A cryptocurrency wallet stores user’s virtual currency and enables him or her to operate with it. It also keeps a record of all transactions carried out. A digital currency wallet does not store the cryptocurrency itself. In fact, it only contains a matching set of a private key along with a public key of its user that are needed to access assets and authorize transactions.
- A private key is a unique secret number of the user that guarantees full control over the account. It is essential to keep the private key secured as anyone in possession of the key has an access to the funds linked to it and when lost it cannot be recovered.
- A public key is an identifier derived from the private key using a one-way cryptographic function ensuring no one is able to work out the original private key. The public key is then used to generate a public address that works in a similar way to a bank account number.
As mentioned earlier, security should be the top priority when choosing a cryptocurrency wallet. There are numerous wallets with different features to suit just about anyone’s needs and it is worth investing time into the research. Most cryptocurrencies have their own official wallet. However, there are also third-party digital currency wallets, some of them allowing storing multiple cryptocurrencies.
There are five basic types of cryptocurrency wallets
online, mobile, desktop, hardware and paper wallets, all having their pros and cons. Online wallets accessed via a web browser are the least safe among them as they are highly susceptible to malware attacks and scams. On the other hand, they are easily accessible from any device connected to the internet, which makes them very convenient.
a) Mobile wallets
come in the form of applications installed on mobile devices. Mobile wallets might offer a slightly higher level of security than online ones while still maintaining account accessibility on the go. Digital wallets installed on mobile devices enable quick and easy payments just like a real wallet does. However, cybersecurity issues are great and there is always a risk of losing the physical device along with the keys stored on it.
b) Desktop wallet
Another type of cryptocurrency wallet is a desktop wallet. Desktop wallets are downloaded to a computer and installed just like any other software. The level of security can vary depending on whether the PC is connected to the internet or not. As a rule of thumb, a desktop wallet is only as safe as the computer it is installed on. The biggest advantage of desktop wallets is the possibility to store private keys on the device instead of a third-party server. However, any funds linked to one‘s private key can be lost as a result of a computer malfunction, so a back-up is a must.
c) Hardware wallet
One of the safest ways for storing cryptocurrencies is a hardware wallet. Hardware wallets are special devices similar to USB drives that store private and public keys. Since they are not connected to the internet, they provide very high security. Hardware wallets are most suitable for large amounts of coins stored for a longer period of time. However, the funds are not as easily and readily accessible and the cost of a hardware wallet is rather high.
d) Paper waller
Paper wallets are offline in nature and as such, they are considered extremely safe. Private and public keys are printed on a piece of paper along with corresponding QR codes that can be scanned to make transactions. Although paper wallets might seem easy to use, they are a bit more complicated to set up which makes them less available to beginners. It is also important to note that while paper wallets are immune to cyber threats, they are still susceptible to physical damage and can be easily lost.