There are three Cs which continue to remain at the top of this season – Coronavirus, Cash Economy, and Cryptocurrency.
Due to pandemic and global lockdown, people sell-off shares to increase liquidity, and the Federal Bank continues to announce a cash injection into funding markets; it is expected that the Fed Bank and other central banks will inject almost $6 trillion before the end of 2020.
All these have pushed investors to consider Bitcoin as a potential hedge to protect oneself against the current market volatility and economic crisis.
Just like gold, it’s a safe place to store wealth.
As more and more people are considering cryptocurrency investment and trading as an alternative income source, it is essential to learn and understand the role of the crypto wallet.
In this blog, you will learn everything you need to know about the crypto wallet, types of wallet, how it works, and it’s security features.
What is Cryptocurrency Wallet?
A cryptocurrency wallet is an application that helps the crypto users to store and transact digital coins and assets.
Let’s try to understand using a simple example. Think of a physical wallet that we use to carry fiat currency. This wallet will help us to keep conventional fiat currency safely in one place.
This is the core principle of how cryptocurrency wallets function. Crypto wallets functionality also remains the same; it assists the hodler in sending and receiving bitcoin and other cryptocurrencies.
Now, let’s make it a little complex.
The cryptocurrency wallet doesn’t store the actual currency or its value like your physical wallet or e-wallet, which are used to transact. Instead, crypto wallets contain a numerous set of public keys and private keys to control the funds.
Crypto wallets are like those you might run on a smartphone or computer system. You can also have a crypto wallet as a physical device that runs the application to handle your funds. Let’s discuss the different types of wallets in a separate section.
So, now you have a basic understanding of digital currency wallets, let’s see how it works.
How does Cryptocurrency Wallet work?
As above-mentioned, the crypto wallets don’t truly store cryptocurrencies; instead it stores public and private keys to interact with the blockchain network. Along with that, the wallet includes the address, the alphanumeric combination identifier. The address is a location on the blockchain to which coins can be sent.
For your understanding, consider this wallet address as your bank account number, which you can share with others to receive funds to your wallet, but you should never disclose your private keys to anyone.
Private keys are the one which let you access cryptocurrency. By sending or receiving cryptocurrency to your wallet, the coin never leaves the blockchain network; it gets transferred from one address to another.
Now, you might ask a question, if wallet addresses are like bank accounts, then what is the role of public keys and private keys.
What is Public Key and Private Key?
The Public Key and Private Key are two different but uniquely related keys. As the name suggests, the public key is an encrypted key available for everyone to access from the digital directory. On the other hand, the Private keys are secret; only the owner of the wallet uses them to access the funds.
Whatever data encrypted in the public key can also be decrypted using the specific private keys and vice versa. This public key and private key adds an extra security layer to your wallet from potential hacking. The private keys are used to conduct new transactions and access funds.
These technical details are explained for you to understand the process of encrypted transactions. Using a crypto wallet is as easy as sending an email using the internet.
Now, we have a better understanding of how crypto wallets work. The next step is to know the different types of wallets.
What are the different types of cryptocurrency wallets?
Crypto wallets can be broadly defined as hot and cold wallets, depending on the way it operates. Hot wallets are software wallets, and Cold Wallets are hardware and paper wallets.
Let’s understand each wallet type in detail.
A hot wallet is any wallet that is always connected to the internet. It is easy to set up and straightforward work to conduct transactions of any volume. It is more convenient for traders and other frequent users.
Cold wallets are quite the opposite of hot wallets. They have no connection to the internet. As keys are stored offline, it is much safer and secure. This cold storage system is most often suitable for long-term storage for Hodlers.
As mentioned above, software wallets are hot wallets. The software wallets are further categorized into web wallets, desktop wallets, and Mobile wallets. Let’s see one by one.
Web wallets can be accessed directly through a browser without downloading or installing anything. Most of the cryptocurrency exchanges provide web wallets to their registered traders. To get this kind of wallet, you just need to sign up and set a personal password. Make sure you never compromise your wallet security. Always manage your private keys by yourself.
This wallet is like desktop software that you need to download and execute from your system. It is more secure than web wallets. You can have access to full control over your keys and funds. When a person gets a new desktop wallet, the private keys are stored locally on your computer. It is necessary to create a personal password to keep the solutions safe.
By doing so, every time you try to access the wallet, you need to provide the password to gain access. The most common problem is people tend to lose either the password of the file itself. It always has a backup of your private key file.
You also need to look after the security features in your system. Make sure your system is virus-free before setting up the wallet.
Mobile wallets are the one function similar to desktop wallets, but the former is specially designed to access through your smartphone. It is quite a convenient option for transactions. You can send or receive cryptocurrencies just by scanning QR codes.
Trust Wallet is the most popular mobile wallet.
We just to make sure the mobile is secured from any malware infections and attacks. Wallet encryption with a personal password is recommended, just like your desktop wallet.
A hardware wallet is a physical wallet that uses a random number generator (RNG) to generate public keys and private keys. It is just like your pen drive or hard disk. It is not connected to the internet.
This wallet is highly-secured from online attacks, they may pose a risk if the firmware implementation is not done correctly. One should consider using a hardware wallet if you plan to pile up a large volume of cryptocurrency or store it for a long time.
The paper wallets have crypto wallet addresses, private keys in the form of QR codes. These codes need to be scanned to transact. The paper wallets have numerous flaws; it is considered to be dangerous. Transaction through paper wallet can only be conducted entirely, not partially. This led to losing all the cryptocurrency. Paper wallets are currently considered hazardous and should be discouraged.
Each wallet type has its advantages and disadvantages. The choice of wallet for a new crypto user should be based on the purpose it is going to be used. As crypto wallets are an integral part of bitcoin and other cryptocurrency transactions, it is essential for a user to thoroughly understand its functionality.