Artistone

What Is a Crypto Wallet?

UTC by Beatrice Mastropietro · 9 min read
What Is a Crypto Wallet?
Photo: Depositphotos

Cryptocurrencies are all the rage now and offer several benefits that traditional currencies cannot. To take advantage of these benefits, you need a crypto wallet. This guide will cover what a crypto wallet is and how it works.

If you decide to trade cryptos online, the most convenient option is using a cryptocurrency wallet (also known as a blockchain wallet). For starters, these wallets help you securely store your money without any hassle. Besides, web-based wallets are not mass-produced by hackers or malware since they don’t have access to the software’s source code. Using a crypto wallet also allows you to stay anonymous when trading your cryptocurrency with others online. The main objective of these wallets is to provide encrypted storage for your money, allowing you to trade, spend, and receive it with ease. Let us have a deeper look at what a crypto wallet is, how it works, and how to use all the benefits offered by blockchain wallets.

Crypto Wallet Definition

A cryptocurrency wallet is a software program that stores private and public keys. It interacts with various blockchains to enable users to send and receive digital currency and monitor their balance. If you want to use Bitcoin (BTC) or any other cryptocurrency, you need a digital wallet. These digital wallets act like physical wallets, which store your hard-earned cash. However, digital wallets don’t hold actual coins or notes. Instead, they store private keys that give you the right to use the currency associated with it.

How Crypto Wallets Work

A wallet in the crypto world is somewhat different from a physical wallet. It is not only online but also virtual, which means it does not exist anywhere physically. Instead, it exists within its network. If you are wondering what this concept really means, just look at your computer hard drive or Solid State Drive (SSD). All of your files are actually stored there, yet you cannot hold them in your hands. It is merely a storage unit that can be accessed via the internet if enabled to do so.

Crypto wallets work in a similar way, except they exist online and not on your computer. Instead of having to remember the addresses and passwords for each site you sign up with, they allow you to have one address that serves as an identifier. Then you can access all those different sites from one spot without needing to input new information every time.

In fact, this is just about how most things work where cryptocurrencies are concerned. They have been designed from the ground up to be more accessible, efficient, and secure than fiat currencies. They also do away with the middlemen so they can help people save both money and time.

If you want to use your coins, the wallet must be connected to the blockchain. This is done via a full node in most cases, but it can also work with selected altcoins. Whether you are using a full node or an alternative one, they both have something in common. They contain a complete copy of the coin’s transaction history and a record of all the balances that exist at any given moment for all accounts on that specific blockchain.

Types of Crypto Wallets

There are dozens of cryptocurrency wallets available today. However, not all of them work the same way. It’s important to research your options before deciding what type of wallet to use. Once you know what to look for, you should be able to find a wallet that meets your needs. Here are some specific types of wallets you can take note of.

  • Desktop wallet. This type of crypto wallet stores your currency offline on your desktop computer or laptop. As the name implies, it exists only on your desktop device and no other system. You will need to download this software yourself and install it on the computer where you want it to store private keys. Since they are free to create and easy to use, many crypto traders prefer desktop wallets over any other type.
  • Mobile wallet. This online wallet is available on both Android and iOS devices. Crypto trading platforms have their dedicated mobile app that allows you to easily exchange currencies in a peer-to-peer manner or store your cryptos securely in one place. Some of the most popular exchanges include Coinbase Inc (NYSE: COIN), Gemini, Bitfinex, Binance.
  • Hardware wallet. A hardware crypto wallet is another option for maximum security when storing large amounts of cryptocurrencies. As the name implies, this type of wallet exists offline until you connect it with your computer or smartphone via USB connection or Bluetooth. Some can hold several different currencies and automatically convert them according to the market rates. A hardware crypto wallet is ideal if you hold large amounts of cryptocurrencies since it is not connected to the internet and cannot be hacked.
  • Paper wallet. This type of crypto wallet exists only in digital form. It’s a printout of your public and private keys, allowing you to store cryptocurrency offline on paper for maximum security. Many traders prefer this wallet when dealing with large amounts of money or offering long-term storage options for their currencies.

Crypto Wallet Fees

The fees charged by crypto wallets vary depending on the type of wallet but are usually minimal. Hardware wallets might be a bit expensive to purchase initially but do work well in keeping your coins safe offline and away from hackers. The most common fee you will incur when using a crypto wallet is a mining fee for sending funds to another person. These fees are usually small amounts which help miners confirm transactions faster by prioritizing them over other pending transactions with lower fees attached to them.

For example, CoinPayments boasts over 85 different cryptocurrencies that can be used to pay for products or services offered by participating vendors. Their fees are as follows:

  • Standard Plan: 0.50% fee per transaction, a monthly subscription of $30 per month (paid in crypto coins), or an annual subscription of $240 per year (paid in crypto coins as well).
  • Gold Plan: 0.40% fee per transaction, paid annually with a one-time payment of $480 (in addition to the standard plan).  This plan offers various features such as using your domain name(s), unlimited sub-users on the account, unlimited invoices, and more.

