What is a Cryptocurrency Wallet?
The digital currencies are not stored in a specific location and do exist in a physical form.
Instead, cryptocurrencies, account balances, and transactions exist on a blockchain or similar technological foundation.
What is blockchain?
Blockchain is a term that describes a running ledger of transactions.
A cryptocurrency wallet has software that creates and stores your private and public keys, interacts with the blockchain, monitors your balances, and allows you to send and receive cryptocurrency. So, to send, receive, store, and monitor your cryptocurrency balances, you need to use cryptocurrency wallets.
Or in order word cryptocurrency wallet, is as a key to access your funds. Because your cryptocurrencies on the blockchain, which is a running ledger of transactions distributed all over the world, are basically just assigned to your private key, so your wallet gives you access to the funds assigned to your “account” of sorts.
How do Cryptocurrency Wallets Work?
A simplified way to understand how cryptocurrency wallets work, is to consider how your traditional online banking applications work.
Let Imagine your bank is the blockchain, your bank account number is the public key, your
crypto wallet is your online banking app, and your online banking app login credentials
are your private key. So, your bank records and tracks all of the transactions going to and from your bank account, just like the blockchain records and tracks all of the transactions going to and from your public key.
Using your online banking app, you are able to check the balance of your bank account
and send or receive transactions, just like a cryptocurrency wallet allows you to check
your balances and send or receive crypto. However, in order to login to your online banking app, you need to first type in your username and password, which is like using your private key to access your cryptocurrency wallet. A public key is similar to your bank account number, in that if you provide anyone with your bank account number, they can send you funds.
Keep in mind that public keys are also commonly known as “wallet addresses.”
However, having your bank account number alone would not allow someone to take funds from
your account. This is also how a public key works - people can send you cryptocurrency using your public key or public wallet address, but they cannot take funds from you using your public key. Giving your online banking app login credentials to someone would allow them to send funds from your bank account to somewhere else. This is similar to a private key - if you give someone your private key, they can access your cryptocurrency and send it somewhere else.
Unlike traditional banking, if you give away your private key and your funds go missing,
you will likely not be able to recover them. This is why it is so important to keep your private key private. Before sending and receiving cryptocurrency, you must first make sure you are sending the same type of currency to a wallet address, or public key that supports that particular
Cryptocurrency.
For example, you can only send bitcoin to bitcoin addresses and you can only receive
Ether from ether addresses.
If you have another person’s public key, or address, you can easily send them some
Corresponding cryptocurrency. And vice versa.
When cryptocurrencies are sent or received, no actual physical or digital exchange occurs
between the wallets. Remember, cryptocurrency wallets interact with the blockchain and the blockchain is where all cryptocurrency transactions are logged. And it’s also where balances are tracked.
Different types of Cryptocurrency wallets?
There are many different types of cryptocurrency wallets to choose from and each of them have
Their own pros and cons. We have hot and cold crypto wallets
Hot Wallet
A hot wallet creates and stores your private keys online, while cold wallets create and Stores your private keys offline.
So examples of hot wallets include desktop or mobile app software. These wallets operate on your computers and cell phones, which are connected to the internet.
So when you set up these wallets, your private key is generated on a “hot” device, which
Means it's connected to the internet, which could be more vulnerable to being compromised.
However, by far the least secure way to store large investments in cryptocurrency for the
long term is on an exchange. Because first of all, it’s online, therefore hot, therefore more vulnerable to hacks. And on top of it, cryptocurrency exchanges are HUGE targets for hackers since obviously there’s a ton of potential crypto that can be stolen.
With any regular wallet any of us manage on our own, a hack has no idea how much potential
loot there is to steal.
While crypto exchanges are a guaranteed gold mine of sorts. And as if it couldn’t get any more sketchy, cryptocurrency exchanges rehypothecate crypto, and without going into too much detail breaking that down, basically it means that one ether you are looking at in your account, could also be the same ether 5 other people on the exchange are looking at.
Meaning cryptocurrency exchanges don’t actually have all of the crypto backed one-to-one for
all of their customers. So if there was a massive run on exchanges where everyone wanted to move their bitcoin and ether to their own wallet, there would not be enough to go around.
Cold wallets.
