Last updated on October 23, 2019
A cryptocurrency wallet is a software mechanism that is used to securely send, receive, store digital assets such as Bitcoin, Ethereum, Litecoin, Ripple, etc. Main function of the wallet is transacting with related blockchain straight-forward using the private and public key. Cryptocurrency wallets are very similar to traditional banks but cryptocurrency wallet fund’s completely controlled by wallet user.
There are a few types of wallets exist that is a paper wallet, a hardware wallet, an online wallet, a desktop wallet, and a mobile wallet. In this guide, I will explain these wallets short way. Let’s find out how does cryptocurrency wallets work?
How does cryptocurrency wallet works
Already you know cryptocurrency wallet is a software mechanism, there are two different keys available for every cryptocurrency wallet generated that is a public key and private key.
The public key is key to receive funds into your cryptocurrency wallet which is very similar to a bank account number. Also, the public key can be used to view the wallet balance and transaction history using the block explorer.
The private key represents the fund’s of the cryptocurrency wallet without the private key, you can’t access your wallet funds. Let’s take a look at the type of the cryptocurrency wallets,
General terms of cryptocurrency wallet
There are a few common cryptocurrency wallet related terms and facts. Let’s find out,
The public and private key
The public key is mainly used to receive digital assets into your personal wallet from anywhere such as from your friend, cryptocurrency exchange, or from the mining pool.
The private key is mainly used to access your wallet and update current wallet balance and also, the private key makes secure communication bridge between your wallet and relevance cryptocurrency blockchain.
The hot and cold wallet
The hot wallet is online and connected to the internet as example cryptocurrency exchanges use the hot wallet in order to facilitate fast withdrawal and other operations. The hot wallet needs greater security than the cold wallet.
The cold wallet is not online and not connected to the internet every time,in this case eventually, it will increase wallet security at a greater level. The disadvantage is basic operation such as sending, receiving funds is not possible until it is offline.
What are the transaction hash(Txn)and transaction fees?
Transaction hash(Txn) is a combination of alphanumerical text that is used to identify particular cryptocurrency transactions. Which provides a timestamp, from and to address, value, and block no, etc.
There is a transaction fee when a new cryptocurrency transaction happens on a particular blockchain where the fee is going to the relevant miners or stake partners for validation of the relevant transaction.
Users can set the transaction fee when a new transaction happened, where high fee fast transactions and low fee slow transactions.
What is wallet seed or keyphrase?
Cryptocurrency wallet seed or keyphrase is a bunch of memorable words that can be used to recover the wallet funds when the wallet is crash or lose. The seed is generated during the first time in wallet creation. The seed or keyphrase word count might be 12 words or 24 words in many wallets.
Multisignature wallet requires two or more parties or keys to process wallet functions such as access to wallet funds, transfer wallet funds, etc.
Multicurrency wallets support two or more cryptocurrency or tokens where all operations can perform within the one wallet. Every multicurrency wallet has a wallet seed or key phrase to recover the wallet where the public key generated separately for various coins.
Using a multicurrency wallet is too easy than using separate wallets for every currency holding.
Type of cryptocurrency wallets
In cryptocurrency space, you can use many wallet types such as desktop wallets, web wallets, mobile wallets, paper wallets, and hardware wallets. lets find out,
Web or online wallet
Web or online wallets directly run on online internet servers where most of the cases, wallets provider control the wallet and its keys. Web wallet provides userfriendly services as well as facilitate the cryptocurrency swap or exchange services.
If the server is hacked, hackers can access your funds if you are don’t own the private key. Also, a phishing attack can be happened in any online service that can be caused to lose the funds, leaks the privacy information. When you access the wallet service, please check the domain name as well as avoid the malicious emails.
Check out the best example for Bitcoin web or online wallet >> Blockchain.com wallet
A desktop wallet is a kind of downloadable software program currently, various desktop wallets available for the windows, macOS, and Linux os. The desktop wallet has good security compared with web wallets because it is not directly connected to the internet server but still phishing attacks or malicious hacking can happen.
Mobile wallet is a wallet app or software run on mobile operating systems such as Android and iOS. Mobile wallets provide easy to use user interface, QR code to send or receive cryptocurrency, etc. One drawback is regular wallet updates but necessary for wallet security.
Hardware wallet consists of a physical device like pen drive where the private key and public key integrate into the device. Wallet security is considerably higher than the other wallet types because it always in offline mode.
This is a piece of paper where private and public key print on it as a QR code or as alphanumerical text. These two addresses can generate through online web services and print it on paper. If you are a regular cryptocurrency user, a paper wallet is not the option because it is not easy to use.
A paper wallet is the most secure wallet that exists because there is too little opportunity to hack or phishing attacks.
Check out the best Bitcoin paper wallet generator >> Bitcoinpaperwallet.com
Take a look at, how cryptocurrency wallet security increasing with the type of wallet.
How to secure a cryptocurrency wallet?- Safety precautions
There so many facts to consider your wallet security and funds security. Here are a few more things you can consider right now
- Don’t lose private key or seed phrase: If you lose keys eventually lose all funds on it. Please do consider storing your private key or seed phrase in a secure location
- Use cold wallets: cold wallets have greater security than the hot wallets. If you can afford to buy a hardware wallet, your funds can securely store
- Regularly update your wallet to prevent existing malware attacks and phishing attacks
- Activate 2FA if available
- Double-check the send or receive address before takes any action: There some malware which can change your sending address, then your funds will go anywhere else
- Don’t put your large amount of funds on an exchange account and in one wallet: Spread your funds through two or more wallets
- If you are using online or web wallet, check site domain address before any actions to avoid a phishing attack
Conclusion – cryptocurrency wallet basics
Cryptocurrency wallet plays a major role in this emerging industry therefore, you need to choose proper wallet wisely. I think you can understand the cryptocurrency wallet basics through the article.
Check out other helpful readings,
- How to create a Bitcoin wallet
- Best Bitcoin wallets
- How to create an Ethereum wallet
- Best Ethereum wallets