Cryptocurrency wallets, simple explanation! (Bionic Reading)

Contrary to popular belief, cryptocurrency wallet services like Metamask, Trustwallet, do not store cryptocurrencies, instead, they are a tool (programs, software, or systems), a sort of gateway to connect users to blockchains.

These services will generate and store your wallet’s public and private keys/seed phrases and the blockchain address.

A public key is a string of random letters and numbers that you share when you expect a transaction to be made into this wallet.

A private key is basically a password to your wallet (AKA crypto bank vault), which must never be shared with anybody or made digital under any circumstances. Do not screenshot, do not store it in the notes app on your phone, do not email them, just don’t. Write them on a piece of paper or document that you can store somewhere safe.

On one hand, a public key allows you to receive transactions. On the other hand, a private key allows you to access funds, make transactions (send cryptocurrency or interact with contracts), and recover your public key and address. It makes a private key the most crucial element of a crypto wallet.

Private keys are backed up with a seed phrase, composed of between 12 to 24 random words.

Now that we have covered the basics, let’s talk about the 3 different types of digital wallets:

• Software: online-based wallets like desktop, mobile, and online wallets. Software must be downloaded for desktop and mobile wallets, whereas online wallets are accessible through a browser. Public and private keys are stored inside the users’ data store on their devices, which are accessible through the users’ account/device.

The downside is the security of your software wallet is only as good as the website you chose to get your wallet from or the security of your own computer (from malware, phishing, etc.). While these wallets make it easy to communicate with the blockchain, they will also be accessible via the web. It always leaves the chance of anyone, anywhere in the world, having a chance to access your wallet.

• Hardware: physical electronic devices which look like USB sticks storing public and private keys with no internet connection. They still have a very secure process through a seed phrase composed of 12- 24 words and a digit password. Indeed, the devices give you several layers of security that a software wallet does not typically provide. In order to use a hardware wallet, a user must connect the device (ie. Ledger) to a computer/smartphone (via cable/Bluetooth). Once connected, the user must type in the 6–8 digit password directly on the hardware wallet. Once the password is entered, they can connect to websites/interact with contracts freely. However, for each transaction, the user must confirm via the hardware wallet. The only way for a bad actor to access your funds would be to get your seed phrase which you wrote down on setup (STORE IT SAFELY!)

If I lose my hardware wallet, would I lose my cryptocurrency? The seed phrase will allow you to recover your wallet and send your crypto to another wallet with a different seed phrase to ensure the safety of your funds. Fortunately, all hardware wallets also have a security feature that will completely lock the device if the password is entered wrong 3 times.
The downside is that a hardware wallet is usually pricey (starting at $100).

• Paper/Cold Storage: This is when you have your private keys and the blockchain address (usually as QR codes) written/printed on a piece of paper. Hopefully, stored in a safe place that no one will ever find (except you or someone you deeply trust).

The downside is losing or destroying the piece of paper by accident, and it’s unpractical for users who regularly interact with the blockchain. A compromise would be to store long-term assets in cold storage and have a separate wallet for active transactions.

All those wallets are classified into 2 categories: hot and cold wallets.

Hot wallets are connected to the internet, accessible through an app or on computers and smartphones. Highly practical and simple to use, they make transactions easy and fast. As for wallet types, they are the most vulnerable to cyber-attacks.

Cold wallets are offline-based wallets, like hardware(Ledger) or paper wallets. Because they’re not connected to the internet, it’s harder for hackers to access, but because of their physicality, there’s a higher risk of losing or breaking the physical support.

The question now is, which one to use? Well, it depends on several factors.

1. Security — Do your research and use a trustworthy provider. Always get a hardware wallet directly from the provider and never accept an already set seed phrase (it must be provided when setting the device).

2. Type of cryptocurrency — Make sure that the wallet you choose supports the type of cryptocurrency you want to use.

3. Budget and Fees — Software wallets are often free, but providers do take a fee for each transaction (like MetaMask in some cases) and hardware wallets can cost around $100 and more.

4. Practicality — Software wallets are beginner friendly, easy to access from your phone or your computer, and easily interact with the blockchain. Hardware wallets take a bit of time to set up, but most of the time, are highly secure.

In conclusion, choose a wallet that suits your investing style and the security you need. Be safe out there. Cryptocurrency can be a dangerous place if you let it.