The cryptocurrency wallet is a safe and secure piece of software that is used for storing, sending, and receiving digital currencies. It functions as an online wallet, and most digital coins have an official version to facilitate their storage.
In case they don’t, experts highly recommend some third-party online wallets for using in the crypto-trading companies. These wallets are essential tools for using digital coins.
How do Cryptocurrency Wallets work?
The term ‘wallet’ can be a misnomer, since cryptocurrencies as such are not stored here. Instead, these wallets contain a secure digital code known only to the user and the specific wallet, known as the ‘private key’. This private key is a lengthy hexadecimal code and indicates ownership of another code known as the ‘public key’. This key links to a specific amount of currencies. Only when the private and public key match, can the user spend their digital coins.
Therefore, this wallet functions as a storage area for public and private keys while enabling sending and receiving coins. Additionally, cryptocurrency wallets also serve as personal transaction ledgers.
Forms of Cryptocurrency Wallet storage
There are many forms of storing and maintaining cryptocurrency wallets. One way is to keep them on a hardware device. It is important to ensure their timely connection with the web for performing efficient transactions. Some users store this hardware in bank vaults when they are not in use. Another method is known as cold storage, where keys are written on a paper.
In simple terms, the hosted wallets resemble conventional banking apps. One reason is to enable access to the crypto balance on various devices. Similarly, in case the phone is lost or the password is forgotten, the funds aren’t lost forever.
Creating Cryptocurrency Wallets
Before creating a wallet, the first step is to determine a way to access the wallet. There are multiple ways of accessing cryptocurrency wallets:
- Using a mobile phone
- Using a laptop/desktop computer
- Through logging onto a website
- Storing the keys offline on a hardware device
This first step is important since certain wallets don’t function across all types of platforms. The next step is to evaluate the usefulness of the wallet for storing your coins of choice. The chosen wallet should be able to support the particular cryptocurrencies and should be trustworthy and reputable.
The basic process of creating cryptocurrency wallets resembles the process of signing up for an email address. Also, most reputable wallets offer a detailed guide regarding the process of setting up and using their app. The essential step is to create a safe and secure backup for the private key password.
Security of a Cryptocurrency Wallet
A certain amount of security is a prerequisite for all cryptocurrency wallets. However, specific security measures differ between individual wallets. It is critical to apply best practices to maintain the maximum level of security when using the wallets. It is preferable to store only the usable amount of cryptocurrencies in one wallet; not more than needed.
Other ways include the use of the Google authenticator that offers multiple protection layers. This includes enabling wallet encryption, and using a wallet that is endorsed officially. Another security method includes using multi-signature transactions.
Below are some additional tips for keeping your coins safe and your cryptocurrency wallet secure:
- While maintaining a backup, it is wise to keep the keys on a thumb drive or CD to maintain a hard copy of them.
- Users should not trust wallet software available from an unknown and untrustworthy source since it may contain malware.
- Passwords should be strong and protected by additional security features like two-factor authentication.
- Users should never share their PIN, keys, passwords or seed to anyone.
- The most preferable method is to use the wallet in an offline mode and keeping separate passwords for separate wallets.
Examples of Cryptocurrency Wallets
Since the criteria for choosing the appropriate software is applicability and security, most users prefer officially promoted wallets. Therefore, traders can use the following coin-specific wallets to ensure maximum efficiency of their transactions:
The examples above won’t be useful for storing anything other than a specific cryptocurrency. Other types of wallets are available for this purpose. Therefore, users investing in a lot of coins can use multi-coin wallets / universal wallets. Universal wallets are available in both software and hardware form. Additionally, many users essentially choose the hardware versions for long-term storage.
Based on the control in keeping private keys, wallets can be of the custodial kind or the non-custodial kind.
- The non-custodial option allows the user direct control of the private keys and these wallets function as an interface, eg. My Ether Wallet and Blockchain Wallet.
- With the custodial option, the user has no direct control over the private keys, eg. Coinbase
- Exchanges such as Binance function as a custodian wallet, but it is prudent not to keep all the funds in them.
In the end, certain wallets are network-specific and operate best when they are used for their specific purpose.
E.g: Trust and Coinbase Wallets use the Ethereum network. These wallets assist with transactions involving the Ethereum-based coins and tokens. They also function as a web browser using the decentralized web.
Irrespective of the different features, the particular coins determine the type of wallets to be used. Also, none of the available wallets is able to store all types of coins, which makes careful evaluation of this software mandatory.
For long-term storage, offline non-custodial wallets are a good choice. To engage in trading, custodial wallets such as Binance act as a customary tool. In case of everyday usage, software wallets like Trust, Blockchain Wallet and Coinbase are the most preferred options. Therefore, employing best practices while using reputable wallets helps to make the most of the a cryptocurrency wallet.
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