Crypto wallets 101
If you plan on purchasing cryptocurrency on a trading platform or exchange, you’ll need a crypto wallet first. These digital wallets allow you to send, receive, and store cryptocurrency. Like a bank account that holds fiat money (basically any paper currency like the US dollar), crypto wallets store digital currencies like bitcoin (BTC) and ether (ETH). However, unlike traditional bank accounts, not all crypto wallets are custodial. As a result, you can control who holds your private key, determining who has access to your funds.
Like a standard bank account that uses a PIN to control access, private keys allow you to “send” or spend the crypto in your wallet. In other words, private keys prove crypto ownership and facilitate transactions. Custodial crypto wallets need access to your private keys so they can transact on your behalf, similar to how a bank oversees your regular accounts. However, sharing your private keys comes with the risk that your crypto is withdrawn or sent without your permission.
Non-custodial wallets eliminate this possibility by requiring that users hold private keys, meaning no one else can access your crypto wallet. While this may be more secure, non-custodial wallets can be risky if you forget your recovery phrase. This auto-generated sequence of words serves as a security blanket, enabling wallet access without your regular password. There’s no way to recover your crypto assets without the recovery phrase because there’s no custodian.
A public key is equivalent to your bank account number, allowing you to receive cryptocurrency transactions. More specifically, It’s a cryptographic code paired to your private key. While anyone can send crypto to a public key, your private key works alongside it to prove that you’re the owner of the crypto received in the transaction.
How to use a crypto wallet
With the basics of public and private keys established, we can begin to explore the process of sending and receiving crypto to your wallet in more detail.
There are many reasons you may want to receive cryptocurrency in your wallet. For example, you might be using an exchange, which means you’re selling one cryptocurrency to receive another. Alternatively, you might buy crypto using your bank card or receive it as a gift. In any situation, the sender will need your wallet address, an alphanumeric sequence of numbers generated by hashing your public key. Hashing shortens the wallet address from 256 bits to 160 bits, making it easier to use without error.
It’s important to note that your crypto wallet will have a different address for each cryptocurrency that you hold. For example, you might only have one exchange-based wallet, but the address for your ETH wallet is different from the address for your BTC wallet. As such, if someone sends you BTC to an ETH wallet, you could lose those funds forever.
Most crypto wallets display an alphanumeric number and QR code for each digital currency in your wallet, also known as the address discussed above. To send funds, you’ll need this number from the other wallet holder. In general, sending crypto involves the following steps:
Locate the send feature in your wallet and enter the receiver’s wallet address.
Select the amount of crypto you want to send and confirm the transaction. If you’re new to the process of sending crypto, you might want to try a small test transaction first.
When you send crypto, you’ll likely pay a transaction fee. This fee is equivalent to the transaction fees banks charge to send a wire transfer or use your debit card every month. However, instead of going to a bank, these fees go to blockchain miners, the individuals responsible for securing each blockchain. Like the centralized validation process on the VISA and Interac networks, miners validate transactions on decentralized blockchain networks; every cryptocurrency exists on this infrastructure.
Hardware and software crypto wallets
When selecting a custodial or non-custodial wallet, you’ll also need to decide whether you want to use a hardware or software wallet; let’s delve into how each of these options works.
A hardware wallet is a small device, similar to a flash drive, that allows you to store your crypto offline. Hardware wallets are also known as “cold wallets” because they’re offline. Because hardware wallets keep your private keys off of your phone or computer, they are all non-custodial. Most hardware wallets interact with a computer using a web-based interface, company-created app, or separate software wallet.
Although hardware wallets are relatively inexpensive, around $100, they can be more complicated to use than software wallets because there are more steps involved. For example, instead of signing up for a web wallet on a crypto exchange, you’ll need to install software on a desktop or mobile device to ensure it can communicate with your hardware wallet. While this is simple for some, it might be intimidating for others.
Software wallets can be web-based, mobile, or desktop applications. While many mobile and desktop wallets store private keys offline, they’re also known as “hot” wallets because they’re hosted on internet-enabled devices. As such, they can be riskier than hardware wallets because other app vulnerabilities can lead hackers to your wallet. In addition to this concern, mobile, browser extension, and desktop wallet applications are susceptible to spoofing. Using this practice, hackers emulate legitimate software applications in hopes users will download theirs instead, allowing them to steal their funds. Beyond these security concerns, browser extension software like MetaMask is also more intensive in your machine central processing unit (CPU) as it runs continuously in the background.
While both hardware and software wallets have pitfalls, new solutions have begun to emerge that aim to integrate the best features of both. For example, Braves’ new browser-native wallet is part of the software, not an extension. As a result, the browser-native wallet reduces the risk of spoofing, and there’s no additional burden on your device CPU. In addition, as part of the Brave browser, the wallet is interoperable across devices, mobile or desktop, which means you won’t lose it like a hardware wallet.
Crypto wallet takeaways
Beyond standard crypto wallet functionality, some crypto wallets also integrate features like token swapping or staking, which generates a yield similar to share dividends or bonds. In addition, some wallets enable access to select decentralized applications (DApps) built on different blockchain networks. For example, the Metamask browser extension provides access to the Uniswap decentralized exchange (DEX).
While many see hardware wallets as more secure, the process of connecting a device to your computer can be more complicated than using a software wallet. However, if you decide to use a software wallet, you’ll want to ensure the wallet provider you select has a good reputation and a history of secure operations. Due diligence is even more crucial because deposit insurance won’t cover wallet hacks.
Like funds held in a conventional bank account, cryptocurrency security is never foolproof. Selecting a software platform wallet that integrates additional security features can effectively protect your crypto investment. Once you establish your security plan, you can focus on the benefits of holding digital currency.