Cryptocurrency wallets are like the common physical wallets that we use to carry cash or credit cards. However, our physical wallets do not assist us in sending and receiving money. Neither do they help us to keep records on our spending. Cryptocurrency wallets are digital apps which are smart. One wallet can handle hundreds of cryptocurrencies, all clearly marked that you cannot mix them.
If you are planning to acquire some digital currencies, then you need to understand how the wallets work. You may also be using them already but you don’t really understand how the hell they work.
A cryptocurrency wallet is a necessity to everyone who is involved in the cryptocurrency market. One needs a secure digital wallet to access, send, receive or store a digital currency. Cryptocurrencies would not have thrived if there were no cryptocurrency wallets because it’s the only way users like you and I can access them.
How do cryptocurrency wallets work?
These wallets do not actually “store” or “hold” your coins. Rather, they store your private keys needed to handle the digital currencies you own which are stored on the blockchain ledger. A wallet has a private key which is equated with your bank account pin and a public key which is like your bank account number. The private key should only be known by you and your wallet. You should not lose it or share it with anyone, because you need it to permit any transfer. Store them safely where you can access them easily. When sending or receiving a digital currency, what is shared is the public key.
There is a wide variety of wallets to choose from. It depends on your preference and convenience given what you plan to do with your coins. All of them carry basic functions. For instance, do you have stable access to the internet? Do you prefer using your wallet on a mobile device or a desktop? Will you use your coins in day to day transactions, for shopping purposes or trading? Or you want to keep them safe hold them for a longer period as you wait for the value to hit the ceiling. Some wallets can store multiple currencies while others are limited to only one currency. Keep in mind that you can use more than one wallet to store your cryptocurrencies depending on various circumstances.
Which wallet do I choose?
It is quite a hard task to select a cryptocurrency wallet as a beginner. Many factors have to be considered, the most paramount being the safety of your money. It is much dangerous lately when scammers are issuing fake wallets to steal cryptocurrencies. You have to ensure any wallet you decide on is legit and secure. Let us discuss on the various wallets:
These connect to the network and allow you to spend your cryptocurrencies in addition to holding the keys that prove ownership. They are based on computer software. They can take the format of a desktop or a mobile. These usually come in the form of mobile applications which can be downloaded from app stores or computer programs that can be downloaded to a desktop.
They offer similar functionality but may be easier to use. In this case, credentials are stored with the online wallet provider rather than on your own hardware and can be accessed across each of your devices. They are more convenient as they can be accessed from anywhere and from any devise. They are very secure as they possess multiple security layers but it is highly advisable that you back up your information and extra care should be taken to keep them from being hacked. These wallets store your private keys for you, thus be aware that you are completely at their mercy regarding the security of your keys.
They store the credentials offline. A simple “paper wallet” could be the keys printed on a piece of paper that you hold in your pocket or more securely stored in a safe. Your coins are stored 100% safe from online hackers but it will depend where you keep your paper. It is also prone to getting misplaced or lost which means you also lose your coins if you don’t have the private keys. The processes involved are also cumbersome as it means you will have to input the string of credentials every time you transact.
A hardware wallet
This is a product that holds your private keys securely on an electronic device that can be accessed without an internet connection. However, to use a hardware wallet you will first have to use a software wallet to interact with your devise. All hardware wallets have their default software wallets. There are various hardware wallets to choose from including Trezor, Keepkey, and Ledger. The device acts as a secure location for your private keys much like a paper wallet but is a far easier method than paper for sending and receiving bitcoins. If the hardware wallet is lost or stolen it can be restored using a 12-24 word phrase called a “seed.” Due to their guaranteed security, they are a bit expensive compared to the rest. It is advisable to use them if you are going to store a considerable big amount of coins.
Cryptocurrency exchanges have their own wallets which are mostly used by beginners. Immediately you open an account at any exchange, you automatically access a wallet. Some exchanges such as coinbase, kraken and bitstamp accept fiat currencies in USD while others like bittrex and bitfinex only accept digital coins. Maybe you are wondering why you would not just keep the exchange wallet and avoid the complexities involved in acquiring another one. Most probably you would not dare to face the risk involved. This is because you have no control of the private and public keys. The exchange may be hacked or closed down anytime. Although different exchanges have different security layers, only coinbase is known to have 100% insurance.
If you want your transactions to stay anonymous, keep in mind that even with software and physical wallets, data will be sent to nodes maintaining the blockchain and the server may be able to view your IP address and connect this to the address data requested. To improve privacy, most cryptocurrency wallets will automatically create a new address each time you want to send or receive a transaction, which makes it more difficult to identify the sender/receiver.
Most wallets have adopted the two step authentication feature to increase security. To access your wallet, you have to input the authenticator code which only you can do, unless you have shared your information or it gets into the scammers hands.
Most wallets, however, allow you to be in charge of your own private keys. This means that no one in the entire world can access your “account” without your permission. It also means that no one can help you if you forget your password or otherwise lose access to your private keys. If you decide you want to own a lot of digital currencies, it would be a good idea to divide them among several different wallets. Remember; don’t put all your eggs in one basket!