Posted on: 09 Jan, 2020
This guide will break down all you need to know about cryptocurrency wallets, from what purpose crypto currency wallets serve, how cryptocurrency wallets work, what are the types of cryptocurrency wallets, how cryptocurrency wallets make money, and so on.
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In layman terms, a cryptocurrency wallet can be a device, program or a service that keeps the public and private keys that would allow to receive and spend cryptocurrencies.
As part of a cryptocurrency wallet, the public key makes it possible to receive cryptocurrencies sent from other wallets. This is akin to how you would make a deposit via a bank account. As long as you know someone’s public key, you can make payments to that wallet's address, while the private key allows to send cryptocurrency from a specific wallet address.
It goes without saying that the public key of a cryptocurrency wallet, as the name indicates, is a non-sensitive string of numbers that by itself has no intrinsic value unless you hold the private key. It is precisely this series of highly confidential numbers that one must never share in order to keep hackers at bay and stay safe from your funds being stolen. The moment someone takes possession of your cryptocurrency wallet private keys, your funds may be stolen easily.
It’s important to make an important distinction though. A cryptocurrency wallet, unlike the name indicates, does not store the actual cryptocurrency but rather, the codes (keys) that will allow the cryptocurrency to be transacted off its publicly available domain. In the case of Bitcoin, a publicly available ledge under the name of blockchain is where the cryptocurrency is stored.
Make no mistake, we should be eternally thankful to the bright minds that came up with the idea of creating cryptocurrency wallets in the first place, as without them, there would be no way to adopt these digital assets and engage in the constant transaction flows.
You need to think of a cryptocurrency wallet as a vault or a deposit box, but instead of storing our most important possessions, what we store is the ownership of cryptocurrencies via digital keys, also known as private keys or master keys.
This is an example of a Bitcoin private key: 5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF
While at first it can be quite intimidating to think that this is a string of numbers and letters one must remember, the common way to handle these codes’ security is by having them backed up via writing it down, print it out on paper, take a screenshot and keep the image, or, yes as bizarre as it sounds, some would even memorize it.
The moment a cryptocurrency wallet owner wants to spend the cryptocurrency, the private key will be shown, unlocking the funds allowing it to be used in your transaction.
The transaction will then be initiated, broadcasting to the blockchain network a request to spend the cryptocurrency by sending it to another wallet. Before this can be confirmed, the private keys utilized must match the public address the cryptocurrency resides on.
Should this transaction be successful by the matching up of the public and private keys, it will manifest, as if a digital notary we were referring to, to a mere transaction record on the blockchain by which a change in balance in the cryptocurrency wallet gets registered.
There are literally hundreds of cryptocurrency wallets out there. By far, the most popular are the cryptocurrency wallets pertaining to the storage of Bitcoin and Ethereum as these two cryptocurrencies are the ones more interested by the market.
Top 3 cryptocurrencies by market capitalization via coinmarketcap.com
It would be a pointless exercise to list the huge list of cryptocurrency wallets, it is more relelvant to make a clear distinction about the different choices we have to store and access cryptocurrencies.
When it comes to cryptocurrency wallets, the choices out there include software (desktop, mobile or online), hardware (physical deice) and paper wallets (printable hardcopy).
Software wallets (desktop)- These wallets, upon downloaded, gets installed on a PC or laptop’s hard drive. One of the drawbacks is that in terms of security, this category has more exposure to hacking attacks or viruses infecting your computer. If this were to occur, all the cryptocurrencies-related private keys could be at risk and hence your funds.
Software wallets (mobile) - An option that is definitely the most convenient especially for regular users transacting small amounts is the mobile version. It consists of an app that runs on your phone, you can take it anywhere. With a mobile wallet, make payments on the go via QR scanning. However, do not be complacent and only keep small amounts as mobile wallets also face the same risks as desktop wallets.
Online wallets - These run on the cloud. While one of the clear advantages is that we can access the cryptocurrency wallet from any location, it is a rather weak platform to store and manage your cryptocurrency keys. Think about it. The access to your keys is controlled by a third party, which makes it more susceptible to any mishandling or wrongdoings that may cause the exposure of your information to undesirable parties such as hackers or thefts.
Hardware wallets - If one wishes to up the game security-wise, then the hardware wallet is the way to go. These tiny physical devices, the size of a credit card must be first connected to a computer or laptop, which is not the most convenient, but are by far the safest option available if you want to take your security to the next level by isolating your private keys from an online connection. In the crypto jargon, the fact that the hardware device allows to manage the crypto coin's private keys in an offline environment, away from the internet, is referred to as cold storage.
Paper wallets - If you want to go old school, then the most rudimentary way to go about it is by generating your keys via a paper wallet. The simplicity of the concept does not conflict with the high levels of security that this option delivers. It is indeed one of the safest ways to store your cryptocurrency funds because what you are doing, essentially, is creating your public and private keys via a software program, only to store them in an offline environment (cold storage).
What’s crucial is that once the keys get printed on a piece of paper along with a QR code, you must keep it as if your life depended on it (ok, not for all, but you get the point). This means tucking this paper and the backups away in a vault or safety box. The loss of the paper, (unless you managed to memorize the keys ) would mean you o longer have access to the cryptocurrency funds.
When it comes to choosing the best cryptocurrency wallets, the industry standards to evaluate the appeal of a wallet encompasses design, ease of use, support, security and reputation.
