A crypto wallet is a software or device that stores your public and private keys to enable the accessibility and security of your cryptocurrencies. Crypto wallets are similar to physical wallets, but they are not the same. While physical wallets hold your cash, crypto wallets do not store cryptocurrency. Instead, they store public and private keys. These keys, in turn, help users to access their crypto and keep them safe. Learn more about crypto wallets, how they work, public keys, and private keys in this article.
How do crypto wallets work?
A common misconception about crypto is that they are stored in a crypto wallet. Cryptocurrencies are stored in the blockchain. However, the blockchain is so complicated that users cannot directly use and access their coins from the network. This is where crypto wallets come in. Crypto wallets put the number of coins owned by the user on display and enable them to buy and sell coins. This is done with the help of two major keys in cryptography: Public keys and Private keys.
As the name implies, the public key is easily accessible to the public. Public addresses are also derived from public keys through hashing. A public address is a location where a user sends cryptocurrency. All users have different public addresses unique to them on the blockchain. A public address could be a series of characters that are easily generated. When a user sets up a crypto wallet, a unique public address is created specifically for them. So when someone wants to send you cryptocurrency, they ask for your public address. This is to confirm the location where the cryptocurrency will land in.
Think of private keys as a PIN or a password. Unlike public keys, they are not to be accessed by the public. When you set up your crypto wallet, a private key will be given to you. This key will be used anytime you need to access crypto in your wallet. Hence, it should be kept as safe as possible.
Public keys encrypt data. By this, we mean that they convert data from simple form to complicated form. The complicated form makes it hard for humans to decode or access. Private keys, on the other hand, decrypt data. Data decryption is simply converting data from a complicated to a simple form. This is why when you need to access your crypto or crypto wallet, your private key will be required so that it will only be accessible to you.
Just to make sure you understand this concept better, we’ll use an illustration. In this illustration, we will relate the crypto wallet to the bank. Suppose Bob needed to send some money to Mark through a bank transfer. He then asked for Mark’s account number to proceed with the transfer. This account number can be likened to a public address because it is telling us where the money will go to. When Bob got the account number, he transferred some money to Mark. Mark received the money, but he wanted to withdraw it through the ATM. However, the ATM required him to input his bank PIN to access the money. After inserting his PIN, the required cash amount was disbursed. In this case, the PIN represents a private key because you cannot access your cryptocurrency without it.
Types of crypto wallets
Crypto wallets have evolved into various types. Every type of crypto wallet has its uniqueness and benefits. Each wallet falls within the category of hot wallet and cold wallet. A hot wallet is connected to the internet, while a cold wallet is offline. There is another wallet category known as a custodial and non-custodial wallet. In custodial wallets, your private keys are managed by a third party. While in non-custodial wallets, you get full control and management of your private keys. We will be placing each wallet type into its different categories. Let’s explore the types of crypto wallets and their pros and cons.
A paper wallet is a cold storage wallet because its private keys are written on paper. It is also a non-custodial wallet since users get full control of it. A paper wallet is exactly what it sounds like. The public and private keys are both written on different sides of a paper. The private key could be generated manually, however, it was too stressful, so people opted for key generator programs. A good advantage of paper wallets is that it is impossible to hack since their storage is offline. Although, they have to be stored tightly in different safe places. It is also subject to the risk of destruction like burning, wearing, or tearing because it is paper.
A hardware wallet is a cold storage, non-custodial wallet. The private keys of a hardware wallet are stored in a hardware device. Hardware wallets are used by connecting it to a PC and performing transactions on the device. On its own, a hardware wallet is a cold storage wallet which makes it impossible to hack. However, its downside is that you can lose the device at any time since it is a physical item. Another con is that if you lose your hardware wallet, you also lose your private keys, so you will be unable to access your wallet.
A software wallet is a hot storage wallet. Software wallets could either be custodial or non-custodial. This is because some software wallets are controlled by a third party while others are not. With the software wallet being a hot storage wallet, they are always connected to the internet. This makes it more convenient and easily accessible for users. You can easily log in to your software wallet through the app or on the web to access your crypto and perform transactions. Transactions on software wallets are significantly faster, and they support more cryptocurrencies. However, software wallets are more prone to hacks since they are connected to the internet. They are also at risk of viruses got from the device on which they are installed.
How do you convert crypto to cash?
Trading crypto can be great, but is it really exciting if you cannot use it in the real world? Cryptocurrency is a digital currency that has not fully been adopted in the real world. This is why it needs to be converted to fiat currency in some cases before you can use it. This guide will walk you through how to convert crypto to cash.
- Crypto exchanges: You can trade cryptocurrencies and fiat currencies on crypto exchanges. But more importantly, you can trade your cryptocurrency for fiat currency. This can be done by connecting your wallet to your crypto exchange for easy transfer of cryptocurrency. After transferring your crypto from your wallet to your exchange, you can then sell it for cash. On Coinbase, for example, there is a buy/sell option. If you have your bank details on the exchange, your cash will be transferred to your bank account after selling your crypto. But keep in mind that the duration in which you will receive your money might vary based on location. You can learn more about crypto exchanges here.
- Peer to Peer trading: Crypto can be traded directly among two parties, either online or in person. Some physical exchangers exist to buy and sell crypto from people. They simply give you their rates and trade with you. For instance, they could agree to buy Bitcoin for X amount. You then send the Bitcoin to their wallet. When they receive it, they can send the corresponding amount of money to your bank account. This method can be done face-to-face as well. However, it is important to be on the lookout for trusted people to exchange with.
- Bitcoin ATMs: Unlike conventional ATMs, Bitcoin ATMs are connected to the internet. They are not physical stands where you withdraw money. Rather, they enable the exchange of Bitcoin for cash by scanning a QR code from your wallet. Many Bitcoin ATMs exist in different parts of the world, and you can find one around your location. As convenient as it looks, Bitcoin ATMs come with a catch. Their fees are significantly higher compared to other methods. Bitcoin ATMs don’t exactly have a fixed fee, but they charge a percentage of the transaction. They may also require a valid means of ID to verify your identity before completing transactions. You may also need to provide your phone number, where a verification code will be sent.
Does your crypto grow in a wallet?
Yes, your crypto can increase in value while it is stored in a wallet. Be careful not to mindlessly store volatile cryptocurrencies in your wallet if you don’t want them to be at risk of losing their value to volatility. On the flip side, they may also grow and increase in value. You can opt for stablecoins if you want the value of your cryptocurrency to stay the same. Stablecoins act as a good store of value and are not prone to volatility. If you need to keep crypto as a store of value, you can swap your token for a stablecoin.
Diana is the CTO of Vestinda.
She’s an engineer with extensive experience in the payments space, passionate about mathematics and artificial intelligence.