How crypto wallets work: 5 key things you should Know

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The 2021 user index showed 97% confidence in cryptocurrencies. Since then, many more users have shown interest in crypto and have started trading in the space. As of March 2022, the average daily crypto trading volume was $120 billion, and the global blockchain market is predicted to go up to $23.3 billion by 2023.

This explosive industry growth has led to keen interest from many potential crypto users. However, while a newcomer might be interested in the use of cryptocurrencies, the purpose and functions of a crypto wallet might not be entirely clear initially.

This article explains 5 key things you should know about crypto wallets and their functionalities.

1.   What is a crypto Wallet?

A crypto wallet is a physical device (hardware wallet) or an app or program (software wallet) for storing cryptocurrencies. Wallets also enable sending and receiving of crypto while maintaining a clear record of transactions on the blockchain.

2.   Type of crypto Wallets

Crypto wallets may be simple-to-use apps or more complex and secure solutions. Following are the main types of crypto wallets you can choose from:

Online Wallets

With an online wallet, your keys will be stored in an app or other software. Therefore, it is advisable to look for an online wallet that is protected with two-step encryption.

Sending, receiving, and utilizing your crypto through an online wallet is as easy as using an online bank account or digital payment system.

Paper wallets

With a paper wallet, your keys will be saved using a physical medium like writing on paper. The paper must then be stored in a safe place to ensure maximum security. Of course, this physical system makes it difficult to use your crypto as the key is offline, and the crypto is only usable on the internet.

Hardware wallets

With a hardware wallet, your keys will be stored in a thumb-drive device that must be kept in a safe place and connected to a computer only when you wish to use your stored crypto. The idea of a hardware wallet is to try and strike a balance between security and convenience.

Technically, crypto assets aren’t stored “in” the wallet. The crypto coins exist on a blockchain that records all transactions, balances for any given address, and details about who holds the key to those balances. The wallet merely stores addresses, enables interaction with the balances held on the blockchain and allows you to move coins elsewhere. Others can also see the balance held at any given address through your public keys.

3.   Crypto wallet Keys

A crypto wallet has two keys: public keys and private keys.

Public Keys

A public key is a cryptographic code (paired with a private key) used to receive cryptocurrency. Anyone can send crypto using the public key, but they cannot “unlock” the transactions without the private key. Therefore, you can share your public key freely without worry.

A public key that can receive crypto is typically an address — a shortened form of your public key.

Public keys for online crypto addresses are usually seen on donation pages for charities or content creators or with the public keys. Anyone can donate through the public keys, but they cannot unlock or access the donated funds without the private key.

Private Keys

A private key holds the ability to prove ownership of a crypto wallet or spend the funds associated with that public address. Therefore, you should store your private key extra carefully and never share it with anyone.

Private keys take many forms:

  • QR code
  • A mnemonic phrase
  • 64-digit hexadecimal code
  • 256-character long binary code

Irrespective of its form, a private key is an extremely large number. You can generate a public key using a private key, but it is practically impossible to do the opposite due to the sheer largeness of the number — an effective one-way “trapdoor” function.

While you can have any number of public keys linked to a single private key, you cannot have more than one private key.

Which type of wallet is the most Effective?

All crypto wallets have their unique upsides and downsides, making their effectiveness subjective to the requirements of the holder.

Paper and hardware wallets make it more challenging for malicious users to access your crypto wallet because they are stored offline. However, they are limited in their functionalities and come with the risk of being lost or destroyed.

Online wallets offered by major exchanges are simpler for novices and offer a good balance of security and ease of access. However, it is crucial to remember that your protection against hackers is only as good as the security offered by your wallet provider. Since your private info is online, you must look for features like two-factor verification in an ideal online wallet.

4.   Sending and receiving funds with a crypto Wallet

While each wallet has its unique functionalities, the following are some of the general steps for sending and receiving funds via a crypto wallet:

  • If you wish to send funds, you will require the address of the receiver’s wallet. Using the “send” feature in your wallet, enter the address of the wallet to which you want to send coins and select the amount of crypto you’d like to send. Once you have cross-checked the details, you can click “confirm.” It is advisable to perform a small test transaction before sending a large amount of crypto. Sending coins comes with a fee paid to miners in exchange for processing the transaction.
  • If you wish to receive funds, you will have to retrieve a public key from your wallet by clicking on the “generate address” feature. Copy the QR code or alphanumeric address and share it with the person who wants to send crypto to your wallet.

5.   Biggest plus point and minus point of using a crypto Wallet

Plus point: self-ownership of Money

Holding your own private keys implies that the crypto in your wallet belongs to you and only you. In comparison, money in a bank is technically the property of the bank.

Holding your own private keys implies that the crypto in your wallet belongs to you and only you. In comparison, money in a bank is technically the property of the bank.

Minus point: individual Responsibility

While self-ownership of money is empowering, it also means that you have to assume 100% liability for anything that goes wrong with it.

The decentralized nature of crypto brings along with it the risk of losses in case of hacking or scams. You must remember that transactions cannot be regulated or reversed through any intervention — you are wholly responsible for the transactions you choose to make.

Therefore, it is your responsibility to stay alert while making transactions and choose a secure wallet that protects your crypto against theft in storage.

Closing Thoughts

While choosing a crypto wallet, it is important to find one that meets all your requirements. For instance, CoinStats allows you to manage all your DeFi and crypto in one place — one wallet for buying, selling, swapping, tracking, and earning on your crypto assets.

If you’re new to crypto and using a crypto wallet for the first time, there might be a learning curve. You will need to have a basic level of computer knowledge and get familiar with a new financial ecosystem.

Jonathan Gibson

Jonathan Gibson