What is a cryptocurrency wallet?

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Digital Wallets are where you usually store your cryptocurrencies. Depending on their working mechanisms, they may also be referred to as hot or cold wallets.

So, how do they work?

Contrary to popular belief the wallet you are using doesn´t really store your cryptocurrencies. Instead, it works as a sort of right to access to your coins which are on the blockchain. So, if someone stole your wallet, and don’t have the password to access it, you are safe as the wallet itself doesn’t store your coin; it helps you to communicate with the blockchain. A cryptocurrency wallet is essentially a software application that allows users to store, track, send and receive coins on the blockchain, just like a bank account.

Why do we even use a crypto wallet? You could also keep your coins on an exchange such as Kraken, Binance, etc. The main difference is that on an exchange you give up your private keys. In other words, you grant a third party (the people who control the exchange) the right to access your coins. Have you already heard this sentence:

"Not your keys, not your cheese.”

No matter what security verification process and policies that exchange implements, there's always a risk of getting hacked and lose all of your crypto. Many great hacks left hundreds of holders totally bankrupt; the most famous one being the Japanese Mt Gox heist where around 850 000 bitcoins were stolen in February 2014. The Ku Coin hack is another example of these attacks where users’ data got leaked and hackers stole about 275 million dollars in September 2020. On August 19th, 2021, hackers stole 97 million dollars from the Liquid exchange. Exchanges are generally safe until some hacker breaks their defenses. As we saw, when you store your cryptocurrencies on an exchange, you're technically losing control over them and so, if we learned anything from the past, it's that we must use a reliable wallet to keep our coins secure.

Now, we must talk about keys. Imbedded in the word cryptocurrency, you’ve got the term “cryptography”. In a nutshell, cryptography is a clever mathematical way to encrypt data. Regarding wallets, the encryption is achieved using a pair of digital keys which are string of alphanumeric characters that represent a specific wallet. As soon as you download or buy a crypto wallet, you are issued two types of keys:

Public Keys (PubKey) and private keys (PrivKey). A public key is essentially what identifies your account on the network; in other words, you can compare it to your bank’s account number. Everybody can see it and send you money. If someone wants to send coins to you, they need your public key. On the other hand, your private key works as the password on your bank account. It can be 12 or 24 words called a “seed phrase”. The concept of keys is, after all, very similar to the one you understand when dealing with your bank account.

What type of wallet can you get?

There are four types of available wallets that you could have.

So, first: mobile wallets. These wallets are available in the form of a mobile application that you download form the Internet. In this course, we will use Abra wallet.

Second: desktop wallets. Since your keys are stored on your computer, you can access these wallets even if you're offline. They tend to be more secure than mobile wallets as they deploy technically advanced features that increase both security and privacy.

Both mobile and desktop wallets are categorized as hot wallets. But there are also “cold wallets”. This is actually the same thing as a “hardware wallet” such as Trezor or Ledger which are an offline storage device similar to a hard drive disk or USB drive. Undoubtedly, hardware wallets are one of the most secure ways for you to store your cryptocurrency.