Even amid this most bearish of times for crypto traders, the market continues to grow.
There have been many selloffs as investors look to salvage a bit of their initial investment in the face of plunging market prices.
And that’s just how it’s been for the individual investors. For the institutional stakeholder, it’s been worse. Some have gone bankrupt, while other holdings have had to default on loans amidst a fresh financial crisis.
The reason? It’s simple. There are not enough funds available to balance out liquidity. In summary, it’s been a bad year for crypto and everyone involved.
Nevertheless, this isn’t to say that cryptocurrency investment is a scam, as many people are making it out to be. The blockchain is as real as any technology ever invented, and it promises much more than has been achieved.
So, whether you’re choosing to HODL at this critical point in crypto evolution or selling off assets as fast as possible, you still need to take security as crucial.
While many investors prefer to leave their tokens on exchange platforms, crypto wallets are the ideal option for many reasons.
In this article, you’ll learn about them, how they work, and why you should use them.
Stick around as we delve into this interesting topic.
What is a crypto wallet?
The phrase “crypto wallet” implies a safe house, a place where you can store your tokens.
In layman’s terms, that is precisely what a crypto wallet is designed to achieve. However, as you’ll see, it’s an error to think that the wallet contains actual crypto tokens. Instead, they hold something more valuable- your encrypted keys.
So, the correct way to explain crypto wallets would be to see them as software that enables the safe transfer and storage of crypto tokens.
A cryptocurrency wallet is a program that facilitates transactions and validates them via your private and public keys.
Public key
Your public key is similar to your bank account number. It doesn’t have to be private, hence being “public.” It’s the address to your token holdings, and anyone who wants to send funds to your token will carry out the transaction using the public keys.
You should note that a crypto wallet can have several public keys or addresses. No matter how many, they still grant access to the same wallet.
Private key
This is the most sensitive piece of your crypto wallet, one you must guard with all diligence. With it, you can sign off and validate transactions from your wallet. It grants direct access to your tokens; without them, they’re lost forever.
So, a private key is like a secret combination to a safe. However, unlike safe boxes, crypto users can alternatively carry out transactions with non-custodial wallets (more on this later).
Signaling is the act of using your private crypto keys to initiate transactions.
How do crypto wallets work?
To get a clear picture of how crypto wallets work, it’s important to touch on blockchain technology for a bit.
The blockchain is an interconnected, continuous register of mutually validated transactions.
It’s also highly secure, with its underlying mechanisms that are fool-proof and immutable.
The blockchain stores its transactional data as digital records called blocks. The blocks are timestamped records of transactions and represent the actual cryptocurrencies.
So, you see. The wallets don’t “hold” the cryptocurrencies. Cryptocurrencies exist solely on the blockchain. With your crypto wallet, you can manipulate the balance on your blockchain address, i.e., public address.
Crypto wallets also store your network address.
What can you do with a crypto wallet?
A crypto wallet will help you to store and transact crypto. Today, there’s better innovation with wallets; you can do more than receive and send assets.
Now you can stake, swap and access Decentralised Apps on different blockchain ecosystems.
How to send money with a crypto wallet
Although each wallet is unique, receiving and sending funds tend to follow these steps.
First, you should be aware that most wallets support receiving funds. All you have to do is to get the public key by generating an address from the wallet.
Some wallets have QR code support, so all you have to do is to scan it. More often than not, it’s an alphanumeric combination. After that, you’ll share this generated public address with the sender.
When someone is sending you funds, you’ll need to provide them with a receiving address. Sending is just as easy as receiving, as all they’ll have to do is enter in the wallet address you sent and the number of tokens they intend to share.
It’s advisable to send small amounts of crypto before sending higher volumes. Also, each transaction carries a processing fee.
Types of wallets
There are many wallets, but they can be broadly categorized into software and hardware wallets.
Let’s see how they work.
Software wallet
These are small computer programs like browser extensions and apps that enable storing, receiving, and sending tokens.
You’ll probably hear of software wallets being referred to as “hot wallets”. They mean the same thing and are regarded thus because they function over the internet.
This way, you can only access it online. However, hardware wallets store your private keys offline in “cold storage”. We’ll examine more about this in the next section.
Hardware wallet
This is the best form of holding crypto tokens. It probably doesn’t have the extent of convenience that hot wallets have, but they’re much more secure.
Hardware wallets are physical devices similar to hard drives that store your tokens offline.
So, whenever you want to do a transaction, you’ll have to plug it in via the USB port. Therefore, you won’t expose it online too often: only when you want to transact.
Even better, you can rest easy knowing that your encrypted keys aren’t on any computer or mobile device.
Custodial wallets
To do transactions on the blockchain, you’ll have to verify your address with the password. This password is your private key.
And your wallet plays a role in its security and speed.
As explained before, soft wallets are hosted online. Many web-based wallets are referred to as custodial wallets and are usually offered in various exchanges.
They’re easy to use and popular with newbie and veteran traders.
With custodial wallets, the exchanges hold the keys, which they can conveniently access whenever they want to do transactions.
This means that you’d be trusting your keys to the security measures of the exchange platform.
The security measures are usually fool-proof, with the 2FA, biometric, and email verification part of the deal.
As a result, many exchanges won’t let you use a custodial wallet, except you have gained access through every layer of the firewall.
For better security, many crypto exchanges hold token reserves in their cold storage facilities. There, they’re better protected from an online hack.
Key things to know about crypto wallets
Now that you’ve mastered the basics and understand why it’s important to use crypto wallets, let’s move on to the heart of the matter.
It’s always good to be in the know, as you’ll avoid making costly errors and take better advantage of the resources. So, without further ado, we’ll show you the most important things to understand about crypto wallet transactions:
1. Wallet addresses are token exclusive.
An ETH wallet address isn’t the same as a BCH one. When sending, you can only send tokens to a corresponding wallet that supports that same token. So, if you transfer funds from your wallet in error, you’d have virtually signed off everything to thin air.
2. Crypto wallets are a speedy alternative to financial transactions.
With a good crypto wallet, you can say goodbye to waiting days for transactions to go through, as is the norm with traditional finance.
Central banks can slow down the process, and other rules and regulations affect speed and efficiency. This is nonexistent with cryptocurrency, and wallets make things seamless and quick.
3. You can also go old-fashioned with paper
Another method of storing your keys offline is to write them out on paper. It’s not ideal if you’re clumsy or tend to lose things easily. But it’s safe and convenient if you can handle it.
4. Hardware wallets are expensive but worth it
The cheapest hardware wallets cost at least one hundred dollars. This can seem like a lot of money for something so simple. After all, you can easily use many free wallet apps on your mobile phone.
But, if you want that extra bit of security, then you shouldn’t shy away from investing in a hardware device to store your tokens.
Conclusion
CoinStats offers one of the best software wallets, with maximum security and many interesting features. With it, it’s easier to trade and make other dealings with your assets.
So, don’t be shy to try it out. A crypto wallet is more than just a convenience. As a crypto investor and trader, it’s a necessity.