What Is a Cryptocurrency Wallet?
Blockchain technology and cryptocurrencies are gaining more importance and accessing more areas of application day by day. The growing ecosystem attracts new investor groups to the industry. There are fundamental concepts investors should learn after becoming involved in the industry, and one of them is cryptocurrency wallets. Cryptocurrencies are digital assets, and like stocks, they grant rights to their holders in some projects. These rights include ownership rights, voting rights, the right to transfer assets, etc.
Cryptocurrencies are not stored in regular wallets. Accounting records on blockchains keep our assets. “Wallets” describe the process of connecting to a blockchain network and viewing data records. In Public Blockchains, all data records can be viewed. And the data can be controlled by signing the transaction that is desired to be performed with the Private Key. Public Keys are addresses that can be shared with anyone and appear as sender or receiver in transfers. Private Keys are the authorization keys that are used to make transactions.
For example, you can think of a Public Key as your home address, and you can share your home address with anyone or any institution that wants to send you a package. However, the key to the door of your house is a Private Key. You can enter your home using your Private Key and pick up your package. If you share your Private Key, your house can be robbed, and your assets stolen. This also applies to cryptocurrency wallets. That is why, you need to keep your Private Keys well and not share them.
Types of Cryptocurrency Wallets
Cryptocurrency wallets differ in terms of features such as security measures and accessibility. Many sources divide wallets into two main groups, “Hot Wallets” and “Cold Wallets”. However, there are many wallets with different purposes. Let us look at them below.
Today, Web Wallets, Desktop Wallets, Mobile Wallets, Paper and Hardware Wallets, all of which are interfaces, give us access to data ledgers on blockchains. Therefore, we should think of wallets as tools that allow us to access data ledgers. However, they do not provide high security. One of the crucial steps in the security process is signing transactions with a Private Key. Since Cold Wallets do not perform any transfer transactions, or in other words, do not confirm transfers using a Private Key, there is no possibility of infiltration of the device, network, or any other environment where a Private Key is used. That is why, Cold Wallets are considered the most secure wallets. On the other hand, Hot Wallets, which actively confirm transactions, are always risky.
Now, let us look at wallets that you can use to access your assets:
Web Wallets
These are internet-based online wallet apps. Such wallets are easy to access and do not require installation. They are useful wallets for everyday transactions such as trading, transfers, and payments. You can access a web wallet from anywhere with an internet connection. Such wallets are vulnerable to attacks by hackers on unsecured networks due to internet access. In addition, in such wallets, your Private Keys are under the control of the owners of the Web Wallet app or website where you keep your assets. Thus, there is no security concern.
Desktop Wallets
Desktop Wallets are wallets installed and work on desktop or laptop computers. These are widely used wallets compatible with operating systems (Windows, MacOS, and Linux) on desktop devices. Desktop Wallets have advantages and disadvantages.
Advantages:
- The number of supported assets is higher compared to many types of wallets.
Disadvantages:
- Like any other wallet with an internet connection, Desktop Wallets are vulnerable to cyber-attacks. However, due to users’ additional security implications, Desktop Wallets are considered more secure than Web Wallets.
Mobile Wallets
Mobile Wallets are mobile apps used to manage your Private Keys. With a wallet app installed on your mobile phone, you can store your Private Keys and access them easily. They are like Web Wallets, however, in Mobile Wallets, your Private Keys are kept in a mobile app. Mobile Wallets have advantages and disadvantages.
Advantages:
- Since it is a mobile app, you can always have it with you, and on your travels, you can make payments at businesses that accept cryptocurrencies.
Disadvantages:
Since it is internet-based, there is always the risk of your data being accessed.
If someone has access to your mobile phone, they can also access your Mobile Wallet.
Hardware Wallets
These are specially designed cryptocurrency wallets that users prefer to store their crypto assets for long term and are considered highly secure. You need to connect such wallets to your computer or mobile device to perform transfers. This connection is usually made using USB ports. Hardware Wallets have advantages and disadvantages.
Advantages:
The signing process of transactions is carried out on the highly secure hardware of these wallets. Thus, the probability of data leakage is lower than other types of wallets.
Your Private Keys are protected when you are not doing any signing, and the probability of someone else accessing your Private Keys is quite low.
Disadvantages:
- Hardware Wallets may not be affordable for all users.
Paper Wallets
You can store your crypto assets in non-digital printed papers. This type of wallet is called a Paper Wallet. Paper Wallets are usually preferred by long-term investors, “HODLers” who want to hold their assets for a long time instead of selling them. Such wallets are not suitable for daily transactions such as trading, transfers, and payments. If your Paper Wallet is stolen, you may lose access to your assets. You may also lose access to your assets if the paper is damaged, deconstructed, wet or burned.
Multisignature and the Importance of Private Keys
The single key method is generally used in the wallet types we mentioned. Single key or Single Signature is a method of signing that whoever has the Private Key corresponding to the address has the right to access. With a single key, the key holder can transfer cryptocurrencies without the permission of another person. Although it is easy to check wallets and perform transfers with the Single Signature method, it is not secure. In such a method, the entire balance can be accessed with a single key. Therefore, it is considered quite risky to control the entire balance with a single key in large companies. In such cases, a small portion of assets are kept in Hot Wallets to reduce the risk.
As Bitexen, we prefer the Multisignature method to protect the balances of our users. Basically, the Multisignature method defines a safe with a balance in it, which has more than one key and all these keys are collectively used to open the safe. In this method, it is not possible to access the entire balance with a single key.