Crypto wallets help you store and keep your cryptocurrency safe, just like the wallet in your purse or back pocket stores and keeps your cash safe. Here’s how they work
What is a crypto wallet?
A crypto wallet allows users to transfer and store cryptocurrencies, including Bitcoin.
Every wallet has a private key. Crypto users who hold their own private keys and make transactions using their wallets have for all intents and purposes become their own bank..
Public vs private key
A crypto wallet consists of both private and public keys. The private key is kept secret by the wallet owner (and holder of the cryptocurreny). A public key is gleaned from the private key and is the address used to send crypto to the wallet.
Transfer crypto between wallets
When sending crypto funds, you need the address of the receiving wallet (much like you need the account number of a bank account when sending a wire transfer). A fee is also paid to miners in exchange for processing the transaction.
There are three main types of crypto wallets, paper, hardware and software wallets.
A paper wallet has private and public keys that are printed on paper as a scannable barcode, created by an app. When the keys are printed, they are taken offline and removed from the cryptocurrency network. The cryptocurrency tokens remain online but they are inaccessible without the users' keys.
There is no way for hackers to access the paper wallet or retrieve the keys unless they physically take the paper that the keys are printed on. On the other hand, if the user loses their paper wallet, they will not be able to gain access to those cryptocurrencies again.
In order to access the codes, the wallet app on a device scans the paper wallet, thereby transferring the coins to the software wallet.
Paper wallets were considered one of the safest ways to store cryptocurrency, however, due to environmental factors, degrading, and them being misplaced, or damaged has caused a drop in demand within the crypto community.
Paper wallets can be useful if printed out clearly, stored securely, and kept safe from damage.
Hardware wallets are an offline cryptocurrency wallet that stores the user's private keys in a secure hardware device.
The private key opens the lock to the users address on the blockchain where their assets actually are. Since the blockchain is everywhere, all that is needed is the hardware wallet to interact with your tokens.
Private keys stored on the hardware wallet are protected by a PIN and an optional passphrase, making it near enough impossible for a potential thief to take your keys. As these are device-based, and use an offline storage mechanism such as a USB drive to store private keys, it is difficult for hackers to access the key from an online location.
This type of wallet enables users to send and receive cryptocurrency from blockchains or run third-party apps on the device. For example, running universal two-factor authentication on popular sites, such as Google and Dropbox, as well as allowing users to log in to many apps without having to create a new account.
Certain platforms allow users to trade directly from their hardware wallet, which means they maintain control of their tokens at all times. Also, not being deposited to an exchange wallet saves time by skipping deposit delays and fees from withdrawal limits.
These wallets use a 24-word backup recovery phrase in case the device containing the private key is stolen, allowing you to move your keys to a different hardware wallet. All Ledger wallets support various coins and tokens.
A software wallet is a computer program or mobile app that holds private keys online. Potential Users must supply an email address and password that is used to manage the account, upon providing the respective information it will send an automated email requesting that the account be verified.
Once the wallet is created, the user is provided with a Wallet ID. Wallet holders can access their e-wallet by logging into the Blockchain website, or by downloading and obtaining a mobile app.
Note: software crypto wallets are connected to the internet so offer the easiest access and storage but it also makes them less secure.
The three main types of software wallets are
- Web-based wallets - these work as a browser extension and can send ETH transactions, making it easy for users to interact with things like decentralized applications and decentralized finance protocols
- Desktop wallets, which can be used on a desktop or laptop computer.
- Mobile wallets, allow users to store crypto, send/receive transactions, and move the private keys from an existing wallet into the app through scanning a QR code on their smartphones.
Pros and cons of crypto wallets
The advantage of using personal crypto wallets include the fact that the crypto belongs to and is controlled by the user.
Users can send transactions to whoever they like, whenever they like. No one controls the network, making it hard for anyone to stop transactions.
One downside is that users have to assume 100% liability for anything that goes wrong since there is no third party involved. It also requires basic computer knowledge, in addition to getting familiar with a new kind of financial ecosystem.
Should I use a crypto wallet & which one?
Software wallets are built for flexibility, unlike hardware wallets which are built for security. For those holding large amounts of money in the form of cryptocurrency, most experts agree that using a hardware wallet is essential.
In the same way, you can store cash in many ways- in the bank, under your mattress etc there are also many ways to store crypto. However, unlike some of the ways to store cash, for the timebeing at least, crypto isn’t protected by any regulatory body. So it pays to be extra cautious and use the best tools available to keep your crypto safe.
Whether it is a paper, hardware or a software wallet, the choice is yours. You can make a choice based on security, convenience and/or diversification.