When you first start looking into cryptocurrencies/blockchain technology, one of the questions you’ll find yourself asking is what is a cryptocurrency wallet. This can be really confusing for beginners, but rest assured, the term ‘cryptocurrency wallet’ sounds a lot more confusing than it actually is.
Cryptocurrency wallets are one of the most important concepts to grasp if you’re looking to purchase cryptocurrencies.
They are used to send/receive and store your cryptocurrency. Each type of wallet has its own advantages and disadvantages, which are usually associated with security.
So, What is a Cryptocurrency Wallet?
A cryptocurrency wallet is what you use to interact with the blockchain as an end user. It is used to send funds, store your cryptocurrency, and view your balance etc., however, it is still possible to view your balance without a wallet, as all blockchain data is public.
That is what a cryptocurrency wallet is in the simplest of terms.
To get technical, though, wallets don’t actually store cryptocurrencies. Instead, they store your private key. A private key is what you will need to sign your transactions on the blockchain. Without it, no cryptocurrency can be moved from your address.
As a private key is what you need to move funds from your address, I’m sure you can understand why it is so important to keep it safe. If someone gets access to your private key, they can steal your cryptocurrencies!
Public and Private Keys
If you’re a beginner to cryptocurrency, the best way to imagine a public key and a private key is to think about how email addresses work.
To be able to send an email to someone else, you need to know their email address. You can think of this as a public key. However, to get access to your emails, you need to enter a password. Your password can be thought of as a private key.
As you can see, cryptocurrency addresses (which are essentially public keys) and email addresses work very similarly.
Your private key is associated with a public key. If you want someone to assign (or “send”) you some funds, you must provide them with your public key. Then, to be able to access and send those funds, you need to access your wallet using the private key associated with that public key.
This is where the cryptocurrency wallets and email addresses differ: a private key is unique and is associated with only one address/public key, whereas an email address password is not unique and multiple email addresses can have the same password.
Important: If you lose access to your private key, you will not be able to gain access to your funds ever again. There is no third party (such as a bank or email provider) to grant you access to an address you lost the private key for. So, you must keep your private key safe and accessible at ALL times.
Types of Cryptocurrency Wallets
The next part of our What is a Cryptocurrency Wallet guide sees us discuss the different types of wallets available, each of them offering different levels of security and accessibility. Today, I will be covering the four main types — Software Wallets, Web Wallets, Hardware Wallets and Paper Wallets.
This is a type of wallet that can be downloaded to your desktop, laptop or mobile phone. Software wallets encrypt and store your private key for you and are most commonly accessed using a password.
They offer reasonable levels of security, however, if your device is hacked or holds a virus, your funds could be vulnerable. So, I would recommend that you don’t store large amounts of cryptocurrency inside a software wallet.
The good thing about software wallets is that they are free to use, and you can generally store multiple cryptocurrencies in them. Not only that, but they offer convenient access and an easy-to-use interface, making them great for beginners!
Hardware wallets are a type of wallet that stores your private key offline on a physical device that connects to your PC/laptop via USB. They offer the highest level of security of all wallet types because your private key is never exposed to the internet and always remains inside the device.
In order to access the wallet’s interface, you must plug the device into your desktop/laptop, enter a PIN, and then view it using a piece of software or a web interface. Most hardware wallets allow you to store numerous private keys, which enables you to safely store many different cryptocurrencies using them.
However, this high level of security does come with a price tag. The most popular hardware wallets (and the ones we recommend the most) are the Ledger Nano S and the Trezor Wallet. Both are priced in the range of $80-100.
Paper wallets are similar to hardware wallets in the way they offer great security by storing your private key offline.
However, as it is simply just a printout of your private key and public key, it is at a much higher risk to damage and theft. (If it was stolen, the thief has direct access to your funds, whereas hardware wallets require the thief to know your PIN or password also).
A paper wallet is securely generated using a piece of software that creates both a public and private key for you. You can then print your public and private key onto a piece of paper which you must keep safe. When you wish to access your wallet, you simply open a website or a piece of software that allows you to manually input your private key and manage your funds.
As we near the end of our What is a Cryptocurrency Wallet guide, we meet web wallets.
These websites are great at serving their purpose — either allowing you to trade cryptocurrencies, or allowing you to purchase cryptocurrencies for fiat. However, holding your cryptocurrencies on their platforms carries a significant security risk.
This is because the private keys are not stored on your device, but are instead stored on their centralized servers. So, if that website was to be hacked, you risk your funds being stolen. Which, unfortunately, has happened many times over recent years. (Not on Binance or Coinbase, but on other exchange websites).
Note: This isn’t the case for all web wallets, as some do not store your private key and instead allow you to take care of it yourself. MyEtherWallet is a great example of this. We have a full review of it here.
In the world of cryptocurrency, it is important to remain safe at all times. There have been multiple incidents in which funds have been stolen, exchanges have been hacked, and users have lost their private keys.
So, always ensure you enforce the following security measures:
- Never leave your cryptocurrency holdings on an exchange or broker platform unless it is an amount you can afford to lose and wish to keep it on the exchange/platform for convenience
- Keep your devices updated with the latest software
- Keep your wallet updated with the latest software
- Back up your wallet and keep several copies of your private key offline (written down and placed somewhere safe)
- Store funds offline when possible
- Check all web-wallet SSL certificates to avoid fake phishing websites that could steal your private key
With these rules abided by, your cryptocurrencies should remain safe!
Anyway, that’s the end of our What is a Cryptocurrency Wallet guide. If you have any further questions, feel free to leave a comment! We’d be glad to help.