November 18, 2021 -

Everything You Need to Know about Crypto Wallets

Everything You Need to Know about Crypto Wallets

One of the most popular ways of gaining passive profit is investing in cryptocurrency. But to start investing, you need a place to store your digital coins. To do so, you need a crypto wallet. Check out the article to learn what a crypto wallet is, how does it work, and how to start using one to invest in cryptocurrency.

What is a Cryptocurrency Wallet?

A crypto wallet is a digital application that stores cryptocurrencies. We all use traditional wallets to store cash, and we use bank accounts to keep fiat money. Naturally, we need a safe place to store our digital coins. 

A cryptocurrency wallet allows you to buy and sell cryptocurrencies. For example, if you decide to invest in a certain cryptocurrency, you go to an exchange platform. You may use your credit card to buy a cryptocurrency, but you need a digital wallet to get your purchase. And if you want to exchange one cryptocurrency for another digital asset, you can do that only by using crypto wallets.

There is a way to store your coins on the exchange platform, but experts recommend against such an option. Even the safest platforms may be susceptible to hacker attacks, so it is wise to keep cryptocurrencies safe within a digital wallet.

How does the Crypto Wallet Work?

A cryptocurrency wallet is a software app, or some type of physical hardware storage, that keeps your private and public keys. When you own a cryptocurrency, your ownership is displayed within the crypto wallet’s address. If you want to sell this coin, you will sign off the ownership of this digital asset to another crypto wallet’s address. To sell your coin, you need your private key. The transaction is stored within the blockchain.

So, there is no actual transfer of coins since cryptocurrency has no physical form. Let’s say you want to buy Bitcoin, to do so, you open a crypto wallet compatible with Bitcoin

Upon opening a wallet, you get public and private keys that are connected. A private key is like your password, it allows you to approve transactions, in this case, buying BTC. You should never reveal your private key to anyone. 

A public key is like your username. If you want to buy Bitcoin, you need to use a private key that matches the public key. That’s how you get ownership of Bitcoin. The transaction is stored within a blockchain and proves your ownership. Therefore there is no actual exchange, but your public key will display an increase in balance.

As you know, changing a block within a blockchain isn’t possible. Meaning, the information about your transaction can’t be altered, so it’s impossible to steal your coins since no one can change the balance of your crypto wallet as long as they don’t have the private key. 

That’s why so many experts recommend using crypto wallets to store cryptocurrencies. But it’s extremely important to protect your private key. If you give this information to someone, they will be able to make transactions.

Sometimes private keys can be stolen, some users even manage to forget their private keys. In the first case, the user who stole the key will be able to send all your coins to another wallet. In the second, the user won’t be able to use their funds.

Owners of cryptocurrencies can use several types of crypto wallets. They offer different ways to store digital assets depending on the type of devices owners use. Usually, every exchange requires small fees. More about types of wallets are below.

Types of Cryptocurrency Wallets

Most cryptocurrency wallets are categorized into three big categories:

  • software;
  • hardware;
  • paper.

A software wallet is simply a software application or even a browser extension which facilitates the processes of storing, buying, and selling cryptocurrencies. Crypto owners usually refer to software wallets as “hot” wallets because digital money is kept online.

A hardware wallet is also used to facilitate storing, selling, and buying cryptocurrencies. The main distinction is that it stores public and private keys within a physical device which can be plugged into a computer and used to approve transactions. Hardware storages are commonly referred to as “cold” wallets because they are offline. 

A paper wallet is rarely used nowadays. It’s a printed out copy of public and private keys with a QR code. When someone creates a paper wallet, the online version is deleted, so for a while, people thought of paper wallets as safer types of cryptocurrency wallets.

Software wallets

Software storage is a computer or mobile application you need to download and install. You can use software storage only for storing one type of currency. 

These are 3 types of software wallets:

  1. Desktop storage. Used on a PC or desktop computer.
  2. Mobile storage. Allows users to control their funds by scanning QR codes from their mobile devices.
  3. Web storage. It’s a browser extension used to control crypto funds.

