The blockchain is where the money actually resides because cryptocurrencies adhere to the idea of a decentralised ledger. However, the ownership of the money must be confirmed in order to access it. A key is used for this purpose.
The crypto wallet contains the keys. Two different sorts of keys are required for cryptocurrency wallets to operate. They are referred to as a private key and a public key.
A public key resembles your wallet's digital address. This is comparable to the number on a bank account. The investor must divulge their public key in order for others to find their mobile wallets and send money, just as they must divulge their bank account information in order to be granted funds. A public key alone cannot be used to complete a transaction.
The way the Bitcoin system is set up necessitates the use of a private key. This private key demonstrates account ownership. Coins cannot be transmitted or received until the possession has been verified.
Coins can only be sent across acquired from the wallet after the possession has been verified. Since they are not meant to be made available to the general public, these private keys have never been on the blockchain. These keys are instead kept in the online wallet.
A recovery phase is also created each time a new digital wallet is created. This sentence, which resets passwords, is between twelve and twenty words long. This data needs to be kept securely very much like the private key.
Different Types of Crypto Wallets
Different types of cryptocurrency wallets are available. Here are some examples of frequently used types:
Custodial wallets- these are those in which the owner has delegated management to a third party. In these situations, the private keys necessary to authenticate transactions are under the possession of the third party. Numerous cryptocurrency exchanges offer custodial services. However, there are also a lot of bitcoin wallets that are primarily focused on offering custodial services. The advantage of adopting this technology is that the challenging task of maintaining the system's secrecy is outsourced. The disadvantage of outsourcing important work is the clear loss of control that results.
Non custodial wallets- Users who control their private keys are using non-custodial wallets. One advantage is that they have complete control over their keys. The possibility of losing the private key is the drawback, though. Since the private key is the only method to access the money, this might be disastrous. Without a private key, the investor would be unable to access their own money. Investors have experienced this numerous times. Millions of dollars are stored in some people's digital wallets, but they can't access them because they've lost their private key.
Paper wallets- these are types of wallets where the key is written down on paper and kept in a safe place. This arrangement has the drawback of being inconvenient. By nature, cryptocurrency wallets are digital. It can be difficult to get to a piece of paper before making a digital transaction.
Hardware wallets- Private keys can be kept in hardware wallets, which are unique devices. Like a USB, they function. They are, however, much more sophisticated in terms of security. When someone has to complete a cryptocurrency transaction, they merely link these devices to a computer. Private keys are kept in web-based portals called online wallets. An identifying procedure based on two steps can be used to access these sites.
Online wallets- Private keys are kept in web-based portals called online wallets. An identifying procedure based on two steps can be used to access these sites. Online wallets are highly practical in that they function exactly like credit cards. Since they are safer and more practical than other options, most investors prefer to utilise online wallets.
Comparison of cold and hot wallets
Wallets for cryptocurrencies might be categorised in another way. Depending on whether they are online or not, they can be categorised as hot wallets or cold wallets.
Hot wallets are cryptocurrency storage devices that are linked to the internet. These wallets can be downloaded applications that are saved on a laptop or a smartphone, or they can be online wallets. The fact that these wallets exist online, though, is what matters most. These wallets are vulnerable to cyber attacks because they are connected to the internet.
Using hot wallets has a number of benefits. Many of them are simple to set up and cost nothing to use. Also, a large range of cryptocurrencies & their connections are supported by these digital wallets.
These wallets have some issues, unfortunately. Since they are hosted on external servers, transaction delays might frequently result. They are also difficult to use since they need to be updated frequently.
On the other side, cold wallets are those that have no connection at all to the internet. These are the hardware wallets and paper wallets that were previously discussed. These wallets work offline, so they cannot be hacked and offer the cryptocurrency investor better security. Additionally, they can be secured with biometric data, ensuring that only authorised users can complete transactions. However, setting up and maintaining cold wallets can be costly. This method is slightly risky because there is always a potential of losing the paper or the device.