Vital Information About Cryptocurrency Wallets
The Cryptocurrency Wallet
A cryptocurrency wallet is, in some senses, like a regular wallet. In another sense, it’s like a bank account. But, it’s also something new. So how does it work and how does it store your cryptocurrency?
A cryptocurrency wallet is actually a private and public key. The public key is what you use to signal your account when interacting with the world. The public key is used in transactions. Anyone can have it without a problem.
For the most part, each cryptocurrency has its own cryptocurrency wallet. However, in recent weeks and months there have been efforts to centralize and standardize them. These cryptocurrency wallets are known as multi-currency wallets.
The truth is, though, that your wallet doesn’t actually save your coins. Rather, it saves the key to the lock that your coins live behind. Your private key is the most important crypto asset you have. And that is what a cryptocurrency wallet keep safe. It’s like your account number, routing number, social security number, and name all rolled into one.
With it, anyone can access your coins. They can also transfer and spend them. And without it, no one can, not even you. Which leads us to…
Dangers of Cryptocurrency Wallets
The problem with keeping your money in one place is simple: security. You essentially have two options of where the private key to your wallet can be kept. It can either be kept online, for instance on a cloud service. Or it can be kept off-line, say on a USB or written on a sheet of paper.
In the first option, there is always the danger of the hacker. There are some real horror stories here. Individuals who invested early in Bitcoin and became Bitcoin millionaires have lost it all. As the value of Bitcoin and other cryptocurrencies increases, so does the value of stealing a cryptocurrency wallet. Part of the problem is that your phone or computer, while not easy to hack, are much easier to hack then, say, a bank’s system. This means that given the option between hacking a bank and hacking you, you’re the juicy target.
Which might lead you to the second option, storing your key and wallet offline. This has the far more mundane but no less serious risk: you lose the key. Before you scoff, remember if you’ve ever locked yourself our of your house. Or if you’ve ever misplaced an important document. The saying goes that shit happens, and sometimes it just does. Horror stories exist here too. Losing your key can mean the wallet is lost forever. Some of the earliest investors in Bitcoin walked away for a year or two and are now unable to get back into their account. Talk about kicking yourself.
Even if the private key is stored in a file on your computer, there’s risk. If the computer dies, or you spill water on a USB, or there’s a power surge, then it’s gone. Which leads us to…
Backing Up A Cryptocurrency Wallet
Because of the danger of losing a cryptocurrency wallet, and therefore all the coins, several backup options exist.
Some individuals will create an encrypted file that contains their private keys. This file can exist on their computer, a USB, or an external harddrive. As mentioned above, this isn’t fool proof. However if you create two or three USBs with your keys, then you can avert this risk. The loss of a single USB doesn’t mean the loss of the wallets entirely.
Often, it’s better to store these keys off line, so they can’t be hacked. Placing a USB underneath your bed makes it susceptible to burglars, but not hackers. Some people even get their private key burned into a piece of metal. I’m not sure how practical that is, but it is definitely badass.
Some services also offer mnemoric sentences or phrase lists that can be used to recover a lost key. And others use provider-managed keys. However, there are several scams, so providers should be chosen very carefully.
Types of Wallets
As you’ve likely gleaned by now, there are three major types of wallets.
These are web-wallets that you access via your browser. Likely, you sign into a site using a username and password like your bank account. The wallet (keys) are kept by the site. The danger is hacking.
Either on your desktop or mobile, these require physical access to the device to use. This makes them harder to hack. However, the loss or the phone or computer means the loss of the wallet.
Some individuals have turned to a hybrid option. Hardware wallets are secure, offline devices that store your private keys. There are usually around $100. They’re virtually impossible to hack, even if you use them with a computer that has malware on it. So long as the hardware is safe, your key is safe. Strictly speaking, memorizing your wallet or writing down are also so-called cold storage options.
But What Are Keys?
We discussed keys a bit earlier, but it might be helpful to understand the function they serve. Keys always come in pairs. The public key encrypts information and the private key can decrypt that information. In this way, someone can send something to you using your public key. Then you, and only you, can use its twin – the private key – to decrypt that information. It’s a smart tactic that has allowed crypto to be both functional and secure.
Multicurrency Crypto Wallets
Of course, even if you successfully store and prepare backups, having dozens of wallets can be a headache. Some cryptocurrency wallets are increasingly offering multiple currencies in one place. Exodus is a great example. However, hardware wallets can now do this for you as well.
Cryptocurrency Wallet Takeaways
Your public key can be shared but your private key need to be kept securely. Only you should have access to your private key. However, be careful not to lose the private key. If you do, you can lose the entire wallet.
As always, good luck on your crypto journey.
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