7. Cryptocurrency Wallet Guide
This article will guide reader on what is a Crypto wallet, how to select a wallet and an example on how to use it.
What is a cryptocurrency wallet?
A cryptocurrency wallet is a software program that allows the owner to use the wallet private key and public key to interact with the respective blockchain to send, receive and keep cryptocurrencies in the wallet with their respective transaction partners. Users can monitor their coins balance in their wallets.
Why do I need a cryptocurrency wallet?
With fiat money, you do not technically have complete control over your savings, since folks usually keep their money in the bank which will then be used to loan others. What you are allocated is only an IOU, a promise to pay you back. Even fiat money notes held on your hand can be duplicated by the government and thus the values affected depending on their decisions, that is not total control if someone else can manipulate the quantity. Decentralized cryptocurrencies empower you to have complete control of your own money, thus you will need a decentralized crypto wallet to achieve that.
How does it work?
Every wallet comes with a private key and a public key. A private key is similar to your PIN number or passcode used to access your bank ATM or account, you will need to, and will be prompted by the wallet to use the private key to send cryptocurrencies out of your wallet everytime. Do not let anyone else know of your Private Key passcodes, because they will be able to withdraw all your coins from your wallet if they do.
Private Key generates and creates the Public Key, the Public Key can then generates the public address. Public Key is used to encrypt message. In the case of cryptocurrency transfer, Public Key encrypts transactions with only the corresponding Private Key capable of decrypting them. In short, Public Key encrypts and Private Key decrypts.
The public address is like your bank account number, an identity or address for others or yourself to send cryptocurrencies to. Do note that Public Key and public address (wallet) are not the same. Public Key consists of hash and is used to derive the public address. If a user loses his public key, he can still have it regenerated with his Private Key.
Now if it is the other way round, a user loses his Private Key, is there any way for him to generate it back? The answer is no, you do not want criminals to be able to generate the key and steal all the coins from the victim’s wallet. Decentralized Cryptocurrencies (eg. Bitcoin) use an extremely complicated mathematical algorithm for generation of Public Keys, cleverly designed to make it easy for Public Key to be generated by Private Key but ridiculously difficult to reverse the algorithm to achieve the opposite result. Once a private key is created, it cannot ever be generated again. If a user loses his private key, he loses access to his wallet and all his coins in it permanently.
Caption: Every transaction uses private & public keys, has its own hash & contains the hash of previous transaction.
Types of Cryptocurrency Wallets
Below are the different types of cryptocurrency wallets available for your considerations.
Owner has full control of coin security in his paper wallet, completely eliminating any possibility of online hacking since paper wallet has no connection to the internet or any network. The owner can keep it in his pocket wallet similar to his dollar notes, or just lock it at home in the cabinets or safe.
A paper wallet sample
Now how do you create a paper wallet? Every coin has different ways to create paper wallet, but usually it involves using the respective cryptocurrency free web services that randomly generates the paper wallet for you. You can then choose to print it, take picture of it, or write the public and private keys on a paper. “Www.bitaddress.org” is an open-source random wallet generator example for Bitcoin and Bitcoin cash. Once you are in the webpage, just follow their instructions, it is very direct and simple. It is recommended to google for the review of any web services you are interested to see if it is authentic before using it.
The random key generation is usually done on your browser, so be vigilant. After you load the page, remove the network cable of your desktop/notebook. This will eliminate any connection that may include hackers spying your machine or sniffing your data. After you completed the generation and saved/print your wallet, completely clear your browser cache, restart your computer before connecting the network cable back to your machine. This will ensure your machine has no more info of your created wallet after you restore network. Do not keep any image of your paper wallet on your computer or phone that may get connected to the network.
When you need to receive coins to your paper wallet, just provide the sender your public address. When you need to send coins out of your wallet, just scan or key in your private key. Due to the potential risks of private key being revealed as soon as you use it online to hackers sniffing for information, it is recommended that you change your paper wallet after using the private key, because anyone that gets hold of your private key has the power to send out all cryptocurrencies in your wallet balance to any location the attacker desire.
Brain wallet is similar to paper wallet where the public and private key can be generated using the web services, although instead of wallet keys being randomly generated, the keys are generated by the choice of your desire passphrase.
In this regard, Brain wallet has higher probability of being hacked vs paper wallet, since humans are predictable in choose their own password or phrase and hackers has machines to match out the possible words we will use. Thus, if you really prefer to use brain wallet, choose a passphrase that is as complex as possible. Similar to paper wallet, it is recommended as well to change your brain wallet after using your private key.
Exchange Wallet: Can I simply keep my crypto coins on an exchange?
Every user is allocated a wallet on the exchange after signing up. You can transfer and keep your coins at the exchange for storage purposes or to trade, but keep in mind since the wallet is located at the exchange, the exchange holds both the private and public keys of your wallet. You can execute coin transfers anytime but technically you do not have full control of the wallet. Similar to the banks, the exchange only provide you an IOU, a promise to pay you back and exchange can be hacked, a personal offline wallet cannot be hacked. You need to research, choose a trustworthy exchange that has good security, high liquidity, similar to how you would choose a bank. [ Read Cryptocurrency Exchange Guide ]
An offline wallet is always more secured than an exchange wallet, although Exchange wallet is useful for regular traders that perform trades 20-30 times or more per day on the exchange. It is not possible for them, effort and time wise, to create paper/brain wallets and transfer coins to and fro all the time. Thus, for their case, they have no choice but to research carefully and select the best Exchange. If you absolutely have to use an Exchange for your wallet, you can consider using Binance exchange. [ Trade at Cryptocurrency Exchange ]
Mobile wallet is wallet application that can be installed on your mobile phone for the purpose of sending, receiving and keeping crypto coins. The advantage of mobile wallet is it is convenient and easy to use, you do not need a guide to know how to use the mobile wallet, and you can perform transaction anywhere anytime since we usually have our phones with us all the time.
However, mobile phones are connected to the internet, therefore susceptible to hacking. If you really want to use a mobile wallet, keep small amount of cash that you can afford to lose in it. Similar to your pocket wallet that can be pickpocketed, you can bring $20-$50 for the purpose of having a meal at a restaurant or visit the petrol station.
Example of mobile wallet applications are Coinomi, Exodus, Electrum etc. Before using any wallets, google for their reviews.
Desktop wallet is similar to Mobile wallet except that the wallet is installed and used on a desktop instead of a mobile. We do not recommend you to keep a lot of coins on your desktop wallet as well since it can be connected to the network. Example of desktop wallet applications are Exodus, Electrum etc.
A hardware wallet is a physical piece of secure hardware device that functions as a cryptocurrency wallet which stores the private keys. An example of hardware wallet is the Trezor wallet.
Advantages of hardware wallet over software wallets:
Private keys are often stored in a secured area of a microcontroller in a strongly isolated environment. It is not possible to transfer the key out of the device in plaintext.
The software is open source most of the time, everyone can verify all the codes of the device to check for frauds.
Can be used securely and interactively, as opposed to a paper wallet which must be imported to software for use.
Coins in the wallet can be kept offline which prevent hacking.
Invulnerable to computer viruses