What is a cryptocurrency wallet and how does it work?
A cryptocurrency wallet is a place to store and save a private key, a string of characters that authorizes you to send virtual currencies. It is worth noting that cryptocurrencies are not "physically" in it, just the numerical data stored in the chronological database of the blockchain. It should also be emphasized that each transaction performed must be signed with a private key. Every person knowing the private key has unrestricted access to the wallet and crypto saved on it.
A wallet for every crypto asset
A cryptocurrency wallet, storing all kinds of crypto coins, does not exist. Of course, having something like this would be extremely convenient, but it is very difficult to implement, if only for technical reasons. Each cryptocurrency works differently. They have a separate, autonomous system. There are some cryptocurrency wallets that allow the user to handle many digital coins, but there is none that would allow for the storage of all coins imaginable.
Crypto wallets types
Online wallet (hot wallet)
An online cryptocurrency wallet can be classified as the least secure because it is connected to the internet, which obviously increases the chance of hacking and taking over of private keys. When using these types of cryptocurrency wallets, you should take advantage of additional precautions to avoid hacker attacks. Of course, there are also advantages to this type of crypto wallet. First of all, it is free and it does not require verification. In some cases, however, it is necessary to enter an e-mail address. The online cryptocurrency wallet is one of the most popular wallets. However, it is not recommended to store a large number of funds on them, because they can be easily taken over by unwanted parties.
An online wallet can also be divided into a few types:
Mobile wallet —
It is an application on the smartphone or tablet. The moble cryptocurrency wallet allows you to make quick transactions, e.g. in shops or restaurants, by scanning a QR code. However, its level of security is medium. These types of wallets are not recommended for storing a lot of cryptocurrencies.
Browser wallet —
It is available from both a computer and a mobile device via a browser. The main advantage of using this kind of cryptocurrency wallet is its convenience. However, you can lose control of your digital currencies very quickly, because it does not use private keys. This type of cryptocurrency wallet is only recommended for short-term usage and small transactions.
Desktop wallet —
It is an application that should be downloaded and installed on the computer. These wallets can be divided into light (in which the blockchain is stored on external servers, they are fast) and full (they download the whole blockchain to the computer, which contributes to longer synchronization time).
Offline wallet (cold wallet)
An offline cryptocurrency wallet is considered to be the most secure, due to the separation of the data from the Internet. It makes taking the funds over impossible. Unfortunately, there are not many of them, and we can divide them into two categories:
Also called a hard wallet. The USB cryptocurrency wallet looks like a normal pendrive. Installed on it is a dedicated software, which allows managing the accumulated cryptocurrencies. In order to perform the transaction, the device must be connected to a personal computer or laptop. Everything takes place in an isolated environment inside the wallet. Signed and encrypted transactions are then sent. Private keys do not leave the device. This kind of mechanism allows usage of the USB cryptocurrency wallets even on infected computers. In addition, the equipment allows the user to create backups. A big plus is that the content can be recovered if the wallet is lost or damaged. Please note that every transfer requires PIN code authorization. Due to the highest level of security, these types of wallets are dedicated to the long-term storage of cryptocurrencies. Their only drawback is that they are inconvenient to use, though it can be used for daily transactions. USB cryptocurrency wallets provide full control over the private key.
It is another form of a cold wallet, operating on an offline basis. This is nothing more than a piece of paper on which both public and private keys are printed. The paper should be well protected, best to keep it in a safe and not share it with anyone. It is also a good idea to make a copy if the original was damaged. The advantage of the paper wallet is a high level of security, due to the offline mode and the ease of implementation consisting of the random generation of a characters string. Of course, it is free to use. One of the few drawbacks is its inconvenience. To perform transactions, the private key must be imported into the application. Only one type of cryptocurrencies can be stored in this type of wallets.
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