13. Cryptocurrency wallet – what is it?
What is behind the term crypto wallet? A cryptocurrency wallet is an essential part of investing in digital assets. It is definitely different from the real wallets that we are so familiar with.
Crypto wallets can adopt a variety of forms. They come as a device, medium, program or service that stores public and private keys for cryptocurrency transactions. We won’t lie if we say it’s your identity when buying digital assets. Your wallet address is your “receipt” for purchases and other transactions.
Its primary purpose is to store cryptocurrencies. In addition, it offers us the function of encrypting and signing information. Of course, having a cryptocurrency wallet is not a necessity. You can store your funds on stock exchanges, of which there is a multitude. However, this is not exactly a fully secure option. Cryptocurrency wallets will protect your capital to a greater extent.
They work really simple. They store information about the private and public key that we need to carry out transactions. The wallet does not contain the actual cryptocurrency – it is stored on the blockchain.
As we have already mentioned, when describing a wallet we have two types of keys: private and public. The private key allows you to access your assets hosted on the blockchain. You can never allow anyone to gain access to it. It could cause you a lot of trouble. A public key works similar to a bank account number. You can share it – thereby not compromising your wallet. It allows us to perform cryptocurrency transactions.
Public blockchain networks (Bitcoin, Ethereum, Solana, etc.) are, as the name suggests, public, which means that the record of transactions registered on the blockchain can be viewed at any time and by anyone.
This address is unique and represents your cryptocurrency deposit account on the network you are using, where your cryptocurrency will be stored. To send cryptocurrencies to a blockchain user, you must have their address.
For example, the address on the Ethereum network or most so-called “Ethereum VM compatible” networks is as follows: 0x 12abc3de4567fg… An address on the Elrond network will be of the following form: erd 12abcd3ef45g … etc.
You can check all transactions on the Ethereum network through Etherscan!
This peculiarity is present in all public blockchain networks and conditions the transparency of the network, which allows it to be “trustless “, that is, you do not need to trust any entity to use it. Each network has its own explorer.
In this way, each public address is searchable and perfectly transparent: you can see the contents of the address, what cryptocurrencies are stored there, in what amount, what NFTs have been acquired by this address, etc.
Indeed, a cryptocurrency wallet can be linked to several different addresses, several different accounts. This is the most important element that links them: the private key.
The private key (also called “seed phrase“, “recovery phrase” or, less commonly, “mnemonic phrase”) is, as mentioned earlier, a series of 12 to 25 words depending on the network. This phrase is actually a human-readable transcription of the code that will trivially allow you to interact with the blockchain wallet.
Note that a blockchain wallet allows the owner to create an infinite number of addresses where cryptocurrencies can be stored. The private key ” seed phrase ” corresponds in some sense to the genesis of your wallet.
Each public address has its own private key. All private keys are linked to the seed phrase , which allows the network to verify the ownership of the tokens stored at the address: they belong to the holder of the seed phrase.
Therefore, it is not without reason that anyone involved in this field will tell you that it is necessary to secure their initial phrases and not to communicate them under any circumstances.
Be cautious, it’s not because you received a seed phrase when you created your wallet; your cryptocurrencies really belong to you; it has to do with the concept of a trust/non-trust wallet.
“Not your keys, not your coins”.
You have probably heard this saying before, which sounds more like a warning.
To fully understand it, it is necessary to consider the concept of custody/non-custody. When you open an account on “centralized” exchanges: Binance, Coinbase, FTX etc, the address you get is just a deposit address, which is actually a smart contract. This smart contract allows the exchange to manage user addresses thanks to a limited number of real addresses. So, even though you might have received something that looked like a seed phrase, it is not an actual unsecured wallet and you don’t actually have ownership of your cryptocurrencies.
Therefore, only “non-trust” wallets guarantee ownership of your (own) funds. This can be, for example, Metamask, Trust wallet, Maiar (Elrond network) or even Ledger keys.
All these wallets are not equivalent in terms of security, so it is necessary to distinguish between “hot” and “cold” wallets, which we explain below.
Wallets – types
Knowing the differences between them is very important. This will allow you to choose the right type of place to store your assets.
1. Hot Wallet – the most common type of wallet. They are simple to set up and intuitive to use. They have a direct connection to the internet. They only require an account with the stock exchange. They are mainly designed for people who use crypto on a daily basis. They have one major drawback –
security. As they are connected to the network, they are vulnerable to cyber-attacks. Therefore, we do not recommend keeping all your capital in these types of wallets.
2. Cold Wallet (offline wallet) – definitely a more secure solution. They only connect to the internet when you make a transaction.
3. Hardware wallet – a physical medium, usually looking like a USB. How does it work? You transfer your digital assets to it from an exchange or hot wallet, for example. To make the transaction, you must have the right software to make it work and sign it with a private key.
4. A paper wallet – a piece of paper on which you have written the public address of the wallet and your private key. Keep it in a safe place – preferably a safe. Make a copy for yourself too, as this wallet option is the easiest to lose or misplace.
5. Computer wallet – an application installed on your computer where you store your assets. If you have this type of wallet, be sure to install appropriate anti virus software and two-step login verification.
6. Mobile wallet – an application for your smartphone. Works similarly to a computer wallet.
7. Online wallet – not recommended because it stores passwords on online servers. This increases the likelihood of attacks and theft of funds.
Setting up a cryptocurrency wallet
It is very simple. Just follow the instructions while maintaining the highest level of security. Remember – it’s all about your capital! To set up such a wallet, you need your personal details and passwords. For this we recommend two-step verification. Be sure to keep your private key in a safe place. If you lose it, you lose access to your funds forever.
Which wallet is the most secure?
In our opinion – the hardware one. We have described above what types of wallets the market offers. Remember that everything also depends on your level of experience and cryptocurrency activity. When choosing a wallet, consider the following aspects:
1. Security – each wallet is different and offers us different options.
2. Fees – transaction fees are charged differently in each wallet. It is worth looking into this topic before making a choice.
3. Assets – in some wallets we have a multitude of cryptocurrencies, while others are limited.
4. Mobility – consider where you want to trade crypto from and at what times. Additionally – do you use a computer or a smartphone.
5. Customer support – is it 24/7? Analyze the support you can get from the services offered to you.
1. Never share your private key with anyone.
2. Don’t click on suspicious links.
3. Avoid holding your capital in hot wallets or other online wallets. This will minimize the risk of an attack.
4. Keep most of your capital in offline wallets.
5. If you are unsure about something – contact customer support. 6. The best companies offering hardware wallets are Ledger and Trezor. 7. Check if the wallet offers a Polish language version if you don’t feel confident using English.
As you can see, the cryptocurrency wallet market offers us a range of options and services. Before you make a decision, carefully analyze what you need. From our lesson, you already know what a wallet is and what types of wallets there are. Always make sure that once you have made your choice you keep all the security rules we have mentioned to you.
Commence your adventure with cryptocurrencies on Kanga Exchange