Blockchain 101Cryptocurrency 101

What is a Cryptocurrency Wallet?

The use of digital currencies is rapidly increasing, creating the need to develop cryptocurrency wallets that are convenient and secure for various crypto assets. Hence, crypto wallets aim to eradicate the loopholes found in traditional banking systems. These include transaction delays or denials, hefty paperwork, and tiresome transaction procedures due to a centralized system.

In order to use, send, and receive Bitcoin or any other cryptocurrency, one needs to have a cryptocurrency wallet. Cryptocurrency wallets are defined as software programs that store private and public keys while interacting with various blockchains.

They enable users to easily conduct crypto transactions, monitor their crypto balance, and conduct other various operations. Crypto wallets do not store digital currencies in any physical form, rather these are records of transactions that exist on blockchains.

With the advancement of technology, cryptocurrency wallets have been designed with advanced techniques that are user-friendly and ensure seamless day-to-day crypto transactions across the globe.

Significantly, the advantages of using cryptocurrency wallets include borderless transactions, no intermediaries involved, and cost-effective transactions. The decentralized nature of cryptocurrency wallets ensures that all crypto transactions are not jeopardized, manipulated, or corrupted. In essence, this maintains the confidentiality of the user’s assets and other information.

Bitcoin Wallet

A Bitcoin wallet allows users to send, receive, and manage their BTC. After purchasing BTC, the user’s wallet receives the digital currency. When sending BTC, one has to choose the send option and enter the receiving address of the recipient. The coins will then be sent from the user’s wallet to the recipient’s wallet.

How to create a Bitcoin wallet

Creating a Bitcoin wallet is simple. One can opt to use either a mobile wallet, desktop wallet, or a hardware wallet, depending on the user’s needs. However, after buying BTC, an online wallet is the easiest and most user-friendly way to manage them. Below are the steps on how to download and create a wallet that can store your BTC and other cryptocurrencies.

  1. Go to the App Store (iOS) or Google Play store (Android).
  2. Search and download your preferred crypto wallet.
  3. Open the app and write down your 24-word recovery phrase. (Note: This is very important as this will be the backup to your wallet!)
  4. Set a strong password.
  5. Deposit bitcoin to your wallet.
  6. Use your receiving address to receive bitcoin.

Read Also: How to Buy, Sell, and Store Bitcoin?

Types of cryptocurrency wallets

Cryptocurrency wallets are mainly categorized into two: hot and cold wallets. Hot wallets include desktop wallets, mobile wallets, and web wallets while cold wallets consist of hardware and paper wallets.

Hot Wallets

This category generally refers to any cryptocurrency wallet connected to the internet. Not to mention that they are easy to access and setup, allowing users to store multiple cryptocurrencies.

Hot wallets are an easy way to store small amounts of BTC and other cryptocurrencies. In fact, they are most convenient for spending and receiving payments. Moreover, some hot wallets allow access to funds across multiple devices.

Desktop wallets: This type of wallet can be downloaded and installed on desktops or laptops and can only be accessed on the gadgets they have been downloaded.

With desktop wallets, users are able to have full control over their keys and funds. Thus, the private keys are stored on the hard drive. Moreover, desktop wallets allow you to store multiple cryptocurrencies.

Online/Web wallets: These are wallets that run on the cloud. Private keys are stored online which are then secured and stored by a trusted third party on behalf of the user when permitted.
The software also runs on the server of a third party.

Moreover, they are accessible on any device from any location. Web wallets are incredibly convenient and strive to make cryptocurrency owning very easy for crypto traders.

Mobile: A handy wallet for an on-the-go solution as it runs on your phone. It is very convenient for making payments when shopping or easy fund transfers. Many merchants now accept cryptocurrency payments hence the effectiveness of mobile wallets when making payments.

Mobile cryptocurrency wallets can work alongside smartphone features such as QR code scanner and biometrics for additional wallet security and user convenience. A mobile wallet is more efficient as one can send and receive cryptocurrencies while on the move.

