Cryptocurrency Wallet is a tool that stores privateand public keysand interacts with various blockchain to enable users to send and receive digital currency and monitor their balance. Crypto wallets can be divided into three groups; software, hardware and paper wallet. Depending on their working mechanisms, they may also be referred to as hot or cold wallets.
How Do Cryptocurrency Wallets Work?
Millions of people use cryptocurrency wallets, but there is a considerable misunderstanding about how they work. These wallets provide the tools required to interact with a blockchainand generate the necessary information to send and receive cryptocurrencyvia blockchain transactions, whereby, such information consists of one or more pairs of public and private keys.
Every cryptocurrency wallet has a public keyand private key. A public key is used to receive funds. It identifies your account on the network and it can be searched in the ledger. Whilst, a private key is only used to sign transactions and prove you own the related public key. The wallet also includes a public address, which is an alphanumeric identifier that is generated based on the public and private keys. Such an address is, in essence, a specific “location” on the blockchain to which coins can be sent to. This means you can share your public address with others to receive funds, but you should never share your private key under any circumstances.Hot Vs. Cold Wallets
The basic distinction between the two is that hot wallets are connected to the Internet, while cold wallets are kept offline. On the other note, cold wallets use a physical medium to store the keys offline, making them resistant to online hacking attempts. Simply saying, it is highly secured. This method is also known as cold storage and is particularly suitable for long-term investors or so-called “HODLer”.
Types of Cryptocurrency Wallets
There are various types of cryptocurrency wallets that provide different ways to store and access your digital currency. These wallets can be categorized into three groups – software, hardware and paper.
Software wallets can be a desktop, mobile or online.
Desktop: wallets are downloaded and installed on a PC or laptop. They are only accessible from the single computer in which they are downloaded. Desktop wallets offer one of the highest levels of security however if your computer is hacked or gets a virus there is the possibility that you may lose all your funds.
Online: wallets run on the cloud and are accessible from any computing device in any location. While they are more convenient to access, online wallets store your private keys online and are controlled by a third party which makes them more vulnerable to hacking attacks and theft.
Mobile: wallets run on an app on your phone and are useful because they can be used anywhere including retail stores. Mobile wallets are usually much smaller and simpler than desktop wallets because of the limited space available on mobile.
Hardware wallet differs from software wallets. Hardware wallets are physical, electronic devices that use random number generation (RNG) to generate public and private keys, which the keys are then stored in the device itself. Hardware wallets can be compatible with several web interfaces and can support different currencies; it just depends on which one you decide to use. What’s more, making a transaction is easy. Users simply plug in their device to any internet-enabled computer or device, enter a pin, send currency and confirm. Hardware wallets make it possible to easily transact while also keeping your money offline and away from danger.
Paper wallet includes printing out your public and private keys on a piece of paper which you then store and save in a secure place. The keys are printed in the form of QR codes which you can scan in the future for all your transactions. The reason why it is so safe is that it gives complete control to the user.