When you’re dealing with fiat currency (aka traditional money), you need certain tools to hold on to it and use it. Stuffing your cash under your mattress is not good enough!
You need a bank account to hold it in the long term and a wallet to hold your cash and credit and debit cards. These days, most people also need some sort of social payment app such as PayPal, Venmo, or Zelle to function financially in the world.
In the world of cryptocurrency, you also need tools to hold, trade, and use your crypto. While major banks are coming around slowly but surely and crypto debit cards are beginning to come to fruition, the tool you need to hold and use your crypto is a crypto wallet.
The term crypto wallet is a broad category that covers a wide range of products, from a piece of paper to physical hardware to online accounts. If you’re starting the process of using cryptocurrency, it’s crucial to learn all you can about crypto wallets and which is right for you.
To help educate you on what crypto wallets are, how they work, and what to look for in a crypto wallet, we have put together some of the most important things that people need to know about these new financial tools. Here are three things to know about crypto wallets.
The first thing you should find out about any tool or technology you are investigating is how it works. Before you find out exactly how crypto wallets work, though, you need to understand how cryptocurrency works.
Each crypto coin or token has two keys associated with it. First, there is the public key. This is the unchanging code that is recorded by the blockchain ledger and proves that the unit of crypto exists in the world. There is also a private key. This is a randomly generated code that only the owner of the crypto has.
In order to trade or spend the coin, the owner must present this code. It’s a bit like signing a check–your code proves you own it. As the coin transfers ownership, the public key creates a new block in the blockchain and a new private key is generated which the new owner must hold on to.
A crypto wallet functions like a crypto bank account. The owner can store and protect their assets in the wallet. They can check their wallet’s balance, make and receive payments to and from their wallet, and keep a record of transactions, like a checkbook ledger.
While the basic purpose of all crypto wallets–protecting the private keys–is the same for all types of wallets, the functionality of the various types are very different. Most wallets fall into one of three categories. There are paper wallets, hardware wallets, and software wallets. Each has its own sets of pros and cons.
A paper wallet is literally a piece of paper that has your private key on it, usually in the form of a QR code. A hardware wallet looks like a USB memory stick and plugs directly into your computer. It is its own self-contained unit that keeps private keys stored digitally but away from the internet.
Software wallets are not physical devices. They exist online and in the cloud. There are three main types of software wallets, each with different strengths and weaknesses: a desktop wallet is tethered to a single computer: a mobile wallet exists on a mobile device; a web wallet is accessible from any internet-connected web browser.
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Each type of crypto wallet discussed above offers a certain amount of security and a certain amount of accessibility. These are the two most important considerations when it comes to crypto wallets because the two main things you need to do with crypto is to keep it safe and spend or trade it when the time comes.
To pick the right crypto wallet, you need to figure out where your needs fall on the accessibility/ security spectrum. You can then evaluate what each type of wallet has to offer and pick the one that best suits your needs.
A paper wallet is certainly secure from hackers and other internet thieves who are after your private keys. The thing you have to remember is that if you lose the private key, the crypto is essentially gone. Paper can easily get lost or damaged so this is not the best type of wallet for most people.
A hardware wallet offers the strongest sense of security. It takes the key offline and away from hackers and is a solid, secure piece of equipment. If it gets damaged somehow, you can lose your crypto though. Also, it doesn’t score high for accessibility because you have to put the crypto back online in some form to use it.
Software wallets are the most easily accessible but they offer a sliding scale of security. The easier they are for you to access, the easier they are for hackers to get into as well. A desktop wallet is the most secure software wallet but, other than trading from your home, the accessibility isn’t great.
A mobile wallet is more accessible and can be used on the go but you will find many of the security issues that come with anything on a mobile device. A web wallet can be accessed from anywhere, which is great, but it can also be accessed from anywhere, which is not great if you’re not the one accessing it.
Which wallet is best for you? This Cove Markets overview of cryptocurrency tools has more on striking the balance between security and accessibility.
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When stepping into the world of cryptocurrency, you need the right tools. One of the most important tools you can have is the right crypto wallet. Before you choose a crypto wallet or even start researching them, you need to know how they work, what types there are, and how to strike a balance between security and accessibility. Now you know the most important info around crypto wallets.
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