WHAT IS A CRYPTO CURRENCY WALLET?
To have ownership of any cryptocurrency no matter the amount you need to have a wallet to secure the coins. Like a wallet you may carry around today this is where you hold your funds. One difference however, with the wallet you carry around on your person you physically have your paper money, your coins and or credit cards. With a crypto currency wallet, you will need some kind of electronic device ie your mobile phone and instead of cash or credit cards you will now have one or more digital public and private key(s). With any crypto currency wallet, you do not actually store your coins anywhere, instead rather with public and private keys you hold proof of ownership of coins.
So what are public and private keys and where do they come from? It is all based on asymmetric cryptography. To put it simply to generate these keys the Bitcoin software will select a large number at random, with this number the Bitcoin software will convert it into the two different keys or encryption codes. The public key will become your receiving Bitcoin address, and your private key is what you will use to provide proof of ownership (never share your private key). The Bitcoin software uses the keys to encrypt and decrypt each other.
Encryption simply put is changing data so that if unauthorized users obtain it they can not make any sense of it. If someone were to encrypt the word “hello” and apply some sort of encryption on it could like like any set of characters. Many different forms of encryption exist each with its own standards and outputs. Only the owner of the data knows how it was encrypted and what the original data is. Encryption could be broken if a weak encryption method is used. In the example of Bitcoin, it would take longer than the earth has existed for someone to guess what your private key is. Your coins are safe if you keep your private key private!
One of the more secure ways to store coins. Can also be called running a node. Using this type of wallet requires a large download of the entire blockchain. Using this method of storage is relatively safe as your private key is left on your own machine. Considered hot storage while the computer is turned on. Just do not let anyone you do not trust use your computer as they can transfer ownership of your coins! To learn more about each individual wallet see the links below. Biggest downside (depending on how you look at it) is that this wallet is not portable. It is only accessible when you are around the machine. Go to the official website of a cryptocurrency website to find the download.
For example, Sally will send Mike 10 Bitcoin though her wallet. In order to do this she needs to have Mikes wallet address. Once she has his address she opens up her wallet, enters in his address, specifies the amount, and hits send. When she hits send she essentially tells the Bitcoin network “I am Sally and I want to give Mike 10 Bitcoin”. Under the hood, the Bitcoin software encrypts proof of ownership of 10 of Sallys Bitcoin with Mikes public key and sends this transaction to everyone on the Bitcoin network. Once Mikes wallet picks up on the transaction using his Private key only he is able to decrypt this message from Sally. Mike will then be in control of this 10 Bitcoin.
In this example, encryption is used. Sally’s wallet takes Mikes public key and encrypts proof of ownership of 10 Bitcoin. Mike’s wallet then uses his private key to decrypt the proof of ownership.
This all works thanks to a mathematical proof (under the hood). This private key is the only thing that gives Mike control of the coins. He is able to do this because his private key is the only thing that can decrypt his public key. If you lose this private key the coins are gone from your possession forever.
Cryptocurrency wallets come in several different flavors. Desktop (software), exchange, web, mobile, hardware and paper. These wallets can also switch from hot to cold depending on if they are stored online or offline. If a wallet is stored online it is considered hot, while offline away from hackers etc it is considered cold.
Mobile wallets are perhaps the most useful wallet as they live on your phone thus making them quite portable. Usually, through the form of an app for download this app stores your private key(s) and enables you to pay for things directly on the go. This kind of wallet would be considered hot storage.
One nice feature about mobile wallets is that they are not full clients meaning that they do not download the entire blockchain for whatever coin they are using. Through the app designer they only download a small subset of the block chain and through communication with other users or a database they are able to act just like a desktop wallet.
A hardware wallet is a special kind of wallet that stores your private keys in a secure hardware device. These kinds of wallets have several advantages, private keys can not be transferred from the device as plain text, immune to viruses, and most secure type of wallet. These wallets are currently rather limited in number. This kind of storage is cold storage. See below for the ones of note.
Best Hardware Wallets
Ledger is a wallet that is designed for users who want high security. The wallet is a physical device that acts as a source of protection, meaning that you cannot send Bitcoins without having the physical device.
Pros: It is easy to use, secure and supports altcoins
Cons: It retails about $58 since it provides more security for less usability.
Trezor Hardware Wallet
This is an extraordinary solution for storing lots of Bitcoins securely. It provides world class security with an excellent usability even for beginners.
Pros: It is extremely secure, it is easy to use and supports altcoins and other wallets
Cons: It is expensive, with an approximate price of $99
This is one of the newest hardware wallets. It has a sleek design making it visually appealing to users. Is is very intuitive and easy to use.
Pros: It has a great design, it is highly secure and friendly even to beginners
Cons: Costs about $99
This wallet looks like a credit card and has a small button on it. As an additional security, it has to be close to your phone to send out coins. Even though it is a good innovation, it’s still being fine-tuned.
Pros: it is very portable fitting into your wallet
Cons: it feels clunky.
Future of hardware wallets
The future is going to be digital currency as we can see from the current adoption levels of cryptocurrency. Bitcoins opened up the door to other altcoins and to ensure security, hardware wallets are going to be more advanced, and they are going to be configured in our phones as time goes by. You will need to control your bitcoins with private keys since you don’t want anyone else accessing them. The best way to keep your coins out of reach is by having a hardware wallet.
A paper wallet is a document that has a printed copy of both a wallets public and private key. Generally, this will be in the form of plain text and a QR code. With this QR code, it will be much faster to read the codes for future use. The benefits of this kind of cold storage are that it is impossible to hack electronically (unless you can hack paper). This type of wallet also comes with its own risks. If the document is to be lost or destroyed you have lost your coins forever. To create a paper wallet is different for each coin even though the concept is very similar. Google for the steps on how to create a paper wallet for the coin of your choice.