By Collins Brown, CEO & Co-Founder of MARKET Protocol
A lot of people think of their cryptocurrency wallet as merely a digitized version of a real wallet that is used for storing funds. However, it doesn’t actually store cryptocurrencies. Rather, it saves a pair of public and private keys that grant access to one’s digital belongings. In a nutshell, a public key is a string of alphanumeric characters that serves as an address that others can use to send you cryptocurrencies. Likewise, your private key is what allows you to send money to others. You basically use these two keys to sign off ownership of your coins. There isn’t a physical exchange, mind you. The transfer of funds is simply recorded on the blockchain ledger with the difference of the balance in the sender’s and recipient’s wallet.
Remember: You cannot compromise on the safety of your keys; if you do, it’ll lead to a tearful goodbye to your digital assets. It is imperative to keep them safe. Always have backups.
Unlike real-world wallets that store your change and old receipts, cryptocurrency wallets do much more than that. These wallets enable users to interact with the blockchain, to send and receive funds, keep track of the remaining total, and some even have swapping features to convert cryptocurrencies for another. Hence, they act as an interface to the blockchain ledger.
Like cryptocurrencies, wallets are pseudonymous in nature as well. (However, since wallet addresses are stored on the public blockchain, there is a theoretical possibility to reverse engineer the identities of wallet holders.)
Ever since Bitcoin came into the limelight, a number of cryptocurrencies have sprouted up. Instead of using different wallets for different coins, many wallets support a multi-coin/ multi-currency option. They can therefore store a variety of altcoins, mitigating the need to hold separate wallets for each one. (No single wallet stores all cryptocurrencies).
As is the case with cryptocurrencies, there has also been a surge in the number of wallet services being offered today. Each comes with its own level of security and convenience of access. The best wallet for you depends on your requirements and your practices.
Often called a full node/full client wallet, cryptocurrencies also offer their own official ‘’core wallets.’’ These wallets are quite secure, stable and also able to make backups (which is, we reiterate, extremely important). Examples of core wallets include Bitcoin Core Wallet, Litecoin Core, and Ethereum Wallet, to name a few. However, since they download the entire blockchain, with data containing about every historical transaction, core wallets are heavy and slow. Other types of wallets fall under a broad categorization of hot and cold storage.
Hot Storage
At its simplest, hot storage refers to wallets that are connected to the Internet. This type of storage is largely typified by software wallets, which in turn can be broken into four distinct categories. Hot storage has the advantage of providing quick and easy access to one’s cryptos. Some software wallets also support access through multiple devices, so cryptocurrencies can be easily be carried around.
As convenient and user-friendly as they are, hot wallets are also the riskiest to use; they have a high susceptibility to hacking attacks and theft. Often private keys are stored online and are controlled by a third-party, increasing vulnerability. In addition to this, if your device gets damaged or misplaced, the wallet is lost as well. It is therefore advisable to use hot wallets, just like you use your real-world wallet: Store only a small amount of money for day-to-day spending.
As mentioned before, software wallets include the following: