TLDR : What ‘exactly’ is a “Crypto Wallet”? (5-7min - beginner)
I know there’s a lot of new investors on here, that want the exposure to crypto… but maybe you don’t feel comfortable venturing anywhere else but Public. And that’s perfectly fine, because you can still obtain exposure to the price action of supported cryptocurrencies. (There’s much more exposure to be had, but that’s not what this post is about).
So, with #public not offering users the ability to manage their “crypto wallets”, I feel like there’s a lot of confusion around the topic? What are they? How do they work? How are they used? Why are they so confusing and easy to mess up? Why does the crypto community say, “not your keys, not your coins!!” (Is this a liability with CEX’s?)
Contrary to popular belief, your #crypto is not actually stored “in your wallet”. So while most think of it like cash in the wallet of their back pocket/purse, that is not really the case.
It might be more accurate to compare your crypto wallet : to the key for your safety deposit box. Which is protected/secured/accessed by the bank, right?
Within Crypto, these assets in your “satey deposit box” are protected/secured/accessed by the #blockchain . But you must have your keys 🔑 (wallet) to access those assets.
I stumbled across an article this morning on Crypto(dot)com. That breaks down crypto wallets in a very simple and understanding manner. And wanted to share in hopes it clears any confusion up for some. Maybe even make some confident to further explore the asset class! 🔥✅
It’s internally from the app, couldn’t find a way to link.. but here it is, again, hope this helps anyone needing/wanting more clarity on the topic! 🤙💯
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**Sourced from crypto-com**
What is a Crypto Wallet?
Cryptocurrency wallets store users’ public and private keys while providing an easy-to-use interface to manage crypto balances. They also support cryptocurrency transfers through the blockchain. Some wallets even allow users to perform certain actions with their crypto assets such as buying and selling or interacting with decentralised applications (DApps).
It is important to remember that cryptocurrency transactions do not represent a ‘sending’ of crypto tokens from your mobile phone to someone else’s mobile phone. When you are sending tokens, you are actually using your private key to sign the transaction and broadcast it to the blockchain network. The network will then include your transaction to reflect the updated balance in your address and the recipient’s.
So, the term ‘wallet’ is actually somewhat of a misnomer as crypto wallets don’t really store cryptocurrency in the same way physical wallets hold cash. Instead, they read the public ledger to show you the balances in your addresses and also hold the private keys that enable you to make transactions.
*Not sure what a public or private key is?*
A key is a long string of random, unpredictable characters. While a public key is like your bank account number and can be shared widely, your private key is like your bank account password or PIN and should be kept secret. In public-key cryptography, every public key is paired with one corresponding private key. Together, they are used to encrypt and decrypt data.
*Why You Need a Crypto Wallet*
Your cryptocurrency is only as safe as the method you use to store it. While you can technically store crypto directly on the exchange, it is not advisable to do so unless in small amounts or if you plan to trade them frequently.
For larger amounts, it’s recommended that you withdraw the majority to a crypto wallet, whether that be a hot wallet or a cold one. This way, you retain ownership of your private keys and have full power and control over your own finances.
*How do Cryptocurrency Wallets Work?*
As mentioned earlier, a wallet doesn’t actually hold your coins. Instead, it holds the key to your coins which are actually stored on public blockchain networks.
In order to perform various transactions, you’ll need to verify your address via a private key that comes in a set of specific codes. The speed and security often depend on the kind of wallet that you have.
*Different Types of Crypto Wallets*
There are two main types of crypto wallets: software-based hot wallets and physical cold wallets. Read on to learn about the different types of cryptocurrency wallets, and which is best for you and your needs.
*Hot Wallets*
The main difference between hot and cold wallets is whether they are connected to the Internet. Hot wallets are connected to the Internet, while cold wallets are kept offline. This means that funds stored in hot wallets are more accessible, and are easier for hackers to gain access to.
Examples of hot wallets include:
-Web-based wallets
-Mobile wallets
-Desktop wallets
In hot wallets, private keys are stored and encrypted on the app itself, which is kept online. Using a hot wallet can be risky because computer networks have hidden vulnerabilities that can be targeted by hackers or malware programs to break into the system. Keeping large amounts of cryptocurrency in a hot wallet is a fundamentally poor security practice, but the risks can be mitigated by using a hot wallet with stronger encryption, or by using devices that store private keys in a secure enclave.
There are different reasons why an investor might want their cryptocurrency holdings to be either connected or disconnected from the Internet. Because of this, it’s not uncommon for cryptocurrency holders to have multiple cryptocurrency wallets, including both hot and cold wallets.
*Cold Wallets*
As introduced at the beginning of this section, a cold wallet is entirely offline. While they’re certainly not as convenient as hot wallets, they are far more secure. An example of a physical medium used for cold storage is a piece of paper or an engraved piece of metal.
Examples of cold wallets include:
-Paper wallets
-Hardware wallets
*What is a Paper Wallet?*
A paper wallet is a physical location where the private and public keys are written down or printed. In many ways, this is safer than keeping funds in a hot wallet, since remote hackers have no way of accessing these keys which are kept safe from phishing attacks. On the other hand, it opens up the potential risk of the piece of paper getting destroyed or lost, which may result in irrecoverable funds.
*What is a Hardware Wallet?*
A hardware wallet is an external device (usually a USB or Bluetooth device) that stores your keys. You can only sign a transaction by pushing a physical button on the device, which malicious actors cannot control.
For any cryptocurrency assets that you do not need instant access to, the best practice is to store them offline in a cold wallet. However, users should note that this also means that securing your assets is entirely your own responsibility. So it’s up to you to make sure that you don’t lose it or have it stolen!
(Tip: For increased security, separate your public and private keys, keep them offline, and store your physical wallet in a safe deposit box.)
*Hot Wallets vs Cold Wallets: Which is Better?*
While both methods of storage have benefits and drawbacks, the option you choose will depend on what you are looking for. For example:
If you plan to trade day-to-day, then accessibility will be of paramount importance, meaning that a hot wallet is probably an apt choice.
However, if you are considering storing a huge amount of crypto assets and value security over convenience, then it might be wise to invest in a cold wallet.
Furthermore, you can define these wallets as “custodial” or “noncustodial wallets”. However public limited how long this post was and I could not share it. Check comments for link on custodial Vs. Non-custodial wallets. It’s important to understand IMO!
**Sourced from crypto-com**
**photo credit to crypto-com**
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#crypto #btc #cryptowallets #cryptolearn #crypto101 #blockchain #cryptosecurity #knowledgeispower
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