In the digital world of cryptocurrencies, a crypto wallet is the key to managing and securely storing these digital assets. But what exactly is a crypto wallet, and how does it work? This article will explain the different types of crypto wallet, the way they work and how cryptocurrencies are managed, in a comprehensible manner.
Some important points to remember:
- My wallet, my responsibility! Your wallet access code is the only way to get to the assets it contains. If you lose your access code, you lose your money too.
- The best way to protect your crypto wallet is to use an offline hardware wallet and storing both your wallet ID and all access codes very carefully and securely – even offline, for instance printed out on a piece of paper inside a safe.
- Never pass on your wallet ID and access codes by e-mail or any other way and never enter them into any dubious platform or app either.
Crypto wallets enable you to securely store your private keys – basically your passwords allowing you access to your cryptocurrencies – nevertheless allowing you to access them at any time to send or receive cryptocurrencies such as Bitcoin and Ethereum.
In contrast to a normal purse used to store real money, crypto wallets technically don’t really contain cryptocurrencies themselves, but only access keys (also called access codes). The actual cryptocurrency holdings are stored on the Internet in the Blockchain, and you need a private key to access them. Your keys are the proof of ownership of your digital funds and enable you to carry out transactions. If you lose your private key, you also lose access to your money. It is therefore vital to store and manage them in a secure manner.
What types of crypto management are there?
There are various approaches to managing cryptocurrencies. The first one is self-custody. This provides you with full control of your private keys and your crypto wallet; the most secure method, since you are the only person who can access your cryptocurrencies. However this also requires you to take complete care of protecting and managing your keys yourself.
The second approach consists of custodial services. Here, a service provider looks after your cryptocurrencies for you. This can be a more convenient approach, since your service provider will take care of managing and protecting your keys. There is a risk though that a service provider is hacked or files for bankruptcy. Some examples for such service providers are crypto exchanges such as Coinbase or Binance.
How does a crypto wallet work?
A crypto wallet consists of a public and a private key. The public key is comparable to the IBAN number of a bank account. Other users can employ this address to send you cryptocurrencies. The private key however is a secret code allowing access to the cryptocurrencies stored inside a wallet. This key must be stored securely and must never be shared with anyone.
A crypto wallet enables you to securely store and keep these keys. You can receive cryptocurrencies by providing your public address and send them to other addresses by using your private keys.
What kind of crypto wallets are there?
Crypto wallets offer a wide variety of options, ranging from simple user-friendly apps to highly secure, more complex solutions. The most common types of wallet are as follows:
Software wallets are applications or apps installed on a computer or mobile device. Some examples are desktop wallets such as Electrum or Exodus and mobile wallets such as Trust Wallet or Mycelium.
Pros:
- Private keys are stored locally on your device and you remain in full control.
- Some software wallets don’t even require an Internet connection for you to use them.
Cons:
- You do remain in full control, but also retain full responsibility: In case your device gets lost or is damaged and there is no back-up, you might irrevocably lose access to your wallet.
- Devices connected to the Internet might be susceptible to malware.
Conclusion: My wallet, my responsibility!
Cryptocurrencies are stored digitally in so-called “wallets” and protected by access codes. Your wallet access code is the only way to get to the assets it contains. If you lose your access code, you lose your money too.
Protect your crypto wallet by:
- Best using an offline hardware wallet.
- Storing both your wallet ID and all access codes very carefully and securely – even offline, for instance printed out on a piece of paper inside a safe.
- Never passing on your wallet ID and access codes by e-mail or any other way and never entering them into any dubious platform or app either.
