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How Do Crypto Wallets Work?

Are you interested in becoming a crypto trader? If you are curious about cryptocurrency trading, you must have read about it because it’s one of the hottest trends in the investment world right now. Far from being just a new fad, cryptocurrency investing is changing global finance as we speak.

With all the chatter around the cryptocurrency world, an increasing number of people are venturing into digital currency investing. However, before you begin investing in cryptocurrencies, it is crucial to understand how the various components of this decentralized ecosystem work.

One of the first things anyone needs to handle cryptocurrencies is crypto wallets. If you know the basics of cryptocurrencies, you already understand that it’s not possible for you to fold a cryptocurrency and store it inside a wallet.

So what does it mean to have a crypto wallet? How do crypto wallets work? What are the types of cryptocurrency wallets? 

This post will answer all your questions, starting with what crypto wallets are.

What Is A Crypto Wallet?

A crypto wallet is not like a leather wallet you can use to store currency notes. It is a software program or a physical device that lets you store your cryptocurrency holdings and send and receive crypto transactions.

Every cryptocurrency wallet has a pair of keys called the private key and public key. The public key is derived from the private key, and it is the address that you can use to send crypto to your crypto wallet. A crypto wallet can have only one private key, but it can have several public keys. It means you can give different public addresses for your wallet and use them to send and receive crypto in one wallet.

The private key is a crucial part of your crypto wallet that you need to understand. Think of a crypto wallet as a safety deposit box in a bank, and the private key is your personal key to the box. Anybody who has your private key can take control of the crypto holdings inside your wallet.

Unlike a safety deposit box, however, crypto users with their private keys can make transactions through wallets held by cryptocurrency exchanges.

How Do Crypto Wallets Work?

Now comes the tricky part: understanding how crypto wallets work.

Cryptocurrencies are powered by blockchain technology. Blockchains are decentralized public ledgers that store data in “blocks” that are linked together to form a “blockchain.”

These blocks are a record of all the transactions made on the blockchain network. It contains a record of the balances held at any address in the blockchain network and who holds the keys to those balances.

Cryptocurrencies are not technically stored inside your crypto wallet. Instead, the coins exist on the blockchain network, and your crypto wallet lets you interact with the balances you hold in the blockchain network.

It means that your crypto wallet stores the address of your cryptos on the blockchain, and it lets you move your coins elsewhere.

Not all crypto wallets are the same. Some allow users to send, receive, and store cryptocurrency. Others even allow you to buy and send crypto, swap one type of crypto for another, or stake tokens in exchange for rewards for supporting a blockchain network.

Each crypto wallet has its unique features, but here are some key factors common to most of them:

  • You need to retrieve a public key to receive funds in your crypto wallet. Find the “generate address” feature in the crypto wallet you are using. Copy the public key it generates (in the form of a QR code or an alphanumeric address) and share the public key with the person who wants to send you cryptocurrency.
  • You need the address of the receiving wallet if you want to send crypto to them. Find the “send” feature in your wallet and enter the recipient’s public key. Select the amount you want to send and then confirm the transaction to complete it.

It might seem strange thinking about the fact that you will be sending and receiving crypto through QR codes and alphanumeric addresses, but the process is quite simple. You will get the hang of it after the first few times.

Different Types Of Crypto Wallets

Crypto wallets can either be software wallets or hardware wallets.

Software wallets are desktop software or browser extensions that simplify the process of sending, receiving, and storing cryptocurrency tokens. Software wallets are also called hot wallets because you essentially store your crypto holdings online.

Software wallets are unique to each cryptocurrency. You can use them on the internet in the form of custody wallets at cryptocurrency exchanges that allow you to easily transact with your crypto holdings. However, software wallets are prone to data breaches and theft because of hackers who use internet connections to try and gain access to your wallet.

Hardware wallets also facilitate the same thing, but they are physical storage devices that you can plug into a computer. Keeping your cryptocurrency holdings in a hardware wallet is often referred to as “cold storage” because these wallets keep your private keys offline.

You usually plug in your hardware wallet through a USB port when you want to send or receive crypto from it. They are considered more secure because the wallet is not connected to the internet, and your keys are stored offline, ensuring that hackers do not have access to your crypto wallet in case of data breaches.

Wrapping It Up

Think of a crypto wallet as being a cryptocurrency bank account that only you can control. It also means that you are responsible for its safety and security. Software crypto wallets offer plenty of conveniences because you can access them anywhere you are. However, they’re more prone to theft. Hardware wallets are built for superior security but don’t offer the convenience of software wallets.

Using a combination of hardware wallets and software wallets can help you strike a balance between keeping your crypto holdings secure while leaving an appropriate portion of it liquid in a software wallet for easier trades.

Learning how to use hardware wallets might be a little challenging at first, but it’s one of the best ways to secure your crypto holdings.

Did you find this post on how crypto wallets work helpful? There is plenty more where that came from. Keep following us to read more posts about cryptocurrency investing so that you can get a better start to your cryptocurrency trading career.

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