Everything You Need to Know About Cryptocurrency Wallets
Cryptocurrency is one of the most prominent revolutions in the history of money. The hardware device or online platform or mobile app that holds various cryptocurrencies is called a cryptocurrency wallet. A wallet for cryptocurrency is a system for sending and receiving cryptocurrencies, storing them, and monitoring their rates.
Just as a person needs an email system like Yahoo or Hotmail to manage his/her emails, in the same way, he/she would require a wallet for cryptocurrency to hold and manage his/her cryptocurrencies. Wallet interfaces into cryptocurrency blockchain (e.g., global ledger for cryptocurrency transactions). Wallets monitor cryptocurrency addresses in the blockchain and renew their balances with each transaction. The wallet for cryptocurrency works in stark contrast to the bank passbook. The cryptocurrency wallet is automatically updated when it is associated with a blockchain.
Now, the most important thing to know about a cryptocurrency wallet is where its private key is kept. The secret private key is a very long string of characters that behaves like a password to the wallet. It is using this private key that the wallet is able to send cryptocurrency to other people in the network. This secret key is also used to create a cryptocurrency wallet address.
The private key is just like an email address. It is something that one wants to give to other people who want to send them their cryptocurrencies. One would be concerned if he/she shared his/her cryptocurrency address or key with anyone. However, if the cryptocurrency address or key is encrypted, there is no way to find out what the secret key is just by checking the cryptocurrency address. To summarize, the main function of the wallet is the creation, storage, and use of an encrypted private key. In other words, it performs real-time cryptography.
As cryptocurrency wallets evolved, HD (Higher Deterministic) wallets, were created. HD wallets generate a phrase known as a ‘seed’ or ‘mnemonic phrase’. These seeds are a string of common words that you can memorize instead of a long, confidential key. If your wallet is destroyed or stolen, you can enter the ‘seeds’ to retrieve the private key.
Additionally, you need to back up the wallet each time you send/receive a payment. Because these keys and the encryption keys have full control over your cryptocurrencies, they should be kept confidential and secure. If you fail to protect the privacy of your wallet or seeds, cryptocurrencies and their control can be lost permanently.
A standard wallet for cryptocurrency will be created as a wallet.dat file as shown in the figure aside containing its private key. This file should be backed up by copying it to a safer location like an encrypted drive on your computer, an external flash drive, or even copying it to a piece of paper and keeping it in a secure location.
An HD wallet on the other hand will stream you with a seed phrase with up to 24 characters that you should write down in a safe place.
Different cryptocurrency wallets available to us are:
Full Node Wallet
HD Wallet
These wallets embrace a full copy of the blockchain in order to authenticate each and every transaction.
SPV (Simple Payment Verification) Wallet
TThese cryptocurrency wallets don’t hold the full copy of the blockchain. They rely on full nodes that they are connected to in order to validate transactions. These wallets are quicker and consume less disk space. Since the blockchain is becoming increasingly bigger in size, many wallets offer an SPV solution for limited capacity devices such as mobile phones, tablets, and desktops.
Hot Wallet for Cryptocurrency
Hot wallet means any type of cryptocurrency wallet that is somehow connected to the internet. This could be a wallet for cryptocurrency connected to a web service, an online wallet, or a wallet installed on your mobile phone if you think you have a data transfer to and from your phone. Hot wallets, though popular, are also the least secure because they allow access to their internal functionality via an internet connection.
Hot Wallets
Different Hot wallets available are as follows:
Web services wallets
Markets, exchanges, betting sites, and other cryptocurrency facilities often require you to invest in their online wallets to track your business. These web wallets are the least secured for storing cryptocurrencies since you don’t have any access to your private keys. You are basically requesting someone else to hold your coins for you. Such wallets are also more defenseless against hackers since they have many loopholes along the way. On the other hand, web wallets are highly suitable as they permit you to buy, sell and send Bitcoins at an instant’s notice.
Desktop wallets
These types of hot wallets accumulate your private key on your desktop computer. So, as long as your computer is free of malware or any security weakness, your cryptocurrencies are safe. Today it’s hard to be 100% protected and this makes desktop wallets that are connected to the internet a valuable target for hackers.