A cold wallets are also known as hardware wallets. Hardware wallets are designed to safely create and store your private key offline. And when sending, receiving, or managing funds, you will need to use the hardware device and go through more security steps in general, which makes your funds less vulnerable to theft. By creating and storing private keys with hardware wallets, your funds are safer from hackers and other potential security issues that hot software wallets are more likely to experience. So storing your cryptocurrency on a hardware wallet is the safest, most secure way to manage your funds.
Note there are two important things you need to know about buying a hardware wallet.
First, only buy hardware wallets from the real manufacturer.
- · DO NOT buy used hardware wallets and do not buy from other companies and individuals.
This is because hackers may buy a hardware wallet, tamper with the software, and resell
the hacked device to steal your funds.
- · with all crypto related activities, make sure you double and triple check the
URL you are accessing to buy the hardware wallet.
Make sure the address is correct and that it has an SSL or secure sockets layer, which
uses the https protocol, instead of the http.
There are a ton of phishing scams online that pretend to be the real website you intend
to access. If you access a fake website, you may lose your funds or receive a hacked wallet.
How to Set Up Your Own Cryptocurrency Wallet
Let us use Coinbase wallet on our mobile device for demostraction, step-by-step.
Let Navigate to the app store or google play store and type in “Coinbase Wallet.”
Then download the “Coinbase Wallet App with the blue icon with a white circle and blue
square in the center.
Once the download is complete, open the app.
Next, we are going to create a new wallet together, so tap “Create New Wallet.”
Next, review and accept the terms of service by tapping “Accept.”
Then, now you can pick a username.
This is one way how other Wallet users can find you and send you payments easily, versus
using the long string of characters or QR codes.
When you’re finished, tap “Done.”
Now, you can set your privacy preferences.
You can always change this later in settings, but for now you can choose Public, which just
allows other Coinbase Wallet users to search for you by your username to send you crypto.
Or you can choose to remain private, so people cannot search for your username to send you
crypto. Again, this is only for receiving crypto; users cannot take funds from your wallet using
your username.
Make a selection, then tap “Next.”
Now it’s time to protect your wallet by adding an extra layer of security to keep your crypto safe.
If you’re phone has it, you can choose to use face ID, which is recommended, or you can choose to set up a 6 digit passcode.
Either way, make sure you take the time to add an extra layer of security for good measure.
Now it’s time to back up your wallet.
This is the part where this software wallet on your hot cell phone device, hot just meaning
it’s connected to the internet, created your private key in the form of a recovery phrase.
You will be shown a secret recovery phrase on the next screen.
The recovery phrase is the ONLY key to your wallet.
It will allow you to recover access to your wallet if your phone is lost or stolen.
You will then need to tap the box acknowledging: I understand that if I lose my recovery phrase,
I will not be able to access my account.
Right. So you can’t contact Coinbase support if you lose the recovery phrase and your phone
is stolen or similar. This was a software wallet created by coinbase, but it is just a software wallet that allows you to store and manage your cryptocurrency off of the exchange for yourself.
After these next few steps, it will become clear how our crypto is on the blockchain
and how private keys or recovery phrases are merely keys to access our funds that are on
the blockchain, and how anyone with these words can steal all your funds if you do not
properly secure these words.
Okay, so tap the box and tap “back up now.”
And here we are.
The twelve words or recovery phrase that represents your private key and access to funds.
These 12 words are the keys to your wallet.
Note that I don’t recommend ever storing your wallet private key on any device connected to the
internet, password manager or similar. The best way is using good old fashioned pen and paper for now, securing it in multiple geographical locations in case of fire, flood, or similar.
I recommend writing your recovery phrase on paper and storing it somewhere extremely
secure like a safe or inconspicuous place in your house like in a book on your bookshelf
or similar.
So tap “back up manually” and then write down the 12 words.
When you’re finished, tap “Next.”
With a manual backup, you will need to select the words in the correct order to verify you’ve
Written them down correctly. The spelling and order of words is extremely important, otherwise you can lose access to your funds.
Tap them in the correct order and then tap “Done.”
Now we have our own cryptocurrency hot wallet that is in our complete control, not the exchange.
Before transferring our crypto for safe keeping, first, let’s tap on the cog in the bottom
righthand corner, then tap “App Lock.”
Select to require a lock to access the app, for transactions, and biometric change protection
to further secure your wallet.
Then tap the back arrow in the front left corner to go back to the main dashboard.
Nice, and next, here comes the part that will probably be a lot easier than you think.
