What is a Crypto Wallet? – Hot Wallet, Cold Wallet, Custodial, Non-custodial
What is a crypto wallet, and how do they work? This is a question that many people ask themselves. Upon entering the world of blockchain and bitcoin, there is a range of different terms.
What Is A Crypto Wallet?
Like a regular wallet, a crypto wallet is a software program that will store things inside. This program stores both public and private keys and interacts with various blockchains. This interaction allows users to receive and send digital currency.
If you use cryptocurrency or bitcoin, you will need a digital wallet.
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These wallets will allow you to store, send, and receive digital assets. Remember those public and private keys? They are necessary to help interact and manage any holdings within the blockchain networks.
With a private key, all the secure login details are held for the wallet. These keys are generated based on your location. For example, if you have a BTC (Bitcoin) wallet, the private key will have a number between 1 and 2256. However, someone will have to guess the correct number between 1 and 115 quattuorvigintillion to gain access to your wallet. In other words, it is almost impossible to hack into another person’s digital wallet.
With a public key, think of it as the URL of your wallet. You can use this key to deposit funds and view transactions.
A digital wallet acts like a traditional bank account. You have the login details (private key) to access your account. However, you can share the routing number (public key) to receive and send funds.
Related: Cryptocurrency for Beginners
How Do Crypto Wallets Work?
Although millions of people use crypto wallets, most people don’t understand them. Unlike their real-world counterparts, crypto wallets don’t store currency.
Instead, crypto wallets are software programs that store private and public keys. A user can send currency or conduct other operations as required.
When you receive bitcoins, the person sending them is signing off ownership. The coin(s) will then register in your wallet.
To unlock or spend those coins, your wallet address and public address must match. If both the public and private match, you’ll see your balance increase. Details matter when it comes to bitcoin.
The transaction gets recorded on the blockchain.
Your wallet is like a bank account number. Over the years, you have probably given out that number to transfer or receive funds. Many people have interacted with that number, from paying an invoice for services to sending money to family and friends.
If someone in the cryptocurrency world wants to transfer coins to your account, you will want to give them the address of the wallet. Like traditional bank accounts, no two numbers are the same, which means there are no worries about someone else getting your funds.
There is no limit to the number of wallets that you can create. Many of the digital addresses consist of a combination of letters and numbers, using both lower and upper case.
In many cases, these blockchains make their transactions transparent, making it easy to find out the amount of money in each cryptocurrency wallet. However, the crypto wallet will never reveal the real-world identity of the owner.
Private and Public Keys Relating to a Wallet Address
Now that you understand that a digital wallet address is similar to a bank account, you need to learn how to control your funds. While many people think that a public key is like a public address, there are some differences.
Every individual cryptocurrency wallet address will have a unique public and private key. With the private key, you have access to funds that are tied to the crypto wallet address. If you want a real-world example, think about when you need to transfer money to a bank number. You must have a private password to enter the address. No one else has access to the password, not even the bank. If someone does have access, they would be able to send money from your private bank account.
A crypto wallet’s private key does the same job by linking to the individual crypto wallet. The public key works similarly by mathematically connecting to your address. This is known as a “hashed version.”
The hash function allows a sequence of numbers and letters, known as the input, to be encrypted into another set of numbers and letters (output). With this extra level of security, there are some guarantees that the wallet will not be hacked.
While the two sets of keys may look different to the human eye, software technology can link them together. Those numbers will identify you as the owner, allowing you to receive and transfer funds.
When you use a cryptocurrency wallet, everything is done for you. So you don’t have to worry about the technical complexities of the numbers. All the software operates in the background, while you can securely use your crypto wallet for all of those transactions.
Coins Aren’t Stored in Crypto Wallets?
Now that you understand cryptocurrency wallets and how public and private keys work, you might be wondering why there are no physical coins in the wallet. You probably already know that cryptocurrencies are not physical money but stored on a blockchain. That blockchain is like an accounting ledger that keeps track of every transaction that occurs in the network. Along with that, it holds all the account balances for those public addresses.
The cryptocurrency wallet software is connected to the blockchain, allowing you to submit all transactions to the ledger. With those protocols, the wallet generates private and public keys. If you don’t have those keys, you cannot access any of the funds.
It works in a similar way to using a credit card. You can walk into a store and pay for the goods, but there is no physical exchange of the money. However, with a private PIN, you verify your identity and move funds from your account. This works in the same way as a cryptocurrency wallet. You will enter your private key to verify the account and transfer those funds to another individual. Those keys are the only way that you can move coins from Point A to B.
Are There Different Crypto Wallets?
There are several different crypto wallets. They’re divided into several categories.
A mobile wallet will run on a mobile app. The ability to use it anywhere is attractive, although they don’t have much space.
A hardware wallet, like the name suggests, is tangible—usually, a USB device. While hardware wallets do make transactions online, they are safer for storing information offline. Hardware wallets are compatible with a range of interfaces and currencies, and they are pin protected.
Accessible and convenient, these wallets are controlled by third parties, which makes them more vulnerable. Online wallets store private keys.
You will download and install this wallet onto your computer. Only a single computer can access the wallet. It offers the highest security, but if your computer breaks or gets a virus, you may lose your wallet.
A paper wallet can be two things. The first is a printed copy of your public and private keys. The second is a piece of software that generates a pair of keys.
The keys are printed, which makes transferring bitcoin easy and straightforward. You will need to transfer funds between your paper wallet and your software wallet to spend it; this process is known as sweeping.
A hot wallet is a crypto wallet that is connected to the internet. A cold wallet is one that is not connected to the internet.
A custodial wallet is where a third party is looking after and storing your private keys. A non-custodial wallet, on the other hand, is kept and controlled by an individual.
Are Crypto Wallets Safe?
These crypto wallets have various degrees of safety. The security level you can expect will differ based on the wallet and service provider. The top mistake with a wallet is sending money to a scammer or the wrong person. Once the currency leaves your wallet, getting it back is impossible, unless the person wants to return it.
To protect your currency, only store low amounts in your online wallet for everyday use. Paper or USB is the ideal way to give yourself protection against computer failure and loss. Keeping your software updated means you will have the highest security software.
Many users also add an extra layer of protection with complex passwords and ensuring all transfers require a password.
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Can I Store All of My Cryptocurrencies in the Same Wallet?
Many people have wondered about this question, but the answer depends on the type of coins that you are holding. For example, if you have Bitcoin and Litecoin, it could be possible to use a multi-currency wallet even though they use their own blockchain. Some of these crypto wallets can allow you to store other types of coins, which makes it easier for those who hold multiple cryptocurrencies.
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For example, you might notice that many cryptos were built on the Ethereum blockchain, ERC-20. With that, many of them are compatible with each other. If you have several ERC-20 tokens, you can store them within the same wallet. However, some wallets can only support specific cryptos. In other cases, some coins are not flexible enough to be stored with different types of currencies. Before you transfer funds, you always want to check with the wallet provider. Unfortunately, transactions made to a non-compatible wallet can mean that you lose those funds with no chance of recovering them.