Tokoin’s Educational Article
Crypto Wallet 101: The Wallet Like No Other
As an asset, cryptocurrency needs a secure place to store. The wallet that is unlike any other wallet, there are several types of crypto wallets, which we are going to discuss here.
The Emergence of Cryptocurrencies
If you’ve been following global news’ headlines in the past two-three years, chances are you know what cryptocurrency is. The nascent technology behind the very first cryptocurrency, Bitcoin, has triggered a wave of innovation across the globe back in 2009. Tracing back to that time, a person known as Satoshi Nakamoto introduced Bitcoin and blockchain to the world, at the same time opening up thousands of new opportunities for development and growth.
Ever since, the world of technology advancement has changed a lot where there were tons of emerging ambitious tech projects entering the cryptocurrency space. Each of these projects is aiming to solve a particular problem of the modern world with, utilizing blockchain technology. Aside from the push for innovation that has been brought to us by cryptocurrencies, this unique technology also affected the world from a financial point of view.
To be specific, cryptocurrencies are the new means of exchange, and they can be traded just as the other financial assets on exchanges. Therefore, there are a lot of cryptocurrency investors that are looking to multiply their cryptocurrency possessions. One of the ways to do that is to buy a cryptocurrency when its price is low and then sell when it is high. The possibility of trading cryptocurrencies and potentially growing one’s wealth has appeared as the key driver of Bitcoin’s price back in 2017.
In December 2017, Bitcoin’s price reached 20K on some of the exchanges, as many people were investing in Bitcoin in the fear of missing out. Such popularity and high volatility of the crypto assets have attracted a lot of attention, not only from the general public but also from scammers. In 2018, crypto fraudsters broke the record — on average, they stole $2.7 million from exchanges daily. While many of these exchanges were able to compensate for most of their users’ losses, keeping large amounts of cryptocurrency on exchanges was never a great idea.
Some of the cryptocurrency wallets, on the other hand, appeared to be a better option when it comes to storing cryptocurrencies. Not all of the crypto wallets are secure and some online and desktop wallets are still vulnerable to attacks. Yet, experience shows that keeping your crypto possessions on the crypto wallet is a better idea than leaving the security of your cryptos in the hands of the exchange.
So the questions go to why do we need crypto wallets? And how do they actually work?
What is a Cryptocurrency Wallet?
Before going to the types of crypto wallets and their functions, it is important to understand what crypto wallet is.
A cryptocurrency wallet is a software program, a device or a physical medium that is designed to store public and private keys. It is used to track ownership, spend and receive digital currencies. In addition, users can monitor their cryptocurrency balance.
The reference line of a cryptocurrency wallet can be drawn to a real-life wallet where we store our credit cards, coins, and cash. Yet, while the function is pretty much the same, there are a lot of differences when it comes to how a digital wallet works.
How Does a Cryptocurrency Wallet Work?
In the case with a cryptocurrency wallet, cryptocurrency assets are not actually stored in the wallet, as they do not exist in a physical form. A digital wallet utilizes the power of blockchain to control the funds with the help of public-key typography. According to GlobalSign:
“Public-key cryptography, or asymmetric cryptography, is an encryption scheme that uses two mathematically related, but not identical, keys — a public key and a private key.”
The private and public keys are two unique related cryptographic keys, which are usually long random numbers. A public key is available to the public and can be accessed via any public directory or repository. A private key, on the other hand, is only available to the owner of the wallet.
The two keys are mathematically related. Thus, whatever is encrypted with a public key can only be decrypted using its related private key and the other way around.
To better understand how cryptocurrency wallets work, let’s look into the definition of a cryptocurrency wallet address. An address is an identifier that consists of 26–35 alphanumeric characters. Wallet address will also be unique for each person. The address can be generated by any user of a crypto wallet and can be used to receive cryptocurrencies. So, the wallet address here is similar to the bank account number we have for the fiat money transactions.
