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What is a Cryptocurrency Wallet?

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Cryptocurrency has fluctuated wildly this year, but its relevance and popularity have only gained momentum. 

And yet, despite how far technology has come, you still need a wallet… even if your money is digital.  

How does it work? 

You don’t literally store your cryptocurrency in this wallet. Cryptocurrency wallets are used to keep the public and private keys of your cryptocurrency in one place in the same way your wallet gives you a place to keep your cash and credit cards. 

If you’re new to crypto, you need a public key in order to be able to receive money. You need a private key to be able to make transactions with and use your cryptocurrency. All of your cryptocurrency lives on the blockchain, the digital ledger of all transactions. These keys help manage your “ownership” of the crypto in question. 

So imagine we didn’t mine for gold. Instead, we logged every gold deposit in the world. Let’s say we assigned a number to them. You could own a deposit of gold in Africa. It increases in value as gold prices inflate. And let’s say you want to sell that deposit for cash to someone in Korea. Now they own that gold deposit. The gold has not moved at all but the ownership has changed hands. 

Similarly, if you had bitcoin, the bitcoin never “leaves” the blockchain–its ownership is just being exchanged. 

A Bit About Keys

Now, how do these keys work? On the simplest level, your public key is like your routing number and your private key is like your account number and signature.

Anyone can send you crypto using your public key. You can list it publicly like your Venmo or Cash app. Your private key, however, is what you use to verify transactions and do anything with the cryptocurrency. So you’ll want to keep that more private than your social security number. Anyone who has your private key can–if they know how–clean out your wallet.

The crypto in cryptocurrency is named for the cryptography and encryption that makes it possible for the entire blockchain to be public but for your currency to remain secure. 256-bit encryption is used to derive a private key from a public key. 

While secure, that can be cumbersome for many. One evolution to cryptocurrency is new wallets will provide you with a mnemonic seed. This is a string of random words that correspond to your private key. It’s kind of like in Captain America: Civil War where a few random phrases turned Bucky Barnes into the Winter Soldier. But with these random phrases, you get access to some Bitcoin or Ethereum, not a super-soldier.

Different types of cryptocurrency wallets

Cryptocurrency wallets vary in their use, potential protection, and how easy they make it to use your cryptocurrency. 

Let’s break it down: 

What are the types of cryptocurrency wallets? There are three main types of wallets: paper wallets, software wallets, and hardware wallets. Additionally, a wallet can either be “hot” or “cold,” with hot referring to being on the Internet and cold meaning not actively on the Internet.  

  • Paper wallets are printouts of your private and public keys. This can also be manually written down versions of your private and public keys or the mnemonic codes for your wallet. Paper wallets also have QR codes that help you “sign” or validate your transactions.
  • Software wallets are apps, web pages, or desktop applications that store your private and public keys. They also facilitate signing your transactions. 
  • Hardware wallets are external devices that help you keep your private and public keys off of your computer. This allows you to better protect the privacy of your keys, which is incredibly important, considering crypto prices can be so high that if you lose your private key or get hacked you could lose tens, if not hundreds of thousands of dollars. 

For more on these wallet types click here

A Bit About Websites and Apps

There are many websites and apps that facilitate crypto transactions like Coinbase or Robin Hood. Now, these can vary so you’ll want to know if your wallet is actually on the blockchain or not. 

Oftentimes, these companies will not facilitate wallets so much as act as a middle man. Kind of like a bank. You buy and trade and they facilitate those transactions or allocate the crypto they manage to you. But they manage the transactions on the blockchain. 

These are helpful services and a great way to get started. But it’s important to know where your wallet is and how your crypto is being managed. 

Finding the right wallet can depend on your skill level, the safety required to protect your crypto, and what is more intuitive for you. At first, it can be hard to get a clear picture of the terrain because, by design, cryptocurrency was built by a tech-savvy crowd. And it’s a whole new world because it was designed to act as its own financial system. 

But just like you might look around a few stores at the mall to find the right wallet, now you’ll just be looking around the Internet for the wallet that’s right for you.

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