A comprehensive guide to cryptocurrency wallets

Cryptocurrency wallets: You can send and receive cryptocurrencies digitally with a digital wallet on your smartphone or computer. You might be surprised to learn that cryptocurrencies do not “store” in a cryptocurrency wallet or anywhere else.

Instead, you are tied to a unique key that identifies your ownership. The interface for interacting with the key in a cryptocurrency wallet is friendly. You can use it to verify ownership or to spend your balance. These wallet forms are extremely diverse, from mobile apps to USB sticks-like devices.

Intrigued? Are you intrigued?

What is a cryptocurrency wallet?

Banks and other institutions have been the only ones that were able to provide financial inclusion for the masses for decades. This role is now being threatened by cryptocurrency. Its supporters claim that the technology is more accessible than traditional banking services. We must first understand how cryptocurrency works underneath the hood to understand how wallets fit in all of this.

A comprehensive guide to cryptocurrency wallets
A comprehensive guide to cryptocurrency wallets

Many people believe digital currencies can be used as a virtual currency to replace physical coins. They can be stored in a wallet or pocketed. This is incorrect. A cryptocurrency can be described as a network or ledger of transactions, rather than a collection of digital records.

This means that you don’t have coins, but you do have a global cryptocurrency ledger balance. The digital wallet acts like a password to your bank account, but it is merely a key to that balance. But wallets can be used for more than authentication.

The network stores information about your balance, as mentioned above. This record is updated with any new transactions (incoming and outgoing) and distributed to other members of the network. This is why cryptocurrency is often credited for pioneering decentralized ledger technology or, more commonly, blockchain technology.

Learn more: What is Blockchain technology?

Although a wallet’s primary purpose is to send and receive transactions it can also be used for quality-of-life functions such as backup functionality. This article will take a closer look into the different types of wallets.

Briefly, wallets serve the following functions:

Display your cryptocurrency balance online.

Provide an interface for sending and receiving transactions

Keep a record of transactions in the past.

What is the working principle of cryptocurrency wallets?

We now know what a crypto wallet is. Let’s dive deeper to understand how it works.

There are many types of cryptocurrency wallets. You can have a wallet as a desktop application, mobile app, web app, or dedicated hardware device.

Each wallet has its own advantages and disadvantages, but they all offer the same basic functionality.

Even the most basic wallet will show your balance right in front of you. This figure can be easily determined because cryptocurrency ledgers are publicly accessible and can be viewed by anyone who has an internet connection. Your wallet will also adjust your total balance if there is a new transaction.

However, checking your balance is only half of the functionality of a standard wallet. It is more important to send crypto to businesses and individuals. To this end, wallets offer an interface that allows users to spend their crypto balance however they like. The wallet will simply broadcast the transaction to you by entering the destination address and the amount.

First, wallets structure your transaction in a predetermined way so that the rest of the network understands it. Next, you sign the transaction using your unique key. The signed message is then broadcast to the rest the network via your internet connection.

Your transaction broadcast is instantly picked up by other network users. They can verify its authenticity using the signature in your wallet. Digital signatures cannot be falsified, unlike physical signatures. If all details are correct, the transaction is merged with many others and finally validated by the network’s consensus mechanism.

Continue reading: What is cryptocurrency mining?

Private keys: Your gateway into owning cryptocurrency

A private key is all you need to prove and keep a cryptocurrency balance. How do you obtain one?

A private key is simply a long sequence of alphanumeric characters that has its roots in public-key encryption. This is where cryptocurrency derives its “crypto” heritage. This is how a private key looks — it’s not very meaningful.


The software generates a random private-public combination for you when you create a new wallet. It’s impossible to imagine anyone else having the same private key that you do.

Continue reading: How does public-key cryptography work?

The purpose of a private key is to encrypt sensitive data before it can be shared with the rest of the world. A second key, the public key can be used to decode the message.

The private key is kept secret while the public key can easily be shared.

The private key is responsible for signing outgoing transactions or messages. The network assumes that your transaction was broadcast by the original owner, since technically no one else can access your private key.

The wallet’s receiving address is the public key. For example, a retail store that wants to accept crypto payments might post a QR code with their public address. Online stores may also do this and embed the amount in the QR code.

Newegg accepts crypto payments, for instance. The following QR code will be displayed to you during checkout. To complete the transaction, simply scan it with your cryptocurrency wallet.

Left: Newegg Checkout. Right: Bitcoin wallet following scanning QR

Let’s take a look at public and private keys from a practical standpoint. Below is a screenshot of a Bitcoin public/private key combination that was generated using a web app. You don’t need to worry about the actual balance of this wallet.

It is easy to create a cryptocurrency wallet. The wallet generation code is available on your computer so you don’t need to have an internet connection.

It is actually recommended to generate your private key offline, as it protects you from malware and malicious actors eavesdropping on it. Hardware wallets are more secure than software-based ones because they are physically isolated from all forms of network communication.

Regardless of whether or not the recipient has internet access, cryptocurrency balances will remain in place. This wallet was created in January 2009 to prove this point. It has not seen one outgoing transaction, despite owning over 68 BTC (worth approximately $3 million today).

