Become a better investor
Lesson in Course: Crypto (beginner, 6min )
How do we use cryptocurrency?
Unlike traditional wallets that hold our cash and credit cards, crypto wallets don’t actually store cryptocurrency. We can think of Crypto wallets as gateways or tools that allow us to communicate with a blockchain network, like Bitcoin or Ethereum. The wallet generates the information (public and private keys) we need to use cryptocurrencies.
Remember, all transactions with cryptocurrency (on a blockchain) are public, so they are encrypted using a pair of public and private keys for security. Public keys encrypt the transaction, while private keys decrypt the transaction.
Private keys provide signatures for transactions, give access to funds, and can be used to access our coins on any device. If someone steals our private keys, then they could steal our crypto.
WE SHOULD NEVER SHARE OUR PRIVATE KEYS!!
Some wallets use seed phrases which are simply a list of words we use to recover our funds on the blockchain. We should write down the seed phrases when we open our wallets. Keep the seed phrases in a safe place in case we need to access them later. If we lose them, we could lose our crypto forever.
We can think of wallets as either being hot or cold.
Hot wallets are connected to the internet. They are more convenient to use for trading and making transactions.
Cold wallets are not connected to the internet. They are a physical device that holds the keys offline, making them a safer alternative and more resistant to hackers.
Aside from the hot vs cold wallet types, there are 3 forms of wallets with different advantages and disadvantages.
Software wallets are usually connected to the internet, making them hot wallets. They are web, desktop, or mobile applications that are convenient for using and trading cryptocurrency.
Web wallets use a browser, so it doesn’t require any installations on our computer. Desktop wallets are downloaded on our computers and are considered safer than web wallets. Mobile applications are similar to desktop wallets but specifically designed for smartphones, making them convenient for accessing our coins anywhere.
Hardware wallets are physical devices that we connect to our computers, making them cold wallets. The device randomly generates public and private keys stored directly on the device behind additional security layers. They are less convenient for making transactions but tend to be more secure and better for long-term investors holding coins.
Paper wallets are obsolete and unreliable. Software and hardware wallets are better alternatives.
The video below provides more details about the basics of crypto wallets: