Crypto Wallets. What Are They?
Today lets take a closer look at how crypto wallets work, what they are exactly, and the different types of crypto wallets available today.
While the term “wallet” may seem self-explanatory, a crypto wallet is actually a whole lot more than simply a place to store your cryptocurrency of choice. A crypto wallet is an app that allows users to store and retrieve assets of a digital nature. Unlike that wallet full of cash that you carry around every day, crypto wallets don’t hold any physical cryptocurrency. That’s because cryptocurrency isn’t a physical thing at all. There is no physical coin. Cryptocurrency is, at its core, a decentralized ledger of transactions and balances recorded to and authenticated by the blockchain. The information stored in your wallet serves as a pointer to your assets’ location on the blockchain. What your digital wallet stores are the public and private keys required to initiate and receive these transactions and to track balances. Without your keys, as some unfortunate traders have found out, you lose access to your funds.
How Crypto Wallets Work
In simple terms, crypto wallets are comparable to your bank account. There are unique codes — called keys and addresses — used to identify the wallet. Crypto wallets utilize both a public address and a private key. Whenever a user acquires cryptocurrency like bitcoin, their balance is recorded and stored by a crypto wallet. Likewise, transactions are initiated from the crypto wallet to send currency to others. When you acquire cryptocurrency, either through a currency exchange or as a gift, the sender will direct the funds to the unique public key issued by your wallet. You can spend assets from your wallet for just about any purpose. You can even pay for retail transactions by scanning a retailer’s QR code or sending some specific amount of crypto coins to a retailer’s public address.
Hot vs. Cold Wallets
Now, not all crypto wallets are created equal. There are two basic categories under which all wallets fall; hot wallets and cold wallets. There’s a pretty significant difference between hot and cold wallets, and the difference has absolutely nothing to do with temperature. Hot wallets are simply cryptocurrency wallets that are connected to the Internet. In contrast, cold wallets exist in a physical form and are not connected to the Internet. Whichever you choose — both are equally capable of storing the data needed to send and receive cryptocurrencies inside of them.
Next time we will explore each of these wallets in more detail.
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