It is possible that Satoshi Nakamoto, the creator of Bitcoin, was the owner of the address. It is possible that the wallet owner lost the private key to access the coins, making them permanently unavailable.

Different types of cryptocurrency wallets

It is obvious that cryptocurrency wallets in use today are much more sophisticated than the basic private key generator. Generally speaking, however, most wallets can be condensed into one of these categories:

Software wallets

Software-based wallets are the most popular type of personal crypto wallets. These wallets are typically available as a smartphone app or computer program. It takes almost no time to get started. It’s easy to download and install wallet software on your phone.

Software-based wallets have the disadvantage of exposing your cryptocurrency to hackers. For example, sophisticated malware can scan your computer for wallet-related files and steal your wallets. It may not be possible to detect the intrusion until it is too late.

While most wallets will allow you to encrypt your keys to reduce the risk of theft, many don’t. For example, the Electrum Bitcoin wallet allows you to enable password-based encryption at initial setup.

Hardware wallets

Hardware wallets are the best choice if you want the most secure wallets possible with few to no caveats.

Hardware wallets are electronic devices that securely store private keys and other data. It is safe from hackers and other criminals to steal your wallet. They are secure but require a purchase. Software-based alternatives are more popular because of the higher barrier to entry.

The most popular form factor for hardware wallets is the USB stick. This makes them extremely portable. Contrary to popular belief, these devices are better suited for long-term storage than daily use. A hardware wallet can’t function if it isn’t connected to an external device such as a smartphone, computer or tablet.

Hardware wallets are deliberately simple and minimal in order to eliminate potential security flaws and attack vectors.

To reduce the risk of hackers and vulnerabilities, hardware wallets do not connect directly to the internet. They are also more popular than software wallet developers because they have a better reputation.

Hardware wallets are still a lot more convenient than the software-only alternatives, thanks to modern devices like the Ledger nano X’s Bluetooth connectivity.

Online wallets

You’ve probably used Binance or Coinbase if you have ever traded or bought cryptocurrency.

These online wallets are not fully controlled by these platforms. An exchange account can only have a certain number of cryptocurrency balances. Because exchanges consolidate users’ funds in a few wallets, just like banks, this is possible. Binance holds more than $10 billion in Bitcoin in one wallet.

Exchanges have a poor track record in terms of long-term safe cryptocurrency storage. Although Coinbase and Gemini have a lower chance of losing funds, it’s still possible. You can’t expect governments or other government agencies to bail out cryptocurrency exchanges. Most exchanges, unlike banks, aren’t insured.

Online wallets are therefore the least secure because you have to trust third-party security procedures. You should consider offloading your holdings to exchanges as soon and as quickly as you are able to accept the responsibility of using software or hardware wallets.

Which wallet should you choose?

There are many options available, regardless of whether you choose a hardware- or software-based wallet. Because wallet selection is a subjective decision, there are hundreds of options available. Before you decide on a wallet product or service, here are some things to consider:

User-friendliness, UI and usability: There are many cryptocurrency wallets. They vary in complexity and feature sets. Don’t be afraid to choose a wallet without advanced features if you are new to the cryptocurrency ecosystem. Unfortunately, the most secure and powerful wallets can also be the most difficult to use for beginners.

Development philosophy: Most software wallets used open-source code that was created by the community. Anyone can modify or audit open-source code. There are many proprietary and closed-source options. Although there are many advantages to using proprietary wallets, you should remember that you are essentially putting your trust in their developers.

The perception of the community: Because of the potential loss of large sums of money, it is a smart idea to verify the reputation of any wallet you are considering downloading. You can find everything you need about the trustworthiness and reliability of any wallet by simply doing a Google search for reviews.

Asset support: The cryptocurrency wallet that you choose should be able to support the token you are about to deposit. Many wallets now support multiple assets at once. Hardware wallets offer the greatest flexibility in this regard, as they often support hundreds of tokens.

Make sure you have enough cash!

In 2009, cryptocurrency wallets weren’t intuitive or very secure. An anonymous forum user lost his access to 8,999 BTC, which is worth a staggering $350,000,000 today, due to technicalities. These coins are now permanently etched into the Bitcoin ledger, thanks to blockchain’s transparent nature. Since 2010, they haven’t changed.

It’s not so difficult to create a wallet backup.

Nearly all modern hardware and software wallets will require you to create a list of 12-24 words. These words are also known as seed phrases and offer an easy way for you to recover your wallet or private keys.

The seed phrase can be used to retrieve your wallet if you lose it.

Good practices include keeping your wallet, seed phrase and/or private key in separate places. Keep multiple copies of your private keys and seed phrase safe from prying eyes. Paper-based backups are favored by many in the Bitcoin community for their simplicity and resistance against cyber-attacks. However, paper can also be lost or destroyed so make sure to weigh the pros and cons of each option.

The most important decision you will make when starting your journey is choosing the right cryptocurrency wallet. This article should provide some insight into crypto wallets in order to assist you in making that decision. Don’t be afraid of looking around, software wallets can be downloaded for free.

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