What is a Crypto Wallet and How Does it Work?

A crypto wallet is a digital wallet that stores your cryptocurrencies. As you know, cryptos are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Crypto wallets can be software programs, mobile apps, or hardware devices.

A crypto wallet stores your public and private keys. Technically, the private key is your password. The usage of these public and private keys allows a user to send, receive and also monitor their crypto assets.

A Little Bit About Private and Public Keys

Whenever you have a wallet, you actually have two keys. There is a public key that you can share with your friends so that they can pay you, but there’s also a private key. You do not want anyone else to have your private key.

You can think of it this way. When sending money to someone via Paypal, you ask them for their Paypal email account. Then, you send money to this Paypal email account. In crypto, to be able to send money to someone, you ask them for their public key. Anyone with your public address can send you money.

Your private key is like the password of your Paypal email account. You shouldn’t share it with anyone. If someone was able to find out about your private key then they will have complete and total access to your cryptocurrencies. You can say bye bye to your crypto if hackers were able to gain knowledge of your private key.

You should also be aware that different cryptos have different public/private key (or address) structures. A Bitcoin address will look differently than an Ethereum address, which will look differently from a Polkadot address.

In essence, a wallet is simply a combo of a public key and a private key.

What are the three different types of wallet?

1) Software Wallet

These wallets are usually online based. Exchanges like Coinbase or Binance are great examples of a software or online based wallet. The public and private keys are stored on their servers and they let you access them through your account.

Now it is important to know that they could technically spend your crypto, because your private key (or your password) is on their servers.

2) Hardware Wallet

If you don’t trust your information with a company or being online in itself, you can actually opt into using a hardware wallet. These wallets are basically USB sticks that store your public and private keys for you. You can unplug them and then basically, no one has access to them, but these wallets usually have a very secure process of getting into them.

For example, the Ledger Live uses a 24 key phrase to enter into its system, and there is no recovery process. If you forget them, your crypto is gone forever. This is sort of a double-edged sword. Though this ensures nobody can go and hack into your crypto unless they were able to get access to your Ledger device and know your password to use.

One thing to add is that these physical devices can get a little bit pricey.

3) Paper Wallet

The last wallet you can use for your crypto assets would be a paper wallet. This wallet would consist of your private and public keys and maybe QR codes that are used to facilitate cryptocurrency transactions. Basically, your public and private keys are literally written down on paper.

You can think of this like using cash to debit cards, though one of the largest problems with this method is the ability to lose or destroy the piece of paper on purpose or by accident. This is the most secure way to store your crypto, but it’s also the least practical, which means you should really only use this if you have a large sum of money that you want to protect, but isn’t accessed very often.

crypto wallet

Hot or Cold Wallet?

Another thing you need to know about crypto wallets is that they are classified in two categories: Hot and Cold.

Hot Wallet

A hot wallet is one that is connected to the internet, whether it’s through another company or your own computer, and it can be accessed online or through an application.

If you’re using a hot wallet, it will always be vulnerable to online attacks. Hackers are always trying to find the best new way to access a system. Once your private key is breached, you can practically kiss your crypto goodbye.

Cold Wallet

A cold wallet, on the other hand, is one that has to be connected to a computer like the USB method or having it written down on paper. We also call these as offline wallets.

If you’re using a cold wallet, the biggest vulnerability is either losing it or forgetting the pass phrases.

So, which one is better?

It all depends on your use case. If you’re mining cryptocurrency and need to send it somewhere right away. You could use a software wallet such as Coinbase. However, if you’re investing hundreds of thousands of dollars, you should consider a hardware wallet like Ledger. When you want to ensure that no hackers can have access to your private keys, simply unplug the USB when not in use.

Bottom line

A crypto wallet is a digital way to store your cryptocurrencies. By using a combination of public and private keys, you can keep your coins safe and secure. While there are many different types of wallets, they all work in essentially the same way. Be sure to do your research before choosing a wallet and always keep your private keys safe.

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