crypto wallet

How Cryptocurrency Wallet Works

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Times have significantly changed, and so have our ways of doing transactions. Back then, people only relied on physical currency to pay for their purchases but now, online payments can be made for more convenience. One may link their bank accounts to online payment platforms, such as Paypal or online banking applications provided by their trusted financial company. As time passed, online payments continued to become relevant until the idea of a virtual currency emerged. This idea gave birth to cryptocurrency.

So, what is this so-called cryptocurrency? Just like any other online payment platform, it is used in order to pay for online purchases and services but in a very secure way. Companies have “tokens” that can be traded in exchange for their goods or services. Transactions made with the use of cryptocurrencies are recorded in an online ledger that has strong cryptography, which ensures more secure online transactions. An example of a cryptocurrency is Bitcoin, also known as the pioneering cryptocurrency and the most well-known among the others of its kind.

Much like the concept of having a wallet for your money, having a cryptocurrency wallet is also essential when it comes to keeping tabs on your balance. It stores private and public keys, and it uses a variety of blockchains that allows users to send, receive, and monitor their cryptocurrency. With that, how exactly does this digital wallet work?

Types of Cryptocurrency Wallets

Before proceeding to discuss how an online currency wallet works, it is important to get to know the different types of wallets available in the market. Wallets have three major categories: software, hardware, and paper. Based on how they function, they can either be hot or cold wallets. Hot wallets are stored online, which makes them more vulnerable to security risks. On the other hand, cold wallets are accessible offline and have more security than their hot counterpart.

Desktop

The wallet’s software is downloaded on a desktop or laptop. They can only be accessible on the computer where they are installed, which ensures the highest levels of security. However, you may lose your funds once the computer malfunctions or if there is a virus.

Online

This type of wallet runs on cloud storage and can be accessed on any device. Despite the convenience, online wallets are controlled by third-party applications. This makes it more vulnerable to hacking risks.

Mobile

As its name suggests, mobile wallets run on cell phones. Just like online wallets, they are also very convenient and can be accessed anytime you want to. Moreover, they are also smaller and simpler to use due to the limited storage of mobile phones.

Hardware

Unlike software wallets, hardware wallets store information in a device that is just like a flash drive. Even though they are stored offline which offers a higher level of security, hardware wallets can still be used for online transactions. They are compatible with any web interface and can support any type of cryptocurrency. To use, users can plug the device into any computer device with a USB port. Hardware wallets ensure security by keeping your funds offline without sacrificing the convenience of cryptocurrency wallets.

Paper

A paper wallet is just a hard copy of your public and private keys. It is also the term used for the software that can safely generate unique public and private keys. Paper wallets work by transferring funds from your software wallet to the public address reflected on your paper wallet. If you want to spend your currency, you can simply transfer your funds from your paper wallet to its software version. This process is called “sweeping”, which can be done manually or by scanning the QR code provided on your paper wallet.

How does it work?

Understanding how cryptocurrency wallets work is just as complicated as learning about the cryptocurrency itself. Millions of users still get confused by the technology of these wallets. Upon hearing the word “wallet”, you may think that it is used to store your cryptocurrency balance, but this type of wallet cannot store currency. Cryptocurrencies cannot be stored in a specific location. Information regarding your cryptocurrency transactions is stored in blockchains, the technology that keeps transactions secure and automated. Your cryptocurrency wallet’s only job is to keep track of your balance and to send or receive currency.

Just like in the physical world, a crypto wallet works just like your bank account number. It is safe to give your bank account number to others since this is what they will be utilized to send you money. This is exactly how a cryptocurrency wallet works but in digital form.

Each wallet is entitled to a unique combination of numbers and letters that users can use to receive currency called a wallet address. An example would be the wallet address of Bitcoin’s creator Satoshi Nakamoto, which looks like this: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa

As seen from the given example, it is a combination of lowercase and uppercase letters with a bunch of numbers combined. Blockchains are usually transparent, so it is easy to figure out how much balance a wallet has, and how many transactions have been previously made using the account. However, blockchains are anonymous so the identity of the crypto wallet’s owner will not be publicly revealed.

In a nutshell, a cryptocurrency wallet works much like a piggy bank. It stores and protects your crypto balance. It is not made to store cryptocurrencies since this type of currency is not in physical form. Instead, blockchains store information about the transactions made by the user. These transaction details consist of public and private keys that have control over the user’s funds.

What are public and private keys in cryptocurrency terms?

Now that the basics of a crypto wallet have been discussed, it is time to talk about how cryptocurrency funds are being controlled. Each wallet is encrypted with its unique public and private keys. You may think that a public key is similar to a public wallet address, but this is wrong.

A public key is a hash function that is mathematically linked to the crypto wallet. It serves as an additional layer of protection against hackers. A hash function allows a series of letters and numbers (“input”) to be encoded into a new set of uniquely encrypted letters and numbers (“outputs”). A public and private key are similar to each other. They may look different to a mere human’s eyes, but the software technology can detect that these two encryptions are linked to each other.

On the other hand, the private key works much like a password. For a more concrete example, you want to transfer money from your bank account to another account. Before doing so, you will be asked to enter a private pin or password to have access to your account. Not even the bank account knows about your password. This is exactly how a private key works.

To summarize everything in simpler terms, private keys can only be accessed by the owners of the cryptocurrency wallet. It allows them to make transactions using the wallet. On the other hand, the public key is used for digital signature verification to prove that it is linked with the given private key.

Is it safe to use cryptocurrency wallets?

There are different types of wallets available on the market, and their security level depends on the type of wallet. Since a cryptocurrency wallet is an online type, it is much more vulnerable to online hacking attacks. It is hard to determine whether a certain platform is safer than the other since hackers are getting more creative with their ways of attacking.

It is proven that online wallets are more vulnerable and prone to hacking attacks, so it is important to take safety precautions no matter what type of crypto wallet you will be using. Once your private keys get exposed, your cryptocurrency funds will be endangered. There is no way of taking those stolen funds back, so it is important to be extra cautious when it comes to online transactions. With that, here are some ways to protect your crypto wallet.

Add more protective layers

When it comes to online currencies, it is better to be safe than sorry. The more protection, the better. Set complex passwords that only you have access to, and make sure that every transaction requires a password before proceeding to the actual transaction. Choose wallets that have a good reputation and great reviews from their users. Some wallets have extra features, such as additional password requirements and two-factor authentication. Some wallets also offer multi-signature transactions.

Keep your software up-to-date

Keeping your software updated will ensure that you will get the latest security features. This will give you more confidence that each transaction is safe and protected. Aside from your wallet’s security, you should also frequently update your desktop or phone’s software to avoid hardware failures during transactions.

Backup your cryptocurrency wallet

Choosing to use an online wallet would expose you to higher risks of hacking attacks. For more security, store higher amounts of funds in a place with extra-tight security. Storing small amounts of funds for everyday use on your cryptocurrency wallet will also help alleviate the anxiousness brought about by possible online attacks. Moreover, you can also use a flash drive in storing more information about your wallet in case of unforeseen malfunctions.

Why should you get a cryptocurrency wallet?

Well, you cannot start earning currencies without a wallet. Furthermore, the so-called “cryptocurrency craze” has also gained attention from online hackers. Having a cryptocurrency wallet will not only help you keep track of your transactions, but it can also protect your funds from hacking risks. Before starting your cryptocurrency journey, it is highly recommended to invest in a high-quality crypto wallet first. Whether you are planning to get a hot or cold wallet, always go for the one with enhanced security settings. A high-quality cryptocurrency wallet will not only give you extra protection against risks, but it will also give you more confidence that your cryptocurrency is in safe hands.