A wallet is the first step in using any type of digital currency. Without a wallet you cannot receive, store or spend your coins. Just like an online bank account gives you access to the regular monetary system, a wallet is your personal interface to the network of your digital currency. A wallet contains your private key, the security code that allows you to access and spend your coins. In essence a wallet is a website, app or device that manages and stores this private key for you and interfaces with the blockchain so you can monitor your balance, send money and conduct other operations.
When somebody sends you Bitcoin or any other digital currency, no physical exchange of coins takes place. Instead they are effectively transferring ownership of the coins to your wallet’s address on the blockchain. Provided the private key in your wallet matches the public address to which the currency is assigned, then the transfer will take place. The balance in your wallet will increase, and the seller’s decrease accordingly.
There are several distinct types of cryptocurrency wallets which provide different ways of storing and accessing your coins – Hardware; Software; and Paper.
A Hardware Wallet stores a user’s private key on a hardware device like a USB. The Hardware Wallet must be physically connected to a computer, phone or mobile device before a transaction can be made. The key advantage of this type of wallet is the enhanced security that comes with storing private keys offline. This makes them safe from potential hackers, in the event that somebody would try and steal a software wallet.
Software wallets comprise 3 types – desktop, online and mobile.
Desktop wallets are downloaded and installed on a PC or a laptop. The wallet can only be accessed on the device in which it has been downloaded. Whilst a desktop wallet offers a high level of security, they can be vulnerable if the computer is hacked, or catches a virus, in which case all your funds might be lost.
Online wallets run on the cloud and can be accessed from any computer or mobile device in any location. This makes them both very convenient, but also less secure as your private keys are stored online and controlled by a third party – the cloud provider. This means they are vulnerable to cyber-attacks.
A Mobile wallet runs on an app on a smartphone, which means they can be used anywhere. However, the big problem is that they tend to be smaller and simpler than desktop wallets because of the size limitations of a mobile device.
A Paper wallet is an offline mechanism for storage of digital currency, and involves making a physical copy of your public and private keys. These physical wallets are considered one of the safest ways of storing keys, provided basic safety procedures are followed.
In terms of how secure digital wallets are, it depends on the type of wallet and the service provider. Online wallets are inherently riskier than offline. With an online wallet there is always the risk of a cyber-attack or a damaging virus. Offline wallets, on the other hand, cannot be hacked – they are not connected to a computer network and you are not relying on a third party for security.
This does not mean a physical wallet is completely safe because, if it is lost or stolen, there is no way to access any cryptocurrencies sent to that address.
Crypto Currency Wallets Are Here To Stay
When it comes to crypto currency, a wallet that helps to load and use such currency is also required. This is a software application that helps to store private as well as public keys and can interact with different Blockchain technologies which enable users to send or receive different kinds of digital currency as well as be able to monitor the balance they have. For those who use Bitcoin or other forms of crypto-currency will need a digital wallet alongside as well.
How crypto currency wallets work?
Though crypto currency wallets are varied and many people use them, many are unsure of how these wallets work. They are not digital wallets where one can store currency. In such wallets currency is not stored or to be found to lie around. There are simply transaction records that are maintained in such wallets with the help of Blockchain technology. For such reasons crypto currency wallets are simply software programs that store private and public keys and act as an interface with Blockchain technologies. This enables users to check their balance and conduct different kinds of monetary transactions. A person can send another Bitcoins or other forms of digital currency and that is akin to signing of ownership of part of the coins from one’s wallet which is akin to an address. The coins that are sent across or the funds that are unlocked can be spent only when the private key in one’s wallet matches the public address of the currency that has been transferred.
The transactions that happen are merely records of transactions that are maintained on the Blockchains and reflect on the balance of one’s wallet for crypto currency.
Different kinds of crypto currency wallets
There are different kinds of crypto currency wallets out there that have the following features:
This category of wallet usually runs on cloud and can be accessed by any computing device. These are convenient to access from anywhere and are controlled by a third party service provider.
This category of crypto currency wallets is accessible on a computer where the software program is downloaded. These are known to offer greater security than cloud based applications.
There are wallet apps that can be downloaded onto mobile devices. These are beneficial and can be used at retail stores and other places on the go.
Wallets of this category are akin to USB like devices. These usually have crypto-currency stored in them and one can make transactions online as well as offline. These wallets usually work with different currencies as well as diverse web interfaces.
These kinds of wallets are basically printout or physical copy of private or public keys. Such a wallet can help transfer any kind of crypto-currency by transfer of funds with the help of the public address that is shown on one’s paper wallet.
It is necessary that one chooses the right kind of wallet as per the ease of use, the kind of transactions one wishes to do as well as security and other benefits a wallet offers.