks all of the transactions that occur within your account.
This is the same way the blockchain monitors the fund exchanges handled by your public key. With the aid of your online banking app, you can check your account balance, then send or receive money. Likewise, a cryptocurrency wallet allows you to view your balance, then send and receive crypto.
In order to access your bank app, there are open fields that request password or some sort of user authentication. For the cryptocurrency wallet, it is similar to using your private key to access your cryptocurrency. This public key is similar to your bank account number. It is also known as your wallet address. Like with bank account numbers, people in possession of your wallet address can only send funds, and not withdraw them.
Your private key is akin to your bank app login details, which can be used to send money from your account elsewhere. If this occurs, you might not be able to recover your funds. Ensure to keep your private key away safe.
Please note that you can only send and receive cryptocurrency of the same type to a wallet address that supports it. For example, an Ethereum wallet address can only send or receive Ethereum funds.
Public key vs Private key
A public key and a private key are the credentials that grant a cryptocurrency wallet owner full ownership of a wallet and the funds it carries. Both of them serve different purposes and are to be treated as such.
A public key, also known as a public address, is a cryptographic code that can be shared with the public. It is used to carry out transactions by a wallet owner and can be used to receive funds assigned to that account.
A private key is a secret code meant to be undisclosed and used only by the owner of the wallet. Its function is to authorize the withdrawal of cryptocurrency from the wallet in question.
A public key is used to receive cryptocurrency, while a private key is used to disburse cryptocurrency.
Types of Cryptocurrency Wallets
There are two states a cryptocurrency wallet can exist in. It can either be a hot wallet or a cold wallet.
What is a hot wallet?
A hot wallet creates and stores your keys online. These include desktop or mobile app software. They operate on computers and phones, which have internet connection, also known as hot devices. Wallets set up in this manner have their private keys generated and are more vulnerable to compromise because they are connected to the internet.
The least secure way to secure large amount of cryptocurrency funds for long term purposes is on an exchange. This is because it is online, vulnerable to compromise and a huge target for hackers.
Unlike bank app transactions, hackers and crypto looters stand to gain a lot if they intercept crypto transactions. Storing crypto on exchanges is a bad practice for wallet owners. The best alternative is a cold wallet.
What is a cold wallet?
A cold wallet creates and stores your keys offline. It is also known as a hardware wallet which is specially designed to create and store your keys offline. It makes your funds less vulnerable to theft and is ideal for storing large amounts of cryptocurrency exchanges.
All hardware wallets can be classified as cold wallets, but not all cold wallets are hardware wallets, paper wallets are an exception because they do not involve any hardware.
The following are various types of cryptocurrency wallets and the states they belong to.
Software wallets encompass desktop, mobile and online wallets. They identify as hot wallets because the devices they exist on have an internet connection. Desktop wallets exist on the local hard drives of desktops. Examples are Exodus and Bitcoin Core.
Mobile wallets exist on mobile devices and do not offer top-notch secure transactional spaces. Examples are Mycelium and Edge. Online wallets are owned and hosted by third party providers. They are convenient to use, but do not have efficient security measures put in place. Examples are Coinbase and Binance.
Hardware wallets are physical storage devices that have no internet connection. They are regarded as cold wallets. They are generally more secure that hot wallets and can be accessed with a pin pr password. They are connected to a computer or digital device through USB. Examples are Trezor and Ledger.
There are important considerations to note before purchasing a hardware wallet.
- Always buy a hardware wallet from the manufacturer. Do not make purchases from other organizations, retailers or secondhand brands.
- Confirm the URL used to make the purchase and ensure it is correct.
- Ensure the web address is correct and that it has an SSL certificate.
- Paper wallets are cold wallets. They are usually identified as pieces of paper that bear the public and private keys of a cryptocurrency wallet. They are very safe when stored properly and cannot be accessed with ease. However, it is risky because there are chances of the paper being misplaced or stolen.
An individual or organization should make choices of cryptocurrency wallets based on their needs and security conditions.
Security Considerations for a Cryptocurrency Wallet
It is important to secure your wallet at all times. It is also necessary to keep your private key away from situations that may end in theft or a hacked account.
The following are security measures to take note of while using a cryptocurrency wallet.
- Make use of a wallet that is curated by trustworthy organizations with a track record of fail-proof security.
- Use long and unique PIN codes and passwords. This can be created with a mixture of uppercase and lowercase letters, numbers, and symbols. This prevents easy hacking or password theft.
- Enable two-factor authentication (2FA). This provides an extra layer of security in case someone manages to get access to your wallet or device.
- Keep your private keys offline and back up your wallet. Store the backup carefully. This will be helpful if your devices are misplaced or stolen.
- Do not open your cryptocurrency wallets while using public WiFi. This is an unhealthy practice, and can lead to loss of digital assets.
- Be wary of phishing scams. Often, hackers try to steal login credentials and private keys by luring their victims with tantalizing offers. Verify the source and authenticity of sites and emails before you open them.
Conclusion
Cryptocurrency is a unique concept, and as with all financial data, requires a tool to manage transactions. The use of cryptocurrency wallets keeps funds safe and enables transactions.
These wallets are a good tool to exchange, store, and invest in cryptocurrency. Users can choose wallets according to their preferences.
Although these wallets are managed individually, it is necessary to undertake good cybersecurity measures to avoid the loss of personal details and digital assets.
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