The Types of Cryptocurrency Wallets
There are few types of cryptocurrency wallets and all of them aim to provide different ways of storing and managing cryptocurrency assets. Crypto wallets can usually be broken down into three types: software, hardware, and paper digital currency wallets. However, we can further differentiate between desktop, online and mobile software cryptocurrency wallets.
Software Wallets
Software cryptocurrency wallets are web-based digital wallets that can also be referred to as “hot wallets.” They are “hot” because they are linked to the internet, thus, are potentially vulnerable to hack attacks. Yet, these wallets are known to be pretty secure for users that trade in low volumes.
Desktop wallets
This type of crypto wallet requires a user to download and install it on a computer. Desktop wallets can only be accessed from a single PC or laptop, the one they were downloaded into. These wallets are known for a moderate level of security and are not recommended for the storage of large amounts of cryptocurrencies.
Online wallets
Online wallets are hosted on the cloud and can be accessed from any laptop or device from any location. These wallets come with increased convenience, yet, the level of security of the funds is negatively affected. In addition, online wallets usually store private keys online as well and are controlled by a third party. This adds to the vulnerability of the assets stored on such a wallet.
Mobile wallets
These wallets run on an application on your phone. They are quite convenient to use and can be accessed with your phone from any location. These wallets can be perceived as a smaller and more “mobile” version of a desktop digital wallets. They are also simpler to use and have an intuitive design for better user experience.
Hardware Wallets
Hardware wallets are different from software crypto wallets in that they store a user’s private keys on a hardware device, such as a USB drive. Hardware wallets are designed to store cryptocurrencies offline even though users can still make transactions online. They are also referred to as “cold wallets”, because they store the private keys offline, which makes them resistant to hack attacks.
This type of wallet is usually on the pricier side due to the number of features and the elevated level of security they provide. They can be compatible with a number of web interfaces and support different cryptocurrencies. These wallets are normally used to store larger amounts of crypto because of their high-security features.
Paper Wallets
Paper wallets are simple in use and are known for a high level of security. These are offline wallets that are essentially a printed piece of paper that contains private and public keys and QR codes for the cryptocurrency transactions.
How to Protect Your Crypto Asset?
Regardless of which type of cryptocurrency wallet you prefer, there are a number of unspoken rules in the crypto space that everyone needs to follow to be able to protect their assets.
Don’t share your private keys
First and foremost, it is important not to share your private key with anybody. It is a combination of letters and numbers that should only be known to you. Think of it as it was a PIN code for your credit or debit card, you would not want anybody to know that information.
Strategize
Unless you are planning to HODL, a.k.a. to store your cryptocurrency and not send it anywhere for a long time waiting for it to appreciate in value, make sure not to keep more cryptocurrency that you need at one time in a single crypto wallet.
Layers Of Protection
Do not underestimate the google authenticator and multi-signature protection for your crypto wallet. These might seem like unnecessary measures, but experience shows that all of these can save thousands of dollars’ worth of cryptocurrencies.
Back It Up
Always backup your wallet and private keys. As a bare minimum, it is advised to have at least one backup on a CD or a USB drive to make sure to have a “hard copy” of your wallet and keys at any time. Remember, if you lose your wallet and your keys, you also lose access to all the cryptocurrency assets on that wallet.
Get Smart With Password
When it comes to the password protection of your crypto wallet, take it seriously. Come up with an extremely hard and unique password that includes numbers and letters (both uppercase and lowercase). Do not share your password with anyone.
Wrap It Up!
To have an asset is important. With the current development of technologies under Industrialization 4.0 that has been happening, there are many ways and options where we can allocate our budget to have an asset. The old-school options include buying gold, or stocks. Now, there is also a cryptocurrency that offers a more dynamic experience. Moreover, just like any other asset and with the fact that cryptocurrency is stored digitally, it is also important to store it safely.
The existence of crypto wallet as explained above, is indeed important to help this function. In the end, all of the wallet types can help us to trade our assets safely.
Knowing the importance of wallets, Tokoin will not let it pass just like that. Do you wonder what we have coming up that are related wallets? We have something special, so stay tuned!
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