21 October 2020 | ZebPay Trade-Desk
A Crypto wallet is a software program in which assets and tokens are stored. Technically, Bitcoins are not stored anywhere. For anyone that owns a cryptocurrency wallet, there is a private key (unique number) corresponding to the assets address of that wallet. These wallets facilitate the sending and receiving of cryptocurrencies and give ownership of its balance to the user.
How it works
Unlike traditional wallets, digital wallets don’t actually store currency. These currencies don’t even exist anywhere in a physical form. All that exists are records of transactions, which are stored on a blockchain.
Cryptocurrency wallets run software programs that store unique public and private keys and interact with multiple blockchains. This allows users to monitor their balance, and engage in transactions. When a person sends coins, they are essentially signing off ownership of the coins to a particular wallet’s address. To unlock the funds, and spend it, the private key stored in the receiver’s wallet must match the public address the currency is assigned to. If the public and private keys match, the transaction is successful. There is no real exchange of actual coins.
Hot and Cold Wallets
There are many types of cryptocurrency wallets out there, which can broadly be categorized into hot wallets and cold wallets.
A hot wallet is always connected to the internet and can be accessed anytime. These include online cloud wallets, most mobile wallets, software wallets and exchange wallets. The two huge perks are their ability to hold any cryptocurrency and that they’re free.
On the other hand, a cold wallet is not connected to the internet and lets you store your cryptocurrency offline. Funds can be received at any time, but cannot be transferred out. Cold wallets include hardware wallets and offline kept paper wallets. These are specifically designed devices that are designated to enable physical cryptocurrency storage. One of the biggest benefits that the cold wallets provide is the ability to access tokens wherever and whenever without any interdependencies. These wallets are usually small and compact, which enables both comfort and discreteness while transferring or simply carrying them around. They are very secure, and impenetrable. However, cryptocurrency cold storage tends to be expensive and supports a limited variety of cryptocurrencies only. Examples include:
- Trezor One – The first legitimate and safe Bitcoin wallet that supports many other cryptocurrencies.
- Ledger Nano X – The first wallet with bluetooth, allowing you to connect it with iOS devices.
- KeepKey – Features a larger screen than most hardware wallets.
- Coinkite Coldcard – A leading Bitcoin wallet with bank-grade security.
There are several ways of storing Bitcoins, or other cryptocurrencies:
- Exchange or Service Provider
- Online Wallet
- Mobile or Desktop Wallet
- Paper Wallet
- Hardware Wallet
An exchange wallet is one that is controlled by an exchange. Many leading cryptocurrency exchanges like ZebPay provide their users with wallets. It allows for easy account recovery, and provides for convenient on-the-go trading. However, a third-party is storing the data, and hence there is a need to trust the exchange to protect the private key.
An online wallet is one that is stored on the cloud. It can be accessed by multiple devices with the use of the internet. Allows for fast transactions, and it may allow you to manage multiple cryptocurrencies. Again, it’s convenient to use for on-the-go trading. However there is a high risk of online security hacks and scams, and the risk of computer virus. In this case as well, a third party is storing the data.
Mobile and Desktop Wallets
Mobile or desktop wallets are stored locally on the user’s device. If a mobile app merely allows you access to an online server, it is the same as an online wallet. Data is not stored on a third-party server. It is convenient to use for on-the-go transactions. Sometimes, it might also offer additional features such as QR Code scanning. However, Bitcoins can be lost if a device gets damaged, or if it isn’t backed up and dies. If the device is connected to the internet, it is at risk of being hacked. If the mobile app has a bug, Bitcoins can be lost too.
Paper wallets are stored on printed sheets of paper and are one of the safest options available. Coins can be transferred by entering the private key or scanning the QR code found on the paper. These wallets cannot be hacked or stolen digitally. Data is not stored on a computer or mobile. There is no need to rely on a third-party server. However, they are not not very user-friendly and are hard to use for on-the-go transactions. Moreover, they can easily be lost or destroyed if not stored carefully.
Hardware wallets provide the perfect balance between safety and convenience when it comes to storing coins. It is a physical device like a USB, that is designed to protect an individual’s coins by securing their private keys. It will create keys on the fly while making purchases. Hardware wallets are designed to protect your private keys from online methods of storage, such as computers and phones, which can be accessed by a hacker. Since the key never leaves the device, it cannot be hacked. It is one of the safest Bitcoin wallets available and is immune to online viruses and hackers. It’s perfect for storing large amounts of coins. The USP is that the individual stores their own data and is not dependent on a third party.
If the hardware wallet is lost or breaks, the coins can be accessed on a new device with the help of recovery seed words. However, this is the most expensive type of wallet around. It is at risk of being compromised in the manufacturing process, and can easily get lost, stolen or broken. Lastly, it requires a software wallet to interact with the device.
Identity and Security
Keeping a digital wallet safe is essential as Bitcoin wallets are high-value targets for hackers. One could encrypt the wallet with a strong password or by choosing a cold storage option; that is, storing Bitcoins offline. Frequently backing up the desktop and mobile wallets as problems with the wallet software on your computer or mobile device could erase your holdings, is also advisable. Although online wallets have proven the most vulnerable and prone to hacking attacks, diligent security precautions need to be implemented and followed when using any wallet.
Store only small amounts of currency for everyday use online, on your computer or mobile, keeping the vast majority of your funds in a high-security environment. Deploy cold or offline storage options for backup. Paper or USB options will protect against computer failures, and allow for recovery. The software must be updated regularly to ensure all new enhancements are factored in. The more layers of security, the better, hence string and complex passwords must be set, to enable transactions and withdrawals. Lastly, wallets with a good reputation, and the facility of two factor authentication, are the ones that should be the preferred choice to use.
While digital wallets aren’t anonymous, they are pseudonymous. While wallets aren’t tied to the actual identity of a user, all transactions are stored publicly and permanently on the blockchain. This means that transactions are still recorded, but tied to a key, which is linked to a wallet, as opposed to a user directly.
Disclaimer : This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.