One of the crucial components any trader should understand about cryptocurrency is the crypto wallet. At first glance, its definition seems quite simple; it is a wallet for digital currency. However, most people do not have a solid grasp of what it does and how it works, which could be detrimental for them in the long term. Shedding some light into the inner workings of crypto wallets may not only help build confidence in trading but also inform traders on how they can protect their coins.
For starters, here is a quick breakdown of what crypto wallets are and the other key ideas surrounding them.
What Is a Crypto Wallet?
Firstly, there are multiple types of crypto wallets available on the market, specifically three: software, hardware, and paper. However, the discussion around crypto wallets usually centers on the first type, software wallets, and their terms are often used interchangeably. For clarification purposes, in this article, crypto wallets will refer to all different types, unless stated otherwise.
Crypto wallets are, in essence, platforms that perform two core functions: to store users’ public and private keys and to give them the ability to interact with the blockchain. In this manner, users can keep track of their balance as well as send and receive digital currency, among other transactions.
In terms of function, crypto wallets come with various features depending on their type. There are wallets that allow users to transact with multiple currencies and specialized wallets that focus on one type of coin, like a Monero wallet. Some crypto wallets are also more secure and functional than others, so users must be careful about which wallet they choose.
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How Does It Work?
Contrary to expectations, crypto wallets do not function like regular wallets. The biggest misconception about crypto wallets is that they simply store coins; that is not true. What they can accomplish is give users access to the blockchain where their balance and all their previous transactions (which serve as proof of their balance) are recorded. In this regard, they are more similar to online banking apps rather than the traditional wallet.
What crypto wallets do store is the user’s public and private keys, which are comparable to a username and its corresponding password. All crypto users need a wallet address (the public key) to transact, and for the transaction to be successful, the private key (which is stored in the wallet) must match with the public key. For instance, you can buy USDT on the exchange and transfer them to your wallet. It may take from 1 to 60 minutes depending on your chain. If successful, the blockchain will record the exchange details and show the change in its subsequent balance.
Now that you have understood how crypto wallets work, you can move on to trading your crypto assets. Here are some quick Crypto trading strategies that will help you get started on the right note.
Different Types of Crypto Wallets
As mentioned earlier, there are multiple crypto wallets to choose from, each with its own advantages and disadvantages. All of them, however, can be classified into three umbrella categories, namely:
Desktop, mobile, and online wallets fall under this group. In this type, keys are stored in an app or other software on a personal computer or mobile device. While it is convenient to use, its main downside is that it is more susceptible to cyberattacks.
The keys are stored in offline hardware, such as a USB drive. Users need to insert it into a port before they can access their accounts. They are more secure than software wallets but not as convenient.
Here, the keys are written down on a tangible medium, like a piece of paper or a notebook. While it is indeed completely offline and thereby safe from cyberattacks, it is also more difficult to use and easily risks getting misplaced.
Make sure to keep these in mind when choosing which wallet to go far. Carefully weigh the perks and downsides of each type to find the best crypto wallet for everyday needs.
Why Are Crypto Wallets Important?
Think of crypto wallets like account details. People need to type in their username and password to access their emails and banking accounts. Therefore, losing these details or having them stolen places their accounts at risk. The same idea applies to crypto wallets.
Users who lose their private keys will lose access to the blockchain and by extension, their money. The money is there, but they would not be able to use it, which is a really bad situation to be in. If the crypto wallets are not secured and get hacked, the hackers could use the private keys to get to the coins, which they could steal for their personal use.
Thus, crypto users should stay on top of the security of their wallets. Some of the things they could do include:
- Limiting the number of coins they put online while storing the rest in an offline or high-security environment
- Keeping the software wallet up to date
- Storing the paper or hardware wallet in a secure location
- Taking extra security measures (e.g. two-factor authentication, complex passwords)
At this point, it becomes clear that crypto wallets are quite different from the traditional kind. They have crypto-specific functionalities which make trading and transacting safe and convenient for most users. Of course, some wallets are more effective than others, so in-depth research is critical before settling on one.
About the Author
Alex Turner has authored numerous articles on cybersecurity. His primary interests lie in new technologies and innovative ways to use them. When he is not writing another article, he spends his time watching documentaries and playing video games.