A closer look at everything you need to know about cryptocurrency wallets
Over the decade, the boom of the cryptocurrency market has also necessitated an equally important tool in the crypto space. This tool is none other than cryptocurrency wallets. Crypto wallets are just as important as the digital assets that they contain.
As of February 2021, the total number of crypto wallet users worldwide is estimated to be 68.4 million. The number is even expected to rapidly increase as more people have access to mobile devices. As wallet users increase, so has the number of crypto wallet apps, with some platforms being in the top crypto wallet categories.
In this article, we look at what exactly crypto wallets are and the vital role that they play in the entire cryptocurrency ecosystem.
A crypto wallet is an online facility/ application that allows users to safely secure their crypto assets and conduct transactions on the blockchain. These digital assets can be any cryptocurrency like ether, bitcoin, Polkadot etc. or any digital utility token.
A crypto wallet easily allows you as a user to access your stored asset by keeping your passwords, otherwise known as private keys. A digital wallet makes it possible for you to transfer your cryptocurrencies and change them into fiat currencies. Like a physical wallet for storing money and other documents, a cryptocurrency wallet is an essential tool to interact with a blockchain network.
There are several types of crypto wallets classified into three main classes: software, hardware, and paper wallets. Based on their working mechanisms, they can also be referred to as hot or cold wallets.
Most crypto wallet providers offer software wallets since they are convenient and easily accessible compared to hardware wallets. But, hardware wallets seem to be the most secure alternative. On the other hand, paper wallets comprise a “wallet” printed out on a piece of paper.
Contrary to popular belief, cryptocurrency wallets do not indeed store digital assets. Instead, they offer the necessary features to interact with a blockchain network. In other words, these wallets generate the information needed to send and receive cryptocurrency through blockchain transactions.
The wallet provides a digital signature that authorizes every transaction that takes place from a particular address. Among other things, such information comprises one or more public and private keys.
The wallet also has an address, which is an alphanumeric identifier generated based on the public and private keys. An address serves as a specific “location” on a blockchain where coins can be sent to. This implies that you have to share your wallet address with other people to receive funds. However, you should never reveal your private key to anyone.
A private key works with the blockchain algorithm. Its purpose is to encrypt data and decrypt them as and when required. It usually contains a long string of bits that are almost impossible to guess.
A private key gives you access to your digital assets, regardless of the type of wallet you use. So when your device gets compromised, you can access your funds on other devices, as long as you have the corresponding private key/seed phrase.
Therefore, coins never truly leave a blockchain network; they are simply transferred from one address to another.
A hot wallet refers to a wallet that is connected to the internet. For instance, when you create an account with Tokenizer and send coins to your wallet, you are depositing into Tokenizer’s hot wallet. Hot wallets are easy to set up, and the funds are quickly accessible, making them convenient for traders and other frequent users.
On the other hand, cold wallets are not connected to the internet or easily accessible online. Instead, they use a physical medium to store the private keys offline. This makes them resistant to online hacking attempts since they are not accessible on the internet. As such, cold wallets tend to be a much safer option for “storing” your digital assets and are particularly suitable for long-term investors.
There are several types of software wallets, each with its unique features. Most available software wallets are connected to the internet. The most common types of software wallets are mentioned below:
Web wallets are used to access blockchain networks through internet browsers, and they do not have to be downloaded or installed. They include exchange wallets and other browser-based wallet providers.
As the name suggests, a desktop wallet is a software you download and run locally on your computer or laptop. Unlike some web-based versions, desktop wallets give users complete control of their keys and funds.
Mobile wallets resemble their desktop counterparts, but they are designed particularly as smartphone apps. They are quite convenient since they enable users to send and receive digital currencies via QR codes.
Hardware wallets are physical electronic devices that use a random number generator (RNG) to create public and private keys. The keys are then kept in the device itself, which is not linked to the internet. As such, hardware storage is classified as a cold wallet and is labelled as one of the most secure alternatives.
Though these wallets provide higher levels of security against online attacks, they may be risky if the firmware implementation is wrongly done. Additionally, hardware wallets seem to be less user-friendly, and the funds are more difficult to access than hot wallets.
A paper wallet is a piece of paper on which a crypto address and its private key are physically printed out in the form of QR codes. These codes are scanned to perform crypto transactions.
Due to the numerous shortcomings, the use of paper wallets is now deemed dangerous and should be discouraged. If you still want to use them, it is advisable to understand their risks. For instance, they are not suitable for sending partial funds, but the whole balance at once.
Different types of crypto wallets have different risks attached. But the hot crypto wallet is the most prone among others. Generally, crypto wallets are safe for anyone to use. Your digital wallet should stay secured as long as no one can crack or guess your private key correctly.
However, most cryptocurrency exchange platforms do not provide enough security for wallets. This makes users' wallets prone to hacks. It is no surprise that as the cryptocurrency community grows as well as the value of cryptocurrencies, so has the frequency of wallet hacks and viruses. Some top crypto wallets provider platforms like Binance, and Tokenizer, have perfected their wallet security features for all users.
The answer is Yes and No, or better still, it depends. Hot crypto wallets are not anonymous. Since exchanges provide most hot wallets services, users are required by default to provide a certain level of information for anti-money laundering (AML) and Know Your Customer (KYC) verification. What users get is an acceptable level of privacy.
Cold wallets, on the other hand, are anonymous. Since cold wallets are physical objects holding crypto assets, they are not within the purview of any exchange platform, and this means that they are crypto wallets without KYC or ID.
It is very much allowed for you to have multiple crypto wallets. As a crypto trader or investor, it is advisable that you have multiple crypto wallets and not have all of your digital assets stored in one place.
The online space is quite fragile, and cases of cryptocurrency loss and hacks are becoming popular. Maintaining multiple crypto wallets is an excellent way to stay safe and reduce loss in the eventuality of an unforeseen occurrence.
Cryptocurrency wallets are essential tools for using digital currencies. They form part of the primary infrastructure that facilitates sending and receiving digital assets through blockchain networks. Every wallet type has pros and cons, so it is essential to understand how they work before using them.
BlockX is a blockchain project that specializes in CBDC, digital payments and asset tokenization. BlockX is committed to making investments fully accessible to all individuals through blockchain technology and asset-backed tokens. BlockX also runs an exchange platform - Tokenizer - and a fully secured crypto wallet feature that supports the storage of cryptocurrencies and fiat for all its users. To participate in the private sale of BCX tokens, click here.
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