If a person wants to invest in or use cryptocurrencies, he will need a cryptocurrency wallet. This article will explain what a cryptocurrency wallet is and how it works. It will also list some popular cryptocurrency wallets a user can choose from.
What is a cryptocurrency wallet?
A cryptocurrency wallet is a piece of software that stores public and private keys and interacts with a blockchain to help verify cryptocurrency transactions.
Online bank account vs wallet
The best way to understand a cryptocurrency wallet is to contrast it with an online bank account. When a person has a bank account, the “money” in it consists of data stored on a server somewhere in the world.
The user connects to the server using a web-browser or smartphone app, and the account is kept secure by requiring a password to access it.
The bank has hundreds of customers, so to keep each customer’s money separate, it assigns each customer an “account number.” This account number can be handed out to anyone the user wants to send him money, such as his employer or another bank that he holds a separate account in.
Although this system has worked for decades, it also has its problems. Banks have to hold customers’ passwords on the server in the form of a hash. If a hacker gets access to this hash, he can often use brute-force calculations to determine the customer’s password. He can then log into the customer’s bank account and empty it of funds.
In addition, customers usually have prepaid debit cards attached to their account. Thieves can copy the numbers on these cards or simply steal the cards to access the account.
Cryptocurrency keys and wallets
By contrast, cryptocurrency is not held in an account issued by a particular authority, such as a bank. Instead, when a user wants to receive payment, he uses his wallet to generate a private and public key.
The public key that has been generated is then hashed to create an “address.” The user gives this address out to his employer or customer, who enters it into the “to” field of the transaction. When the transaction is confirmed, it is added to the “blockchain,” which is a complete history of all transactions that have ever occurred on the network. This history is kept on hundreds of computers scattered across the world.
When the user gets ready to spend his cryptocurrency, he uses his wallet to send a transaction to the network. In the process, his wallet signs a copy of the transaction by encrypting it with his private key. Since the two keys are mathematically related to each other, and since the address is a hash of the public key, the network computers can verify that he is the owner of these funds. This does away with the need for passwords held on a central server and helps to prevent the user’s funds from being stolen. It also eliminates the need for credit cards, since the user can spend his funds anywhere he wants using his wallet.
Cryptocurrency wallet security
Despite this great advancement in security, there are also risks to using cryptocurrency wallets. If a thief gets access to a user’s wallet, he can steal the user’s private key. This can result in a user losing some or all of his cryptocurrencies.
Users can minimise risk by not keeping large amounts of cryptocurrency in a wallet that could be hacked, such as a cloud or mobile wallet. Instead, small amounts of crypto can be transferred to these wallets when needed for daily transactions, while the majority is left in a hardware wallet that is not connected to the Internet.
Another way for users to minimise risk is to backup private keys and keep them in a safe place. This can prevent crypto from being lost due to PC crashes, lost smartphones and other issues with keys being destroyed or misplaced. Having a backup of private keys can also allow a user to transfer away funds from an address that has been compromised, as long as the user can perform the transfer before the thief is able to.
Essentially, holding a cryptocurrency wallet that stores private keys is similar to holding cash. Users should take precautions to protect their cryptocurrency wallet, the same way they would take precautions to protect a pile of cash.
Types of wallets
There are many types of cryptocurrency wallets. Some are easy to access and offer greater convenience, while others are harder to access and more secure.
A desktop wallet runs on a desktop or laptop PC. While cloud wallets can easily be accessed from a web-browser, desktop wallets must be downloaded and installed before being used. Private keys are stored on the PC’s hard-drive, and can be backed up to an external flash drive. If a person uses a desktop wallet, he cannot transfer funds while away from his computer.
Because most cryptocurrency thieves target cloud wallets, desktop wallets are considered to be very secure and safe. However, they can still be compromised if the user’s computer is infected with a virus or if his personal computer is hacked.
Cloud wallets run on a central server on the Internet, and are accessed through a web-browser or smartphone app. This is similar to the way an online bank works, and many beginning crypto users feel most comfortable with a cloud wallet because of this familiarity. A cloud wallet can be accessed anywhere, as long as there is an Internet access: from a smartphone, the user’s PC, a relative’s PC, public library, etc. It is this ease of use that is the greatest benefit of a cloud wallet.
However, cloud wallets are the most insecure type of wallet available. They store user’s private keys on an online server. If a hacker gets access to these keys, he can steal the funds belonging to all of the wallet’s users. Because cloud wallets may have hundreds of customers and thousands of dollars worth of crypto, they often make a tempting target for these thieves.
A mobile wallet runs on a smartphone or a tablet. In a mobile wallet, the private keys are stored directly on the device. Due to the smaller memory capabilities of phones and tablets, mobile wallets tend to have fewer features than the desktop. However, they are favoured for providing accessibility to users who prefer to make face-to-face transactions.
Mobile wallets are very secure. However, they can still be compromised by viruses or hackers just like desktop wallets can. In addition, smartphones can be lost or stolen. This increases the risk of using them.
A hardware wallet runs on an external device that does not have Internet access, and stores its private keys on this device. In order to perform a transaction, the device must be connected to a PC, smartphone, or tablet. When a transaction is initiated, the signature is produced within the external device, and the private key is never copied to the PC or phone.
Because hardware wallets cannot access the Internet themselves, they are virtually impossible to hack. However, they can be lost or stolen. Most hardware wallets are protected by a pin number. This should slow down a thief if he manages to get access to the device. But ultimately, even a hardware wallet is not 100% secure. Users of hardware wallets should always back up their keys in case the device is lost.
Hardware wallets are extremely convenient and easy to use. Their one drawback is cost: their prices range from $74 to $200 or more.
15 popular cryptocurrency wallets
Here are links to the official websites of five of the most popular desktop and cloud cryptocurrency wallets, plus those of 3 mobile and 2 hardware wallets, for a total of 15 cryptocurrency wallet sites. By browsing the information on these sites, any user should be able to quickly find the best wallet for his individual needs.