What do you mean by a cryptocurrency wallet?
It is a software programme wherein the users store their private key and public key and interact with other blockchains to help users to send and receive cryptocurrency and displays their balance. If you wish to use any cryptocurrency like Bitcoin or Ethernet, you need to have a wallet.
How does a cryptocurrency wallet work?
There’s a misunderstanding about the way the crypto wallet works, even though there are millions of people using it. When we speak about wallets, the first thing that comes to our mind is the traditional wallet or pocket wallet where we store tangible currency. A crypto wallet is not a traditional wallet as it does not store tangible currency.
Actually, the cryptocurrencies are not stored anywhere or exist anywhere in a physical form. What exists are the records of the transaction on the blockchain.
As we know a crypto wallet stores the public and the private keys and interacts with other blockchains helps to check on balance and helps to conduct other operations.
Technically, when a user sends you any type of cryptocurrency, they are actually signing off the ownership of the coins to your wallet address.
To enjoy these coins and unlock the funds, the private key stored in your crypto wallet should match public address to which the currency is alloted to. The balance in your digital wallet will increase and decrease in the sender’s wallet, only after the private key and the public key match.
There is actually no exchange of real coins. The transaction of sending and receiving the coins is monitored by a transaction record on the blockchain and a change in balance in your cryptocurrency wallet.
The Different Types of Cryptocurrency Wallets
There can be many types of cryptocurrency wallets which are used to store and access your digital currency. Wallets are broken down into three main categories namely, software, hardware, and paper. The software has more sub-categories namely, desktop, mobile and online.
Let us know what all these wallets mean and what characteristics they possess.
1. Desktop Wallet
These wallets are downloaded and installed on the PC or laptop. Only one computer or laptop where the wallet is downloaded and installed can access it. Desktop wallets provide you with the best security, however, if the computer or laptop is hacked, there is a possibility of you losing your funds.
2. Online Wallet
Online wallets can be accessed from any location as they run on the cloud. These wallets are very convenient to access. To keep in mind is that, these type of wallets store your private key online and is also handles by the third party. Therefore, there are a lot of chances of these wallets being hacked and are prone to theft.
3. Mobile Wallet
Here the wallets run in the form an app on the phone. It is very helpful as you can access it from any location. They can even be used in the retail shops. They are simpler then desktop wallets as on the phone there is restricted space available.
4. Hardware Wallet
These wallets are different than software wallets. In here you store the private key on the hardware devices like USB. Hardware wallets are more secure as they conduct transactions online and are stored offline. They are compatible with many web interfaces and also support different cryptocurrencies. 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.
5. Paper Wallet
This type of wallets is easy to use and provide a high level of security. The term paper wallet can mean the printout or physical copy of the private and public key, it can also mean a piece of software used to generate the public and private keys which are then printed. Transferring any cryptocurrency to your paper wallet is accomplished by the transfer of funds from your software wallet to the public address shown on your paper wallet. On the other hand, if you want to withdraw or spend the coins, you have to just transfer the paper wallet to software wallet. This process is called ‘sweeping’ which can either be done manually by entering your private key or just by scanning the QR code on the paper wallet.
How to secure your cryptocurrency wallet?
The security of the wallet depends on what type it is. The intensity of security varies from one type of wallet to another. Mostly the online wallets are prone to be hacked or their funds being stolen just because they are connected to the web. There is very low possibility of the offline wallets being hacked or the funds being robbed as they are not connected to the web.
Some of the precautions that you can take to secure your wallet are:
A. Backup your wallet
The first step would be to store only a limited amount of cryptos needed for the daily use online. This can be in any from any device like computer or mobile, wherein the other large amount of cryptos will be highly secure on the offline wallet. Offline storage will protect you from the failure of the computer wherein your cryptos are prone to be lost or stolen. However, the eager hackers can’t be avoided. In online wallets, there is always a risk of being hacked and funds being stolen.
B. Update software
The second step is to keep your computer or laptop software updated. This helps you in security enhancement. You should update your wallet software and as well as your computer or laptop.
C. Add extra security layers
The third step is adding an extra security layer to your wallet. More the layers of security, better it is. Setting difficult passwords and making sure that any withdrawal of funds require a password is just the beginning. Use the wallets that have the best reputation and which provide two-factor authentication. And which require additional pin code everytime the application is opened.