Transferring your crypto from the exchange to your new, self-custody mobile wallet.
For simplicity, I’m going to assume your crypto is on Coinbase in this guide, however
no matter which exchange you use, you should be able to log in, choose a “send” function
and follow similar steps to move your crypto.
On your computer or phone, log in to your exchange.
In this guide, let us accessing the Coinbase exchange app on a mobile device.
Tap the center blue round button to open a menu that allows you to buy, sell, convert,
send, or receive crypto, and tap “Send.”
Choose the cryptocurrency you want to send to your wallet.
Let say, we are sending bitcoin.
Now, I always recommend that beginners and seasoned crypto investors alike, send a small
amount to a new wallet first to make sure everything goes smoothly before sending large
amounts. So we are first going to send let say $5 worth of bitcoin.
Type in $5 then tap “Continue.”
You may see an option to send crypto to a friend, but we are going to tap “not now” to continue.
Next, in the “to” field we have several different ways to send crypto, but for this
new wallet we set up, we will use the QR code or we will paste the address.
If you are using the same phone and not a computer, it will be easiest to copy and paste
the address, but if you are using a separate device, QR code is much simpler and faster.
So let’s go back to the wallet we set up together, unlock it, then tap “Receive” in the top center of the screen.
You will see a list of several different cryptocurrencies, as well as a search bar you can use to find a cryptocurrency.
Let say, I’m choosing to receive bitcoin.
then, so for bitcoin you can receive bitcoin to a segwit it or legacy address, but we don’t
need to worry about that. If your crypto is on an exchange, use the default segwit option.
From here, you can either scan the QR code or tap “share address” to copy it and
paste in the “To” field on the exchange.
Now that we have our bitcoin address in the “to” field, we can choose to type in an
optional note in the note field.
Let us, just going to leave it blank.
And we are ready to tap “Preview Send.”
Ensure the amount looks correct, check out the fees.
Looks like it will be about .11 cents to transfer the $5 to our wallet.
Finally, tap “Send Now.”
If you have 2 factor authentication on your exchange account, which you definitely should
for extra security, enter the 2-step verification code from your authenticator app, then tap
submit to start the transfer. It was successfully sent.
Note that it says here this transaction usually takes about 30 minutes.
From here you can either view the transaction again or tap done.
Now, we wait a few minutes to ensure the transaction was successful
So here we are: we now are in complete control of our bitcoin and it’s stored on the blockchain
where we are the only ones with keys to access it, rather than it merely being in an amorphous
pool of bitcoin controlled by the exchange.
So secure your private key recovery phrase and repeat these steps to transfer all of
your cryptocurrency on exchanges you’re looking to hold for the long to your new mobile
wallet… that is until your hardware wallet arrives.
So let’s just say I come across your 12 words and JUST your 12 words.
Not your physical phone, not your email address or passwords, or anything that has any connect
With you at all. If I found a piece of paper in the middle of the street with these 12 words, and I wanted to take your crypto. This is how it can be done.
You can use almost any other mobile crypto wallet to do this quickly.
In this example, let us download another great mobile wallet option called Trust Wallet.
Next, let us open the app, but instead of choosing to “Create a New Wallet,”
let us select, “I already have a wallet.”
Then it asks which type of wallet I want to import.
And since I don’t know what it is, as I just have your 12 words, I’m going to select
“multi-coin wallet.”
Let us to name this new wallet.
Then let us enter in the 12 words on this paper I found randomly the street.
Note, that wallets like Ledger create 24 words, and you can do the same exact thing.
If I found your 24 word ledger private key, I can do the exact same thing and take your
funds. Also, here’s a fun fact: notice as I’m typing the words, once I get to the fourth
character, the wallet guesses the word.
So actually, you don’t really need the full words to gain access to wallets.
If you just use the first four letters of words in a recovery phrase, they can be predicted.
Full words just make it easier for memorization and simpler to understand for most people.
Okay, so all 12 words are entered and now let us tap import.
Here’s a message saying your wallet was successfully imported.
And low and behold: the $5. And from here, I can simply tap the “send” button and send all of your funds to another wallet that you don’t have access to.That fast and simple.
That’s why it’s so important to guard your private key, recovery phrase, 12 or 24
Words, whatever you got and to consider getting a hardware wallet that generates a private
key offline and stores it offline for maximum security.
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