Commonly, a wallet is a small folding case that is for carrying paper money, credit cards, and other flat objects. As many believed that a cryptocurrency wallet has the exact same characteristics as a traditional wallet, in reality, it functions differently.
A bitcoin lives into a record of transactions on the blockchain. Bitcoin never leaves the blockchain, so, in essence, the cryptocurrency wallet is somehow a misnomer as it does not store the digital currency.
But instead, your Bitcoin wallet becomes a tool that interacts with the BitcoinSV blockchain that sends, receives, and manages the Bitcoin assigned to addresses. When a person sends Bitcoin, they are also transferring possession of the coins to one address to another.
Some wallets are not linked to the real identity of the owner. As all transactions from the wallet are stored publicly and permanently on the BitcoinSV blockchain. The data, such as wallet addresses, can be traced to the user’s identity in several ways.
How does crypto wallet work?
Crypto wallet stores private and public keys that interact with the BitcoinSV network. An alphanumeric identifier is generated based on the public and private keys. This identifier is commonly known as the “address” as it refers to a specific location on the blockchain. This address is what parties give in to one another in order to transact using Bitcoin.
Private keys stored must have ownership of the public address. In completing a Bitcoin transaction, the public and private keys must match. The transaction is signed by the sender and recorded on the Bitcoin (SV) blockchain. Once it happens, the balance of the receiver will increase, and the sender’s decreases accordingly. The private keys must never be disclosed, or else the party risks having their Bitcoin stolen.
What are the most common crypto wallets?
The majority of crypto wallets are software-based and come in many forms such as desktop, mobile, web, etc. The software-based wallets are convenient and more comfortable to transact with because by and large, they are connected to the Internet.
Web wallets that you find on cryptocurrency exchanges allow you to access blockchains through a browser interface without having to download and install the software. Users can create a new wallet and set a personal password in accessing it. The downside however is, some service providers hold and manage the private keys on the user’s behalf. In effect, information stored on centralized servers is vulnerable to hacking.
Desktop wallets are downloaded and operate locally on the user's computer. However, desktop wallets offer users a full control over their keys and funds. While desktop wallets are considered safer than web wallets, users are still susceptible to theft if their computer has any viruses or malware installed. Thus, it’s crucial to back up the wallet.dat file then keep it somewhere safe. If the hard drive is damaged and there is no backup, the coins are lost.
Mobile wallets are known to be relatively convenient and more comfortable to use in contrast to other available options. With a mobile wallet, users are able to check their account transactions or make in-store payments using QR scanning instantly. These properties make mobile wallets best suited in performing daily transactions. Similar to desktop wallets, mobile devices are vulnerable in malware infection and malicious apps. Users are then encouraged in keeping their private backup keys (or seed phrases) secure in case the smartphone gets lost or damaged.
Keeping Your Bitcoin Wallet secure
To users looking for more security, offline hardware wallets are an alternative to their online software-based counterparts. Hardware wallets, also known as cold wallets, are physical electronic devices that use a random number generator (RNG) in generating public and private keys. The keys are stored inside the device.
As, offline storage means a virus can’t infect a hardware wallet, nor can hackers access it through an internet connection. Similar to a vault, a hardware wallet is an advantage if users are holding a large amount of cryptocurrency. Disadvantage is that users will need to connect the hardware wallet to a computer in accessing their wallet, thus making them relatively less accessible.
However, the most secure yet least popular way of storing cryptocurrency is a “paper wallet”. As the name suggests, paper wallets are printed out on a piece of paper. A software program generates a set of public and private keys. The keys are then printed to a piece of paper along with a QR code and kept offline. If the owner loses the piece of paper, they also tend to lose access to their funds.
The use of a paper wallet is relatively straightforward. Users then transfer funds to the public address shown on the paper wallet. Alternatively, in withdraw or spending currency, the user needs to transfer funds from the paper wallet to a software wallet. This process can either be done manually by entering the private keys or by scanning the QR code on the paper wallet.
A significant flaw of paper wallets is they aren’t suitable for sending funds partially, but only its entire balance at once. If a user imports a paper wallet private key into a desktop wallet and spends just part of the funds, the remaining coins will be sent to a “change address” that is automatically generated by the Bitcoin protocol. If the user doesn’t manually set the change address to one that they control, they will likely lose their funds.
Choosing the Right Bitcoin Wallet
There are many options that are examined available in the market today as well as their pros and cons. Each option then has something unique to offer the user. Some are focused on providing security as others focus on creating easy accessibility. No one wallet covers all areas. Losing access to cryptocurrency wallets can be quite costly, so it’s important to back them up carefully.
Before choosing a cryptocurrency wallet, it’s crucial in thinking about how you intend to use it so you can select the most suitable wallet.
- Are you storing a large amount of Bitcoin which you don’t plan on using in the short term?
- Are you in need of access to your Bitcoin anytime and at any place?
- Are you trading Bitcoin for financial gain?
In the end, it comes down to your needs, on how many Bitcoins you have, how frequently are you planning on using it for cryptocurrency exchanges, the amount of privacy and security you need, etc. Moreover, users also can choose in combining different wallet options that fit their needs. Whichever method requires thorough research and consideration before moving funds into the wallet.