How Crypto Wallets Work: 5 Important Key Things You Should Know

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With the consistent argument of the need for crypto adoption, cryptocurrencies such as Bitcoin, Ethereum, and the rest have a fast-growing community. However, it is vital to note that one may not hold or store cryptocurrencies without wallets coming into the spotlight.

Not considering if you are a top crypto investor or just a greenhorn in the industry, a crypto wallet is needed before trading cryptocurrencies.

A crypto wallet is where an investor can organize and make decisions concerning their portfolio. Ironically, some cryptocurrency traders often forget to study the primary elements that contribute to the functionality of a crypto wallet not doing so may lead to loss of funds due to the varying levels of security each type of wallet has.

With that in mind, let’s check out the key things one should note about a crypto wallet, its functions, and the different kinds of wallets.

What Is a Crypto Wallet?

Most of the time, the interaction that happens on the blockchain is to the courtesy of the crypto wallet; one can hardly find any activity on the blockchain that does not require wallets.

Crypto wallets are needed to invest or trade cryptocurrencies; even getting crypto loans needs a wallet before any other step is taken, so it is indispensable.

A crypto wallet can be related to the traditional bank account; it is where one can manage and trade their cryptocurrencies, including other digital assets like NFTs.

However, data cannot be altered or manipulated in a crypto wallet, and it does not have to pass through intermediaries for a transaction, unlike the traditional financial system.

It is possible to have a wallet anywhere, on your desktop, mobile device, browser, and even offline; it uses public and private keys to exchange funds from one wallet to another.

How Crypto Wallets Work

Public and private keys are the most prominent elements for crypto wallets to function as a tool of interaction within a blockchain network.

While every crypto wallet might have public and private keys, the number of cryptocurrencies they support and their user commitment may differ depending on the type of wallet.

Be it as it may, crypto wallets primarily function by using public keys, which are similar in function to a bank account number, and a private key which acts as an access to the crypto funds one might possess.

These two elements allow users to see the total worth of the crypto they have, send and receive money to their address, and buy other digital assets such as NFTs.

However, it is necessary to note that while the public key can be shared with anyone to send and receive money, private keys, just as the name depicts, should not be shared with anyone to avoid illegal access to your funds.

There have been cases where big crypto investors/ traders lost a crypto portfolio worth a lot of money either by revealing their private keys or losing them.

5 Important Key Things You Should Know

Types Of Crypto Wallet

Crypto wallets are of different types, just as the traditional banking system has different kinds of bank accounts. Nevertheless, the variations of crypto wallets are not entirely similar to that of the banking system.

Paper wallets, hardware wallets, and software wallets are the three basic types of crypto wallets, and both beginners and experienced traders can use any of them.

A vital thing one should note is that each type of crypto wallet one chooses depends on the primary function it will serve.

A paper wallet is primary for those holding their crypto for an extended period and needs to secure their private and public keys by making a printout or a copy of them.

Hardware wallets are similar to paper wallets, although they differ in many ways; while hardware wallets come in the form of a device like a USB, paper wallets are just printouts. In terms of security, hardware wallets are probably the best option; one can easily keep an extensive crypto portfolio safe from cybercriminals simultaneously.

On the other hand, software wallets function on mobile devices, desktop devices, and even browser extensions. Also known as hot wallets, the private keys of a software wallet are stored on the cloud 24 houses a day, and it is effortless and more straightforward to make transactions with them.

Cracking or hacking into a paper or hardware wallet is not a walk in the park; that’s not the case with software wallets. An intruder or a seasoned cybercriminal can easily hack into a software wallet at the slightest opportunity.

Coins Supported

It is necessary to learn that each crypto wallet has the cryptocurrencies they allow to be sent and received. In other words, the cryptocurrencies that are supported by a software wallet might not be supported by a hardware wallet.

This does not mean that software wallets support all kinds of cryptocurrencies – there are still differences in the number of supported cryptos.

For instance, Electrum is a crypto wallet that only allows its users to store and manage Bitcoin in the wallet. In contrast, another crypto wallet, the Trust wallet, allows its users to store multiple coins, including Ethereum and Cardano (ADA).

It all depends on trading functions and storage, but note that more often than not, a wallet that supports one type of coin or a few cryptocurrencies has a lot of security and features.

However, a downside is that it might be hard to memorize the seed phrase or private key of a wallet that supports one crypto if you need to use multiple cryptocurrencies.

Open Or Closed Source

Crypto wallets either come as an open-source or closed source; choosing between these two is not based on anything other than guts.

As the name depicts, open-source crypto wallets are those means that the users of the wallet and the developers can see the negative part of the wallet and drop a review concerning the flaw.

Contrary to open source, closed source wallets don’t have their source code, and many restrictions come with these wallets.

It is of expert opinion that one uses open-source wallets as they are known to receive criticism and improve on the necessary security and compatibility concerns.

Custodial or Non-Custodial

Many beginners overlook this aspect of wallets in the quest to join the bandwagon of cryptocurrency; what is the level of user commitment.

Before using any wallet, check the level of control you have when accessing your crypto portfolio and making transactions.

A custodial crypto wallet is where the private keys and other essential components of the wallet are held by a third party which might be a crypto exchange. In simpler terms, the only thing a custodial wallet user can control is the permission to send or receive cryptocurrencies from other wallets.

This is very different from a non-custodial wallet; the user is the only one that controls the storage of the private and public keys and transaction functions and determines when the wallet is active.

However, while the non-custodial wallet gives users the power to do whatever they like with their security information, custodial wallets allow users to recover their data whenever they lose access to it. Some custodial wallets include Binance, Bitmax, Free Wallet, and Bitgo, while non-custodial wallets are Electrum, Trust wallet, Exodos, Zengo, etc.

Security

The central focus and evaluation of a crypto wallet should be on security; it does not matter whether they don’t have a lot of features.

It is easier to use a wallet that lacks very advanced features than to use one that can easily fall under the attack of a hacker.

While talking of security, most crypto enthusiasts think of a software wallet; without proper care, a hardware wallet can be stolen or manipulated. Therefore, the safety provided by a crypto wallet should be carefully evaluated before any decision is made to use them.

For those using software wallets, note that the security provided should not just end at a password; expert hackers can easily override it. Hence, one must use software that offers two-factor and multi-factor authentication and a backup feature in the case of forgetfulness.

Hardware wallets are not left out in security evaluation; a hardware wallet should come with a CC EAL5+ certified Secure Element chip to ensure hackers can’t access it. Just like a software wallet, you can create a paper wallet that will include your recovery seed to prevent losing funds in case your hardware wallet gets spoiled.

Conclusion

Many inexperienced crypto investors are using a kind of wallet for a purpose not primarily built to carry out.

It is essential to learn how a crypto wallet operates, the commitment a user is allowed to in a particular wallet, the number of coins supported, the security measure a wallet poses, and many other things.

When such knowledge about crypto wallets is grasped, the rampant loss of cryptocurrencies in the crypto scene due to illegal access to wallets by hackers will be reduced.

An engineering graduate who is passionate about writing and loves the very existence of crypto. Trading forex currency keeps me busy when I am not writing and analysing the crypto world.