Bitcoin is a decentralized currency. As such, it gives the masses the power to manage and control their own money. Many people are starting to focus more on such currencies due to the increasing distrust of banks.
Consider that Bitcoin, and other cryptocurrencies, have seen a considerable increase in value. Many people are looking at investing in crypto; if considering bitcoin or a similar form of online currency, people will need to have a “wallet” in which to store and manage different everything.
Today, we’ll explain how digital currency wallets work, and a couple of different types, to help any person choose the right one.
How Does Digital Currency Wallets Work?
Although millions use cryptocurrency wallets, there’s still considerable misunderstanding about the way they work.
Digital wallets don’t store currency – digital currencies don’t exist in physical form anywhere. All that exists is a record of transactions, which gets stored on the blockchain.
They are software programs that store public and private keys to blockchains. That way, using them, people can monitor their balance, send, and receive money.
The only thing signifying the transaction is a record on the blockchain and a change in the wallet’s balance.
Types of Digital Wallets
These wallets come in two main types – hardware and software, the latter featuring two subtypes. The main difference between the two is the location of the private key – a password to the wallet. Let’s take a more in-depth look at the types.
Hardware wallets are physical devices, usually in the form of flash drives. They are sometimes referred to as cold storage, and they act as a safe, holding money that won’t be spent any time soon.
The bonus of this type is the increased level of security. The crypto assets are secure offline, so there’s no worry about hackers. They are also immune to computer viruses.
When a person gets paid, these wallets only need access to a computer. When the currency gets transferred to the flash-like device, it no longer exists online.
A paper wallet is a subtype of the hardware version, and it, as the name suggests, consists of paper. It’s an appealing option, being free, immune to malware, and allows for many copies. Several websites provide free tools for making this cold storage.
Remember, though, is that paper is prone to damage. This type is also less secure than the flash-like hardware kind.
This kind is available in desktop, mobile, and online format. They are similar to online bank accounts and feature convenience in place of security. There are two subtypes of software wallets, based on the location of the private key.
Hot wallets allow accessing funds via private keys without being linked to an establishment. It’s possible to enter the account via one wallet and another the next time.
This kind also provides access to exchange apps. However, they are more useful as payment methods than buying and selling cryptocurrencies.
Using a hosted wallet means trusting private keys to third parties. In exchange, this service provider takes care of security and offers quicker transactions, lower fees, and better overall functionality.
The main advantage of this type is that it’s hassle-free. Also, this method provides the user with more possibilities, like buying and selling cryptocurrencies and paying with them.
Accessing Digital Currency
Various types of wallets provide different methods of storing and accessing digital currency. Let’s take a look at how to do it in each of the arrangements.
- Desktop software – access is available from a single computer, where the storage was downloaded.
- Online software – the funds are stored on the cloud, accessible from any location or device.
- Mobile software – access is possible only from the mobile device where it was downloaded; this is a simplified version of the desktop version.
- Hardware – access to funds happens when the user plugs in their device into an internet-enabled computer and enters a code.
Sometimes, the user will want to turn their digital currency into real money instead of paying online. Luckily, that’s another simple process entailing a brief list of steps.
- Access the relevant website.
- Enter the receiving address.
- Enter the amount for sending.
- Select the appropriate wallet from which the transaction is withdrawn.
- Press the ‘Request Withdrawal’ button.
Remember that there will be a small transaction fee attached to each withdrawal. Most sites will allow users to monitor the charge, which updates periodically. People can use a BTC to euro or any similar tool to figure out how much money they’ll get when they choose to cash out.
The Bottom Line
There will be advantages and disadvantages to every type of crypto wallet out there. While the cold types are less prone to hacking, they lack convenience. Software is easy to use, but then follows the decision of whether to trust a third party.
Picking the right one is a challenge. However, reading into the advantages and disadvantages of the most appealing version can save a lot of time, headaches, and ultimately, assets kept inside it.
Use this guide to get started on the research, but be sure to read more about wallets to make the most informed decision.