With heaps of new people diving into Bitcoin during this bull run here's a quick guide to get you all up to speed on crypto wallets and how you should be storing your Bitcoin!
What is a wallet?
A wallet is an app or physical device that is used to send, receive and store your cryptocurrency. For example, your Bitcoin wallet will allow you to send, receive and store Bitcoin. Most wallets will be able to store many different cryptocurrencies, so you won't need a different wallet for each coin you have.
How does a wallet work?
Any cryptocurrencies you have aren't actually stored on the software, or on the device itself. The coins themselves are stored on the blockchain, and your public and private key allow you to conduct transactions with those coins. Wallets are just a way for you to have the necessary information to send and receive your cryptocurrencies.
Different types of wallets
There are many different types of wallets that you can use for your cryptocurrency transactions. Each type of wallet will have its own unique purpose, and you will more than likely end up with multiple wallets for different types of transactions. However, just one wallet is a good place to start with. Wallets typically fall into two main categories; software wallets, and hardware wallets. A software wallet is an application on your mobile or computer, and a hardware wallet is a physical device. Most software wallets are free to download so in most cases they will be ideal for a beginner.
The terms “hot” and “cold” are also used to refer to different types of wallets. A hot wallet is any wallet that is connected to the internet, and a cold wallet is a wallet that has no connection to the internet. It is much easier to hack a wallet that is connected to the internet, than one that has no internet connection.
Desktop wallet
A desktop wallet is a piece of software you can download on your computer that gives you full control over your coins. Desktop wallets are one of the safest kinds of software wallets because the wallet information is stored locally on the computer and no third party manages or has access to the wallet. When you create a new wallet using your software, it will generate a new public key and private key which it will store on the computer. Your public key is the address for your wallet that is available to the public, which you use to send and receive crypto. Your private key is what is used to prove ownership of the wallet, which is given to you. This means you should never give your private key to anyone. Remember the phrase “not your keys, not your coins”.
Browser/web wallet
A Browser wallet is a wallet that is stored on your web browser and can't be accessed without an internet connection. Some wallets hold your private keys while others give them to you, so it is best to choose one that gives you your private keys. While browser wallets aren't the safest because they are more susceptible to hacks than other software wallets, they are convenient for small and quick transactions.
Mobile wallet
Mobile wallets are very similar to a desktop wallet, except they are an app on your phone. Mobile wallets primarily use QR codes to send and receive crypto, making the process simpler and easier. However, mobile wallets can be vulnerable to hacks so it is best to use them for small and quick transactions, similar to a browser wallet.
Exchange wallet
An exchange wallet is a wallet that your exchange will give you when you open an account with them. This wallet is used to buy and sell crypto on their exchange, which you can then send to your own wallets. It is not recommended to store your crypto on an exchange because the exchange holds the private keys to the wallet, not you. This means that they have full control over the wallet and can stop you from withdrawing your funds. If you are buying crypto on an exchange it is safer to then send your crypto to a separate wallet instead of keeping it on the exchange.
Hardware wallet
A hardware wallet is a physical device that allows you to create a new address to store your crypto on. Since crypto doesn't actually get stored on a wallet – it's stored on the blockchain as mentioned above - a hardware wallet is used to store your private keys. However, hardware wallets are a bit more technical to set up and aren't as easy to use when compared to a software wallet.
The difference between a hardware wallet and a software wallet is that it is not connected to the internet. This means that your wallet has no chance of being hacked, which makes it much safer than a software wallet. Although hardware wallets cost money to purchase, for any long-term storage of crypto, a hardware wallet is the safer option.
Paper wallet
A paper wallet is a piece of paper that can be used to store your private key, seed phrase, or a QR code for transactions. Although paper wallets are considered safe because they can't be hacked, they are easily lost and destroyed. This is why paper wallets should be used as a backup for another wallet, and not used as a primary way to store cryptocurrency.
Backing up your wallets
If you plan on storing any amounts of crypto on a wallet it is very important you keep a backup because access to wallets can be easily lost. Without a backup or way to recover the coins from your wallet, there is no other way to get them back. If you have a desktop wallet there will be a file called wallet.dat which stores information that is used to access your wallet. You can create a copy of this and store it on another computer or a hard drive. A paper wallet can also be used as a backup for any type of wallet. You can write down your private keys or seed phrase on a piece of paper and then store them somewhere safe. In the event that you aren't able to access your wallet you will be able to use your private key or seed phrase, which you have as a backup, to restore access to your crypto.
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Hope you all found this helpful!
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