What are Cryptocurrency Wallets?

Introduction to Crypto Wallets

A wallet is the most essential accessory that everyone carries around with them. A digital wallet is a program that stores personal information about payments and passwords of websites. In Cryptocurrency, a wallet is used as a gateway to a blockchain network. These wallets interact with a blockchain and don’t store cryptocurrencies. A wallet securely stores the public keys, private keys, and the addresses of the user. It can also store the digital signatures of all the data which has been exchanged using the stored addresses and key-pairs. A person will get complete access to the data stored in your wallets using the private key. Usually, we hear in the news about cryptocurrencies getting stolen, this means that someone got access to the private key of the user and all the cryptocurrencies were transferred from one wallet address to another and since blockchain’s ledger is irrefutable, the process can’t be undone.

How Crypto Wallets Function?

All the information one needs to use cryptocurrencies are generated by the wallets. For example, M wants to build a new Bitcoin wallet to receive a payment from Z. Using a ‘crypto wallet program’ would be the easiest way to do this. A new wallet would generate a set of keys; a public key and a private key. The program uses the public key to generate a Bitcoin address. M needs to give Z the Bitcoin address for Z to be able to transfer the Bitcoin from his wallet to M’s wallet.

Coins are only transferred from one address to another and they never actually leave the blockchain. 

While it is safe to share their public key or address, one must never share or disclose their private key with others. One can use the private key to access one’s funds and for signing new transactions. As long as one has their private key, they can use any device to access their wallet but if someone gets a hold of your private key, your funds can be stolen. The private key can also be used to recover the public key and addresses and it is a key element of a wallet. 

Types of Crypto Wallets

There are two main types of cryptocurrency wallets: Hot Wallets and Cold Wallets.

Hot Wallets

Hot wallets are wallets that are somehow connected to the internet, for example, wallets available on cryptocurrency exchanges. They are convenient for traders and frequent users as they are easy to set up and access.

Cold Wallets

Cold Wallets are a safer alternative to hot wallets. They are not connected to the internet and they physically store the public & private keys offline. They are resistant to hackers and are also known as cold storage. They are extremely convenient for long term investors.

Cryptocurrency wallets can be further divided into 3 groups; Software Wallets, Hardware Wallets, and Paper Wallets.

Software Wallets

Software wallets are those that are in some way connected to the internet. They store your cryptocurrency and are easily accessible by frequent traders. It’s a secure wallet but can be compromised in case your system is hacked. They fall under the category of hot wallets. There are three types of software wallets:

Desktop Wallets

Desktop Wallets are software that can be downloaded onto your desktops. They are easily accessible for transactions. They are safer than Web Wallets. Desktop Wallet gives you full control over your funds and keys, unlike some web wallets. A file called “wallet.dat” is stored locally on your computer when you generate a new desktop wallet. It is important to encrypt this file with a personal passcode as it contains your private key information which is used to access your cryptocurrency addresses.

Once encrypted, to read the wallet.dat file, you need to provide your passcode every time you run it. You will most likely lose your funds if you lose the file or forget your passcode. It is critical to back up this file and keep it safe. You can also access your funds on another device by exporting the private key in case your computer stops working.

Web Wallets

Web Wallets are available online and they are accessible through a browser interface without having to download any app or program for them. All exchanges offer them and you can send & receive tokens on them. Web Wallets include any browser-based wallet as well as exchange wallets. They are more susceptible to online hacks.

Mostly, you are required to set a personal password when you create a new wallet to access it. But, some providers hold and manage the private keys for you. This may seem convenient, but it’s dangerous; as if you don’t hold your private keys, you are trusting a third party with your money. To help solve this problem, a lot of web wallets now allow you to manage your keys, either entirely or through shared control. So, it is crucial to see which wallet is most suitable for you from a technical perspective before choosing one.

It is important to use security tools available when using an exchange’s wallet such as 2-factor authorization, anti-scamming code, etc

Mobile Wallets 

Mobile Wallets are app-based wallets that can be used on your phones. One has to download and install them on their phones. They offer extreme convenience as you can trade through the use of QR codes. They are the most convenient for performing everyday transactions and make them the most feasible option for spending cryptocurrencies. One of the most prominent examples of a mobile Crypto wallet is Trust Wallet.

Like web and desktop wallets, mobiles are also jeopardized by malware and malicious forces. It is essential to encrypt your mobile wallet with a passcode and to backup your private keys in case your device gets lost.

Hardware Wallets

Hardware wallets are those where you store your cryptocurrency offline on a physical electronic device. This device generates a random number that is used to generate the public and private keys and the device then stores these keys. These wallets offer a higher level of security as they store the data offline, but that makes them less accessible. To overcome this, many web wallets offer a service to connect your device directly to the trading platform and this allows hardware wallets to be connected to your browser interface.

They are the most secure way to store your cryptocurrency. As they are not compatible with all kinds of cryptocurrency, one has to find a wallet that is compatible with the currency they want to store. They fall under the category of Cold Wallets and hence are more convenient for long term investors. One of the most prominent examples of Hardware Wallet is Ledger Nano S

Paper wallets  

Paper wallets are wallets you print out. They fall under the category of cold wallets. They contain your public and private keys which are usually in the form of a QR code. One has to scan the QR code to access the wallet to execute transactions. Some paper wallets let you generate new address and keys while being offline by allowing you to download their code. Though paper wallets are the safest way to avoid a hack on your data, unfortunately, they come with their fair share of issues. In a paper wallet, you can only transfer the entirety of your funds and transactions.

Just like with any data, back up is the most important so as to not lose access to your funds and private keys. It is essential to back up regularly and research to ensure you are using a wallet of your choice that fits your criteria the best. All wallets have their upside and downside, so choose wisely.