What is a Crypto Wallet and How Does It Work?
What is a Crypto Wallet?
Cryptocurrencies are digital assets that are present in the form of code. Investors do not interact directly with virtual currencies like paper money rather they need special software called digital wallets to manage and store them. There are many different types of wallets that allow investors to store their cryptocurrencies in them.
Digital wallets have features such as indicating the current price of token reserves, total quantity, transaction history, and other indicators.
How Does a Digital Wallet Work?
A digital wallet can exist in various forms and offers multitude of features for their investors depending on their infrastructure and design. Digital currency wallets are just like real wallets but in the form of an application or account on a site.
Investors can perform virtual currency transactions on different forums such as centralized exchanges, decentralized exchanges, and blockchain networks. But the investors should always have a digital wallet account to store and manage their digital currency reserves.
In addition to cryptocurrencies, investors can also place other blockchain products in their digital wallets such as governance tokens, utility coins, NFTs, and altcoins. It is important to note that crypto wallets do not store assets but rather they store the record and transferability for the account holder.
Investors need to secure a unique private and public key in order to safeguard their wallet accounts. Some wallets also have additional security measures such as seed phrase, pin, password, or two-factor verification, etc. A digital wallet is represented by an address which is an alphanumeric value.
Types of Crypto Wallets
Here are some common types of crypto wallets:
Hardware Wallets
They are device-based wallets that are USB like units. These devices use Random Number Generator or RNG to create private and public keys. Investors can transfer their cryptocurrencies from exchange accounts or other wallets to hardware wallets. There are three types of hardware wallets mentioned as under:
Hot Storage Wallets
Hot storage wallets are actively connected to the internet and some hardware wallets have built-in WiFi connectivity.
Cold Storage Wallets
Cold storage wallets are the devices that are not connected to the internet. Investors usually use these wallets for long-term investments and use cold-storage wallets to store their reserves away from reach of hackers and other threats.
Hybrid Wallets
Hybrid wallets are both cold and hot storage. These types of wallets allow investors to connect and disconnect with the internet at will granting them greater autonomy over their reserves.
Software Wallets
Software wallets are computer programs such as websites, exchanges, decentralized protocols, and applications. Here are some of the sub-types of software wallets:
Web Wallets
Centralized exchanges and decentralized protocols allow investors to create an online account using websites. In this manner, the investors may open an account and create a digital wallet to start trading cryptocurrencies.
Web wallets can be custodial meaning that the users are not in possession of their private keys or non-custodial for vice versa.
Desktop Wallets
There are some custodial services providers that have made desktop applications available for the investors. Investors can download them from the official sites and login. They are connected to internet and can allow investors to get live notifications and updates regarding the cryptocurrencies they are investing in.
Mobile Wallets
Mobile wallets are present in the form of applications that investors can download from an official app store. Applications are more accessible since they are present on the smartphones and allow investors to access their digital currency holdings on the go.
Browser Extensions
There are some wallet accounts that investors can download in the form of a browser extension. They are like built-in pockets for the investors where they can quickly store and manage their digital currency reserves while using their computers.
Paper Wallets
A paper wallet is when investors can store their digital wallet address on a piece of paper and print out the private key. This type of wallet is popular since it is secure against hacks and attacks and a widely used form of cold storage.
Conclusion
Crypto wallets are used for trading and they offer many advantages to the investors such as research, installation, security measures, accessibility, and management. However, investors should protect their private keys and incorporate additional security measures such as two-factor authentication (2FA) to secure their token reserves.
