There is an induvial who wishes to invest their money by purchasing a gold bullion. After buying it from the gold market they will have two different ways they can store it, which are:
The first option: When buying gold bullion, it is possible for the buyer to leave it with the merchant who offers the option to exchange it for money or other metals. The merchant will store the gold bullion in a safety box at their store, but it may be vulnerable to theft by gangs due to the high quantity of precious metals present along with it. Additionally, the safety box may be at risk in case of a natural disaster. There is also a possibility that the merchant may act deceitfully and mishandle the precious metals. In the worst=case scenario, if the merchant declares bankruptcy, it could put all investors’ assets at risk.
The second option: Once the buyer purchases the gold bullion, they take it to their home and put it in a special safety box. This safety box can only be opened by the buyer with a private and secret key. The key is used to sell the bullion or transfer it to another person. The safety box also has a public key that can be shared with others. However, sharing the private key can be dangerous because it can give unauthorized access to the safety box and the bullion inside. The public key, on the other hand, allows others to see the history of the bullion that was stored in the safety box.
So technically, in option one, we store cryptocurrencies in a centralized exchange wallet, whereas in option two, we store them in our wallet.
What does a crypto wallet mean?
A cryptocurrency wallet is a software application or a device that enables users to interact on a blockchain. This type of wallet provides a secure storage for cryptocurrencies or non-fungible tokens (NFTs) and also facilitates sending and receiving of these digital assets.
The first-ever crypto wallet was used by the founder of Bitcoin, Satoshi Nakamoto, while the second one was used by Mr. Hal Finney. Both wallets were operated on the Bitcoin application, and a test of 10 Bitcoins was sent using this process. This is considered the first-ever instance of sending encrypted digital currencies in history.
A crypto wallet is a tool that enables individuals and institutions to collect and use cryptocurrencies for various purposes. It is just like a bank account that is necessary for fiat currency. The wallet also plays a crucial role in making crypto assets and currencies functionally useful.
Thanks to modern crypto wallets, blockchain technology has become accessible to everyone. Before, sending cryptocurrency was a manual task that involved entering long keys. However, today, applications handle most of the tasks and cryptocurrency wallets are considered a safe and convenient way to store digital assets and conduct transactions. They are also the perfect choice for preserving, controlling, and trading digital assets quickly, easily, and securely. Without a crypto wallet, it is not possible to connect to decentralized applications (Web 3.0 dApps).
The most popular types of crypto wallets
Cryptocurrency wallets are operated through applications that require an internet connection to access the blockchain network for the encrypted digital currency that we wish to deal with. These wallets can either be in the form of a smart application, available to work on the phone or as an extension in the Google browser, or in the form of flash memory. The wallet that is connected to the internet is known as a “hot wallet,” while the wallet that is not constantly connected to the internet is known as a “cold wallet.” In the case of the first wallet, it is called a “software wallet” because it exists in an application without having a physical entity. In the case of the second wallet, it is called a “hardware wallet” because it exists in a tangible physical entity.
Is the digital currency stored inside the wallet?
Like the bank card in your wallet, encrypted digital currencies are not physically present inside the wallet whether it is a “Software Wallet”, “Hardware Wallet”, “Hot Wallet”, or “Cold Wallet”. These currencies are securely stored in a specific blockchain, which only allows the owner of the wallet to access and use them. Just as the bank protects the money in your account, the blockchain protects the digital currency in your wallet.
Therefore, cryptocurrencies are not physically stored in a wallet. Instead, they exist as pieces of digital data stored in a database. So, when you access your wallet using your public address, the app interface retrieves all the data associated with it and displays your holdings.
What is a public key and a private key?
The crypto wallet’s operation is based on two keys, namely the public key and the private key. Both keys are necessary to access and dispose of the cryptocurrency. The wallet is responsible for maintaining the private key, which acts as a passcode to allow transactions. On the other hand, the public key is stored in the Blockchain database.
In simpler terms, the public key is like a phone number enabling communication, while the private key is like a password that allows access to the phone to make calls.
The simplicity of sending and receiving digital currencies
To send and receive funds like bank transfers, we will require an International Bank Account Number (IBAN). Similarly, when it comes to digital currencies, we need to provide our wallet address (public key) to receive currencies, and the beneficiary’s wallet address to send currencies. Moreover, many wallets come with QR codes that integrate Near Field Scanner technology, which allows users to scan the code instead of copying and pasting the public key.
Crypto wallet security
It is essential to obtain the password for your cryptocurrency wallet (private key) to access your digital assets. The wallet itself is secure, but the risk lies if your phone or computer gets hacked, and the hacker gains access to your password and other information. Therefore, it is crucial not to store your wallet password (private key) on your electronic devices. Moreover, you should avoid carrying out any wallet transaction on suspicious sites that offer free coins (Airdrop) or a rewarding presale. Approximately 55% of fraudulent operations occur through this scam method. There are applications available that can warn you when your wallet gets close to such scams.
If you suspect that your private key has been compromised, it is crucial to create a new wallet and transfer your encrypted assets to it. Creating a new wallet takes only a few seconds, and transferring assets is a simple and fast process.
Is owning a crypto wallet in the world of digital currencies considered common?
The number of digital wallet users in 2023 reached 84.02 million, and the number continues to rise.