Crypto Wallet Security

Crypto wallets are secured with private keys known only to the wallet owner. This unique combination of cryptography, mathematics, computer science, networking, programming, and distributed consensus protocol ensures that all transactions within the blockchain are secure for everyone involved.

Some investors use web-based wallets to store their investments long-term with no daily trading activity, while others use hardware-based, encrypted flash drives to store private keys offline. These wallets are typically used to safely store large amounts of cryptocurrencies for trading or long-term storage.

Crypto wallet security largely depends on the security habits of the owner. It is crucial to remember that all exchanges can be hacked, so it’s essential never to keep funds stored on an exchange for longer than necessary. Storing funds in a secure wallet ensures that your private keys are not compromised during their time in an exchange account. Keeping your private key means you’re solely responsible for its safekeeping and usage. It also means you have full control over your funds at any given time.

Several types of wallets offer different levels of security, but crypto wallet security largely depends on the user.

Private Keys

If you lose your private key, then you will lose access to your wallet’s funds forever. This is why it’s essential to maintain caution when dealing with private keys. Losing one can be devastating. To avoid this scenario, there are several options available to help protect your crypto wallets against loss or theft of your private keys:

  • Passwords and PINs. Using a password or personal identification number (PIN) can prevent unauthorized access to a wallet by someone who steals the physical device itself. Anyone accessing their wallet for spending purposes must use a password and PIN as an additional layer of protection because these safeguards provide another line of defense should the wallet itself be compromised.
  • Hardware wallets. Hardware wallets are considered the most secure method of storing private keys because they are not connected to the internet, which eliminates digital attacks. These devices can still be accessed by plugging them into a computer with internet access and navigating through the hardware’s on-screen instructions.
  • Multi-Sig wallets. Multi-signature (multi-sig) wallets require multiple private keys to process a transaction, which significantly increases security. Still, it also requires more than one unique signature. These withdrawal assets are contained within the wallet. A multi-sig wallet is particularly helpful when dealing with organizations or individuals that need to approve transactions before they’re processed. For example, two out of three signatures might be required (meaning at least two of the three parties involved in the transaction must provide their signature).

Notably, leaving funds on an exchange or with a third-party wallet provider can be risky because it is not uncommon for hackers to successfully infiltrate these types of entities and steal funds. This has happened many times in the past. Some exchanges use multi-sig wallets, which increase security. But if your crypto wallet’s private key is stolen while it’s under the control of an insecure third party, then you’re also at risk.

In terms of cryptocurrency wallet security, it’s important to remember that all exchanges can be hacked – so always withdraw your funds from exchange once you’ve purchased a product or service with them.

Pros and Cons of Crypto Wallets

Speaking of the benefits provided by crypto wallets, the most important one is that your accounts are secure. Any financial institution or business entity does not control it. Besides, you can transact anonymously. Further, crypto wallets offer open software accessibility.

However, there are some risks to take into consideration. A crypto wallet cannot be recovered once your device is lost or damaged. Besides, if you lose your private key, it can never be retrieved by anyone else. No third party can manage the wallet for you on request.

Conclusion

A crypto wallet is a software program that stores your public and private keys and interacts with various blockchains to enable users to send and receive digital currency and monitor their balance. Depending on the type of wallet you use, the information required to access your funds may vary. Generally speaking, a wallet holds at least a pair of cryptographic keys used to sign transactions – one public key that encrypts data being sent from your computer or smartphone and another private key that decrypts it. This way, if anyone were able to intercept the transfer, they would not be able to move it through the blockchain without having access to your private key or password. In most cases, passwords are used to encrypt your private keys. If you do not use a password and your wallet is stored locally (which usually is), anyone who gains access to your computer or smartphone will access your funds.

Share:

FAQ

What is a crypto wallet?

A cryptocurrency wallet is a software program that stores private and public keys. It interacts with various blockchains to enable users to send and receive digital currency and monitor their balance. If you want to use Bitcoin or any other cryptocurrency, you need a digital wallet.

How does a crypto wallet work?

Wallets need private keys to interact with the various blockchains associated with cryptocurrencies. Other senders use public keys on the blockchain network to send currency units to your wallet address, while private keys allow access to those funds so that you can spend them or send them to other addresses on the network. 

What are the types of crypto wallets?

There are two basic types of blockchain wallets: software wallets and hardware wallets. Types of software wallets include web (or crypto exchange) wallets, mobile wallets, and desktop wallets. A hardware wallet is a physical device that secures access to your cryptos offline.

What cryptocurrencies can I keep in a crypto wallet?

It’s important to note that a crypto wallet does not hold any actual cryptocurrency. Instead, it holds the public and private key information needed to carry out crypto transactions. The cryptocurrency itself is stored on a blockchain.

guides
What Is Smooth Love Potion (SLP)? May 9th, 2022

Have you ever wished that you could earn money while doing something that you love? It is possible with a blockchain-based game ca...