They are a suitable option for spending cryptocurrencies anytime and anywhere. Overall, most mobile wallets apps run on Android and IoS operating systems. Below are some common mobile technological stacks implemented nowadays:

Technology

Admin Panel

Android, IOS

Mobile Platform

IBM, Sisco, Spark, Hadoop

Real-time analytics

MongoDB, Postgress, Hbase

Database

e-wallet, Paypal, Google pay

Payments

Twillio, Neximo

Voice and SMS

Push.io, Twilia

Notification

Azure, Google, AWS

Cloud

Cold Wallets

Cold wallets can be categorized into two — paper wallets and hardware wallets. This method is also referred to as cold storage and is particularly suitable for long-term investors.

They do not require any connection to the internet, enabling the keys to be stored offline. As the keys are not stored online, cold wallets have been labeled to be more secure and less prone to online hacking attempts.

Paper wallets: Though paper wallets can simply refer to a physical copy or printout of one’s public and private keys, they can also refer to a piece of software that is used to securely generate a pair of keys that are then printed.

Hardware wallets: Hardware wallets are compatible with several web interfaces and can be connected to a PC. They are physical, electronic devices that utilize a random number generator (RNG) to generate public and private keys.

The device stores keys through a secure element. In addition, these wallets are usually in the form of a USB device.

Bitcoin wallet address

A Bitcoin wallet is a software program storing bitcoins (BTC) for safety. Once installed on your computer or phone, the wallet will generate your first Bitcoin address. The wallet then will enable them to conduct BTC and other crypto transactions and operations.

A Bitcoin address is similar to a traditional bank account number. In line with this, the crypto wallet holds the user’s BTC funds and additional crypto balance. When learning how blockchain technology works, we have mentioned the importance of public and private keys for carrying out transactions.

Public/ private key

A wallet is responsible for the generation of private and public keys for all its users. Without the keys, one is not able to access or transfer funds. Public and private keys are mathematically related to encrypt and decrypt information on crypto wallets.

Public key

Derived from a string of random numbers, a public key encrypt messages within the wallet. The public key is so scalable and able to secure billions of messages daily across the crypto industry. The length of a public key specifically determines the strength of the protection.

Private key

A private key aka secret key is a key only known by the recipient. It is a variable in cryptography that is used to ensure identity authentication. No copies of the private keys should be distributed to ensure wallet safety.

Cryptographic methods used in crypto wallets

Private key cryptography
Private key cryptography

Hashing

One of the most prevalent concepts for cryptocurrency wallets is hashing. To put it simply, it is the creation of a sequence of characters using a mathematical function.

Characterized by a greater level of security, the hashing sequence allows users to send messages safely. Accordingly, it takes input data of any size, performs an operation on it, and returns output data of a fixed size.

Any individual who attempts to decrypt the hash will not be able to predict how long or short the input is, for it is a complex mathematical problem.

Symmetric encryption cryptography

Symmetric encryption cryptography relies on a single key shared between two more users. The same key is utilized to encrypt and decrypt a plaintext that represents the message or piece of data that is being encoded.

Symmetric encryption algorithms enhance data security and user privacy. By making use of symmetric encryption algorithms, data is converted to a form that cannot be understood by any individual who does not possess the secret key to decrypt it.

Asymmetric encryption cryptography

Asymmetric encryption uses two keys, one of the keys can be publicly shared (public keys) while the other one is private (private key). The asymmetric algorithms tend to be more complex and slower than symmetric algorithms.

Common features of a good Bitcoin wallet

For crypto newbies, using cryptocurrency wallets may seem pretty complicated. Therefore, you must ensure that your Bitcoin wallet is user-friendly, reliable, and provides enhanced security and privacy.

As a result, this will help accelerate Bitcoin’s adoption, increase its utility, and help to create decentralized services for all Bitcoin-related operations. In general, a Bitcoin wallet can be in the form of either a hot or cold wallet.

