When people begin trading with cryptocurrency, one of the first things they discover is that a crypto wallet is required. Many novices need clarification on the purpose of a wallet and how it works. This makes it difficult to get the right one for the individual.
A point of confusion is when people believe that a crypto wallet stores cryptocurrency just as a normal wallet is used to keep ordinary (fiat) money. However, this understanding needs to be corrected. We will guide what crypto wallets are and how they work.
What Is a Crypto Wallet?
Cryptocurrency wallets store a person’s private and public keys and interface with one’s cryptocurrency. The functionality of different types of wallets may differ, with some supporting crypto trades and transfers or working with apps.
The private and public keys are used to sign off on a crypto transaction. However, this is enabled through the blockchain and not via the wallet. Crypto is not stored on a mobile device, for example, if this is where the wallet is. The changes take place on the network. The wallet reads the public ledger using the public key and makes a transaction using the private key.
Public and Private Keys
The public key can be shared with others in the same way that a person can give out a bank account number to make a payment into their account. On the other hand, the private key is a PIN or password and should not be shared with anyone.
The public and private keys exist as a pair, with one of each being teamed together and making crypto transactions possible. Each key consists of random characters in a long string.
The Purpose of a Crypto Wallet
How cryptocurrency is stored determines how safe it is. It is usually only kept on an exchange when the person trades often and only in small amounts. The keys ensure that the person stores their crypto safely.
How Crypto Wallets Work
To be literal, a crypto wallet only stores the keys to the crypto. The actual cryptocurrency is held in blockchain networks. When a user wants to carry out a crypto transaction, they need the private key to confirm their address on the web. This key comprises specific codes. Security and the speed of transactions rely largely on the type of wallet being used.
Hot and Cold Wallets
There are two types of wallets: hot and cold. The main difference is that hot wallets are linked to the internet instead of offline, as cold wallets are. Hot wallets are easier to hack. Examples of hot wallets are mobile, web-based, and desktop wallets. Hot wallets encrypt and store the private key online. This can make them more vulnerable to being hacked.
Cold wallets can include hardware wallets, such as a flash drive or a paper wallet. These are stored away from devices and are thus less prone to tampering. When deciding on crypto wallets for beginners, choosing between a hot and cold wallet is important. This guide simplifies the understanding of crypto wallets.