Hot wallets are less secure according to experts since they are connected to the Internet. It is easier to get access to your private key through the Internet. 

Hardware wallets

Hardware storage is a digital device which keeps your financial information offline. To use the wallet, you need to plug it into your computer by using the USB port. Since the wallet is always offline, it is more protected when compared to software storage.

The downside is that it may be a bit harder to use cold storage. You also need to pay for hardware storage, the cost is around $100. The hardware storage also interacts with a PC or computer through an application, a program, or a web-based interface to make it easier for crypto owners to use their wallets. 

How to Use Crypto Wallets Safely?

Choosing a safe wallet is one of the most important steps when investing in cryptocurrency. Hackers understand that a lot of people today are vulnerable since many aren’t familiar with the new financial ecosystem. The danger here is that each user operates as a bank, they don’t have a third party to take care of all the transactions and security measures.

This is a reason why so many hackers take advantage of people. They keep creating new ways of stealing money. Some of them were even able to change the address to which coins should have been bound. But there are ways to keep your funds safe: you need to choose a safe wallet.

One can assume that using hot wallets is a bad idea since anyone can hack into your account. But you can stay safe even while using software storage. The desire to use software storages is understandable since they are more easy to use, even though cold wallets are safer. 

Here is what you need to do to safely use hot wallets:

  • Store only small numbers of coins in hot wallets. Better keep big volumes of coins on hardware storage.
  • Never boast about you having cryptocurrency on any social media, especially when you use little to no security for your device.
  • Always use a personal hot wallet, not an exchange hot wallet. Exchanges do not refund your losses, they offer no insurance in case someone hacks into your hot wallet exchange account. 

The best idea is to use hot wallets only to buy something. Overall, it is best to store funds in a hardware wallet. A cold wallet enables you to check your funds without connecting to the Internet. 

Yes, you need to plug it into a computer, but you use a software program created by the company that has provided the hardware. It doesn’t require an Internet connection.

Here are some of the most respected and reliable companies providing hardware storage:

  • Ledger.
  • Trezor.
  • KeepKey.
  • Prokey.

And if you want to get started by using software wallets, here are some of the safest options:

  • Gemini.
  • Exodus.
  • Coinbase.

Remember, use your software storage to complete various transactions, like buying or exchanging cryptocurrency, or buying some services. But store your savings in hardware storage. Another great advantage of a hardware wallet is that it is always compatible with several coins, so you can safely store different coins.

How to Start Using Cryptocurrency Wallets: Guide

Depending on the type of wallet you choose to use, there are different instructions. Let’s start with how to start using a software wallet:

  • Choose a safe platform that you trust, download the app from an official webpage. Make sure the connection is secured, the website should start as HTTPS, not HTTP.
  • Open the app and create a new account. 
  • The app will generate a private key, make sure to write it down somewhere. It’s always a random password that consists of 12 symbols. Remember, if you forget or lose your key, you will lose access to your account and all the funds.
  • Transfer your cryptocurrency to your wallet from an exchange. To buy cryptocurrency, you need to use exchange and follow their directions. When the exchange asks for the address of your wallet, you insert it where it’s needed.

Even though hardware storage might be inconvenient to use and cost more, they are safer. So, here is what you need to do to start using a cold wallet:

  • Buy the cold wallet.
  • Go to the official page of the company that you have chosen, download the software for your cold wallet.
  • Upon completing the installation of the software, open the program and follow the instructions to set up your wallet. 
  • Transfer crypto to your wallet. You can use exchange platforms to buy cryptocurrencies. 

Remember, neither hot nor cold wallets allow users to buy cryptocurrency by using fiat money. If you want to buy any type of cryptocurrency, you need to use an exchange platform first. Most exchanges allow you to use your credit cards or e-wallets to buy digital assets. 

When you buy the needed cryptocurrency, transfer it from your exchange account to a hot or cold personal wallet by following simple instructions on the exchange.