Mobile wallets or Cryptocurrency wallet app
A wallet for cryptocurrency that stores your private key in your mobile phone in form of an app or storage is called a mobile wallet. Although many wallets are accessible by your mobile apps, doing so presents the worst possible scenario for security. Mobile wallets offer low security and terrible privacy, given the potential association of your cryptocurrency wallet, phone number, and geographical location.
As phones are frequently lost, broken, or stolen, it’s strongly advised that you enable multi-factor authentication, password-protect your wallet, and create a private key backup. Mobile wallets are highly convenient and designed to provide as much security as possible in an insecure environment. Nevertheless, a substantial amount of cryptocurrencies should not be stored on a mobile wallet unless used in tandem with a hardware wallet.
Cold Storage Wallet for Cryptocurrency
These are the most protected form of cryptocurrency wallets. These wallets are the unconnected ones. Cold storage wallets cannot be hacked remotely as they refer to any type of wallet that is independent of any internet connection.
Some examples of cold storage wallets are hardware wallets, paper wallets, and Brain wallets.
Paper Wallets
Paper wallets are just pieces of paper with the private key or seed written on them. By keeping your private key on a piece of paper, only that person could access and steal your bitcoins who can physically get that paper. However, paper wallets are easily destroyed and therefore it’s advisable to create multiple copies so that if one paper wallet is lost, your bitcoins can still be retrieved.
Hardware Wallets
These are physical devices that safely store your private key such that it cannot be hacked even if your device is compromised by malware. You can even use them with a public computer that you don’t trust. Most hardware wallets provide a seed backup in the event that the device is lost or stolen.
To send your cryptocurrencies to someone with a hardware wallet, you will need to have your hardware wallet connected to a computer and use some sort of web page that allows control over the wallet. Hardware wallets offer the optimal mix between security and ease of use. Their only limitation is that you need to keep your hardware wallet on you at all times in order to send the coins.
Brain wallets
Brain-wallets are just a way to create a private key with a predetermined text or a set of words. So instead of getting randomly generated seeds you decide on a login section and use basic algorithms to generate a secret key from that login. However, brain-wallets are very casual, have a higher chance of being broken into.
This is because people often guess what they should use as passwords or text that is said to be random and hackers have a way of knowing that. Other tests were executed where simple passwords were used in brain wallets and deposits were made. They were immediately stolen.
Also, a Bitcoin user lost 4 Bitcoins from his wallet after using a secret key using a phrase from an unknown African poem. This proves that even if you think you have found some strong password entry, you are in danger of being hacked.
Multisig(Multi-Signature)
This is a wallet that allows the sending of cryptocurrencies only with the approval of multiple private keys. For example, let us consider that Jimmy, Shona and Lisa all want to start a business together and invest some of their own cryptocurrencies but none of them wants just a single person to have access to the wallet. So, each one gets one unique private key and uses a Multisig wallet that requires two out of the three keys to be entered in order to be accessible. In this way, none of them can run away with all the cryptocurrencies alone, but they also do not need all three private keys to make the transaction.
For example, if Lisa plans to access all the cryptocurrencies, she can’t because she only has one key. But if Jimmy is missing and Shona and Lisa want to pay the bills, they can do it with their two private keys. Multisig is often used for login services when two parties decide on a transaction that requires two out of three keys. If the seller and the buyer do not agree, a third party will be able to resolve the dispute.
Conclusion
However, it is clear that different people will use cryptocurrency wallets for different purposes. For example, if a person needs to keep a large amount of cryptocurrency securely, he or she will use a different wallet than if he or she just wants to have some cryptocurrency transaction to pay for a cup of tea. Some wallets only allow a particular cryptocurrency and its tokens like the MyEtherWallet which supports Ethereum and ERC-20 tokens. Typically, wallets vary by security level and you need to decide where you want to be on the scale. We must remember that we can use more than one wallet for cryptocurrency. For example, you can use a hardware wallet for big cryptocurrencies for more security and have a mobile wallet with a small balance in it to make smaller transactions. This way if your mobile device is broken or stolen you don’t risk a lot of money. It is always wise not to keep all your eggs in one basket.