The best bitcoin wallets implement features such as:

  • Automatic Generation of a new public key on every new transaction
  • Optional timed logout
  • Recurring billing invoice and bill
  • Push notifications
  • 2FA authentication
  • QR code scanning

Crypto Wallet Security Features

Transferring cryptocurrency anywhere is becoming easier as technology advances. However such great features also require bank-graded security that will protect your digital assets from malicious acts.

Apart from security features offered by crypto wallet developers, it is your responsibility to adopt good practices in order to protect your money. Safe asset storage is a must-have for every crypto wallet user.

Crypto Wallet Security Features

Automated Denial of Duplicate Payments

Duplicate payments are a major problem in the crypto industry as it leads to massive losses. This means spending a balance of the same cryptocurrency more than once. Most cryptocurrency wallets automatically reject duplicate payments as this creates a disparity between the spending record and the balance of cryptocurrency available.

Cryptocurrency transactions occur digitally through crypto wallets. Through blockchain technology, these wallets prevent duplicate payments. Although, in the event of a duplicate payment, both transactions remain unconfirmed or the second transaction becomes invalid.

Two-factor authentication (2FA)

2FA is increasingly becoming a go-to for user security and identification in the cryptocurrency world. The method ensures authorized access to crypto wallets by requiring second-level authentication even when the user has provided a password.

Following this, the user will be requested to send a pin code to a different device. In this case, 2FA enhances security authentication in the crypto ecosystem thereby reducing the chances of cryptocurrency hacks securing your digital assets.

Mnemonic phrase

A mnemonic phrase is a group of words with 12 or more characters created to protect the users’ unique wallet addresses. It is a series of data particularly associated with randomly chosen words.

These phrases offer direct access to one’s wallet and they should be entered in the correct sequence. In light of recovering funds on your crypto wallet, you can use your mnemonic phrase. With this in mind, the mnemonic phrase cannot be changed and keeping it safe is vital.

Wallet backup

It is crucial to back up a wallet in order to maintain access to your funds and data in the event of a lost, stolen, or damaged device. Backup your wallet by using a mnemonic phrase or via cloud storage.

Apart from backing up your wallet online, crypto wallet users can opt to utilize various manual backup methods such as writing it down on a piece of paper or saving it in a notepad on your computer. This helps to back up your wallet in a safe manner that will enable the recovery of data.

How to keep your cryptocurrency wallets safe

Choose wisely. Though there are a number of cryptocurrency wallets out there, it is wise to select a wallet with a good reputation and implements strong wallet security features.

Add extra security layers. Set long and complex passwords that are not easy to guess or decode. Equally important are biometric authentication, fingerprint recognition, and 2FA.

Avoid using public WiFi Avoid making transactions or leaving your crypto wallet details on gadgets connected to public wifi. Instead, use networks with protected and stronger security features to avoid security flaws. Utilize networks with strong encryptions.

Double-check the recipient’s address. Always make certain that the recipient’s address is correct when sending cryptocurrencies. Once done, a transaction cannot be reversed. You cannot take back the cryptocurrencies once sent.

Keep your software updated. Always update your software. This ensures that you get the latest version of your crypto wallet’s security features. Apart from updating your wallet software, there is a need to also update the gadgets you are using.

Keep your private keys secure. Keep your private keys secure at all times and avoid sharing them with various parties. Since if anyone gets their hands on your private keys and mnemonic phrase, they can access and tamper your funds.

Conclusion

Cryptocurrencies are being developed and launched in the market on a regular basis. Therefore, the use of crypto wallets has become a prerequisite for crypto users. Indeed, cryptocurrency wallets provide a useful and reliable management system for all digital currencies.

By all means, they aim to provide tailored solutions by guaranteeing user data security and system reliability. Without a doubt, for investors to trade cryptocurrencies and keep their assets secure, having the most suitable crypto wallet is the best option.

CoinQuora Staff

CoinQuora is an online publication that aims to educate about news, exchanges, and markets in the cryptocurrency and blockchain industry

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