6 min read - [education, wallet]
Cryptocurrency Wallet Basics
Welcome to the Bitcoin and cryptocurrency wallets series. This is the first of a three part series in which we will explain and demystify the most important part of cryptocurrency: wallets.
What they are, how to choose one, and how to use them. No prior knowledge is needed, and by then end the world of cryptocurrency will hopefully make a bit more sense.
This series is an accompany resource to our Wallet Finder Tool.
A cryptocurrency wallet enables anyone to store, receive, and send cryptocurrency with anyone in the world, directly.
Cryptocurrency wallets come in many forms, but at a minimum they are made up of a private key and one or more associated public keys.
Unlike fiat currencies which are stored in physical wallets and bank accounts, cryptocurrency exists exclusively on the blockchain. All of the information about how many bitcoins each person (account) has, is stored on the blockchain, but only the person with the key is able to access them. It sounds complicated, which is where wallets come in. Wallets remove all the complexity by dealing with the blockchain interactions for you, allowing anyone to send and receive their bitcoins easier and faster than traditional currency options.
Wallets create and manage private keys which allow you to access the associated coins on the blockchain. Each private key can be thought of as a unique account.
Bear 🐻 with me as we go through some core concepts.
All bitcoin and cryptocurrency exists on their respective blockchain. Wallets allow you to `store`, `send`, and `receive` coins while removing all of the complexity for everyday use.
Private keys are the accounts of cryptocurrency. They enable you to do two central actions - Generating public keys, and sending coins to another account by signing transactions.
Generating public keys is required for receiving coins, and sending coins is required to send coins to someone else, such as to buy things and trade with other people. The only information needed to generate public keys and send coin from an account is the private key. As such, tt is very, very, important that the private key stays private and secure.
Most wallets allow the user to backup and store their private keys, and most will guide you through the process. Some wallets - typically web and exchange wallets - control your private keys for you. Having an exchange control your keys is simple and fine for short periods, but it's not as secure as controlling your own private keys. Every so often exchanges "lose" their holdings, and if they control your keys, they can also lose your holdings. So if you are going to hold coins it's best to hold them on your own private keys.
Since the only things needed to send your coins is the private key, as such, a common saying is "Not your keys, not your money".
The only information required to access your assets is the private key. If the private key is lost, the assets are lost. It's very important to back-up your private key in a secure place and to never expose or share your private key with anyone.
Repeat every morning 10 times: "Not your keys, not your coins"
Terminology Guide :: Public Key Public keys, are addresses where you receive funds and send payments to. Friends, family, strangers, computer programs, etc, can all send money to your public keys. All these addresses allow is to receive money/transactions, so they can be shared freely and openly. Public keys are often displayed as QR codes and they are extremely easy to use and setup for payments and purchasing goods.
Public keys are generated using private keys, and there can be hundreds of thousands of public keys associated to each private key. Generating new public keys constantly to receive funds is a good idea for privacy, and all previously used addresses will continue to work. Many wallets will rotate and generate new keys automatically.
🔑 Key Ideas
Crypto wallets come in many forms, each with their own trade-offs around security, convenience, and ease-of-use. It's common to use multiple types of wallets for different purposes. Some are great for spending money, some are great for distributing money, and others are perfect for long term storage. Let's go through them briefly.
The most common type of wallet. Mobile wallets are applications perfect for sending and receiving crypto assets in everyday life. Everyone should have a wallet on their phones loaded with enough funds for coffee and to split bills with roommates and friends.
These wallets however are not the most secure - in the same way money in your wallet is less secure than a bank - so it's only recommend to keep enough in mobile wallets for daily/weekly use.
Similar to phone wallets, except usually with more advanced features. The functionality of these can extend to a better UI, long term asset tracking, trading capabilities, full-node verification of the blockchain, chain analysis, mining, and even more, the only limit being developers 🌈 imagination 🌈.
Desktop wallets are a great candidate for storing cryptocurrency, and for using cryptocurrency on the ever increasing amount of websites which accept cryptocurrency as a payment option
Wallets which are extensions within a web browser. These essentially turn your whole browser into a wallet, and allow for a whole bunch of exciting new use-cases. Currently this type of wallet is pretty new, but I am very excited for what will be coming in this space.
In terms of security these should be treated like mobile wallets. Secure for most amounts, but avoid holding your life savings in them.
Wallets accessible through websites and webapps. They usually secure your private keys behind a password and 2 factor authentication. These can be simple to use, but are generally not recommended for storing assets for long periods of time.
If the company managing the keys disappears, you may be left with no way of accessing your assets.
These are commonly found as part of applications which use crypto for micro transactions, such as memo.cash.
Be very wary - and avoid - of any website which requires you to give them your existing private keys.
These are a subset of web wallets connected to an asset exchange. With these wallets the exchange controls the private keys for you, and hopefully protects them with a password / 2Factor Authentication combination. These wallets are required for trading assets, and will be where your assets are held while buying and selling through an exchange.
Since the exchange controls your private key, if they get hacked or shut down your assets may be lost. Therefore, it's recommended to only store actively traded assets on exchanges and to move the rest onto wallets you control the private keys for.
Commonly used for event give-aways. Paper wallets are private and public keys printed on a piece of paper. These are great for distributing small amounts of an asset at events, like weddings, birthdays, store openings, meetups, etc.
The security on these entirely depends on where/how the private key is displayed, and who has access to them. If you receive a paper wallet it's recommend to scan the code with a mobile wallet to "sweep"/transfer the funds off of the paper wallet.
Hardware wallets are the most secure way of storing crypto assets. Hardware wallets are designed such that the private keys on them is never exposed to any other device. The only way for funds to be stolen from a hardware wallet is if someone steals your private key recovery phrase.
These are recommended to use for secure long term storage. Everyone serious about crypto should have and use one of these.
That's all for part 1.
In part 2 we will cover some of the features to look for in a cryptocurrency wallet.