What is a wallet?
So you’ve decided to invest in cryptocurrency, but you’ve heard the horror stories of exchanges being hacked and people losing their investments. Leaving your coins in someone else’s control leaves you open for the possibility that you could potentially lose your coins. While most reputable exchanges are trustworthy, you can never be 100% certain some hacker won’t find a way to hack an exchange and steal coins. The solution to protecting your cryptocurrency investments is the ability to store your coins. This is the purpose of a cryptocurrency wallet.
In essence, a cryptocurrency wallet is a software program that makes use of public and private keys, as well as an address. The software interacts with the currency’s peer-to-peer blockchain network, enabling the user to send and receive cryptocurrency, and monitor their transactions.
How do they work?
It’s a common misunderstanding to think that the wallet actually physically stores currency. The fact is the currency doesn’t get stored in any single location, it exists as records of transactions residing within the overall blockchain for the currency.
Cryptocurrency wallets are software programs that store your public and private keys and interface with various blockchain networks so users can monitor their balance, send money and conduct other operations. When a person sends you cryptocurrency they are essentially signing off ownership of the coins to your wallet’s address. To be able to spend those coins and unlock the funds, the private key stored in your wallet must match the public address the currency is assigned to. If public and private keys match, the balance in your digital wallet will increase, and the senders will decrease accordingly. There is no actual exchange of real coins. The transaction is signified merely by a transaction record on the blockchain and a change in balance in your cryptocurrency wallet.
What types of wallets are available?
There are several types of wallets you can make use of. In general, wallets are broken down into 3 categories: Hardware, Software and Paper. Software wallets can be further classified as Desktop, Mobile or Online.
- Desktop Wallets: Desktop wallets are downloaded and installed on a desktop PC or laptop. These wallets are only accessible on the machine in which they are installed, but offer one of the highest levels of security for your coins. It’s important to note however, that if your computer is compromised by a hacker, it is possible those funds could be compromised as well.
- Online Wallets: Online wallets are stored in a cloud and are accessible from any computer, anywhere. The added convenience does come at a price though, as the private keys are stored by the online wallet vendor, and thus is controlled by a 3rd party.
- Mobile Wallets: Mobile wallets are software that you install on your mobile device, and thus can take with you anywhere. These wallets can often be used to make purchases and are usually much smaller than a Desktop wallet.
- Hardware Wallets: Hardware wallets store the owner’s private keys on a physical device such as a usb drive. The wallets make transactions online but are stored offline, providing an added layer of security. Most hardware wallets provide an easy way to perform transactions by simply plugging in, accessing a web interface and entering a pin.
- Paper Wallets: Paper wallets provide a very high level of security and are easy to use. While the term paper wallet can simply refer to a physical copy or printout of your public and private keys, it can also refer to a piece of software that is used to securely generate a pair of keys which are then printed. Using a paper wallet is relatively straightforward. Transferring Bitcoin or any other currency to your paper wallet is accomplished by the transfer of funds from your software wallet to the public address shown on your paper wallet. Alternatively, if you want to withdraw or spend currency, all you need to do is transfer funds from your paper wallet to your software wallet. This process, often referred to as ‘sweeping,’ can either be done manually by entering your private keys or by scanning the QR code on the paper wallet.
For more information on wallets, including where to download, check out our Wallet Resources Page!