Exodus is one of the most highly rated software desktop-based wallets out there which has gradually grown in popularity since its inception and has the backing of users’ satisfaction. Exodus is a multi-crypto currency wallet, useful at an entry level due to it being less sophisticated. Exodus has the advantage of also being available in mobile version. Click here to download it.
Electrum is another desktop-based wallet that you cannot go wrong with. It’s been documented that over 10% of the Bitcoin transactions occur via Electrum, even if the interface is not as intuitive as Exodus. You can download it here. It can be downloaded via multiple operating systems like Windows, Linux, and Mac OS. Electrum can also be integrated with most popular hardware wallets like Trezor, Ledger Nano and KeepKey as well.
Jaxx, is another popular desktop-based software, a reputable BTC cryptocurrency wallet that also expands its range of storage offering through cryptocurrencies such as Ethereum, Litecoin, Bitcoin Cash and a large number of extra digital assets. Similar to Exodus, Jaxx offers a mobile version and even a chrome extension. Jaxx has been marketed as a wallet for all types of levels, from beginners to advance. Click to download it.
If there you're looking for a mobile based cryptocurrency wallet, Mycelium is a Bitcoin only wallet one that excels in it's category. While there is a bit of a learning curve to become familiar with the interface, Mycelium takes pride of offering "bank-grade security" for its mobile app. The fact that it provides anonymity and keeps your Bitcoin in a secure environment is priceless. If one is interested in downloading the mobile app, you can do so by clicking here.
If you are thinking about the most trustworthy online-based cryptocurrency wallet, then Blockchain.com is hands down the website that you want to keep in mind. Once you are granted online access to the software, Blockchain allows you to send and receive cryptocurrencies for a marginal fee, including Bitcoin, Ethereum, Bitcoin Cash, and more. Even if online cryptocurrency wallets are not as safe as hardware wallets, Blockchain does a great job in recommending all user to go through all security features in one’s account, which includes email verification, two-factor authentication, and a back-up security phrase.
If you take security by heart and want to keep hackers away, then in the space of hardware wallets, it’s hard to beat the popularity of a French-based firm called Ledger and its top product, the Ledger Nano S, with an operating system called BOLOS at its core.
The Ledger Nano S is a compact USB device. One of the greatest advantages, unlike its main competitors Trezor or KeepKey, is that Ledger has a vastly diverse support for different cryptocurrencies as it allows an open policy to development from project teams. It is precisely this welcoming policy guideline that has led the Ledger Nano S to support more than 1,000 digital assets to date, hence making it a more convenient option.
That’s a fair question to ask since the route these companies follow to achieve the end-goal of profitability is rather unclear for the less techy out there.
A big driver for these cryptocurrency wallet companies to pop up, even if not universally applicable, is the genuine interest that exist to promote and expand the cryptocurrency ecosystem as a whole, so that awareness and adoption can continue to improve.
Therefore, as a clear first goal, before even thinking about revenue, is to make a cryptocurrency wallet that is accessible and easy to use for the masses. A big plus is that it offers the convenience of storing multiple cryptocurrencies and offers enhanced security.
From there, it’s all about building a user base. The theory at play is that if Bitcoin and other digital assets become popular enough and the cryptocurrency wallet keeps its fair share of the market users, that’s a great position to be in, in order to exploit a particular business model.
This model, in the case of a software-based cryptocurrency wallet, could consists of collecting a small fee every single time a transaction is broadcast into the blockchain network.
The fees a wallet will charge, in part, are not coming from the actual company’s wallet, but rather, the user must incur in networks fees aimed at rewarding miners, which are tasked with securing the network by validating transactions.
Another common way cryptocurrency wallets can make money is through affiliate fees - a profitable business model if attracting enough users. For instance, the wallet, if it has a large user base, would act as a source of referrals to sites the likes of Shapeshift or Changelly, where users can swap cryptocurrencies with convenience and instantly, even if the fee to be paid tends to be significantly above the market standards.
Another common practice is for big cryptocurrency exchanges to pay lofty fees to cryptocurrency wallet companies in exchange for the referral of traffic flows that could be converted into new clients.
Lastly, promotional banners of hardware wallets in a software-based wallet is also a strategy used, so that the cryptocurrency wallet company has more venues to get affiliate fees.
Remember, these types of software wallets are, for the most part, free to download, so they must resort to other strategies to keep their heads above water and be sustainable overtime.
Alternatively, if we are thinking of the business model a hardware cryptocurrency wallet would implement, it’s all about the volumes of device sales they can achieve.
It is estimated that Ledger, the leading cryptocurrency hardware wallet manufacturer, has sold more than 1.5 million units of the Ledger Nano S.
If we think about the cost for the end-user, a hardware device may vary from $60 to $250 USD, with a cost of production probably not exceeding the 15 USD mark. We are talking about big margins here, hence why they can afford attractive affiliate programs to incentivize sales.
There are other cryptocurrency wallets that are simply open-source, meaning that the project is run by volunteers with no interest to profit from it.
In some form or another, in this new 2020 decade, with the blockchain technology advancing at full speed and institutional interest not abating, cryptocurrency wallets are a key pillar anchoring the whole ecosystem. Without these codified fortresses built for the digital era, the thriving of cryptocurrencies would be a passing thought of wishful thinking at best.
In whatever version you feels most comfortable (software, hardware, paper), these wallets are the glue that keeps it all together. The ambitious goals for the adoption of cryptocurrencies around the globe wouldn’t be possible without these geek-built programs that allow the users to connect to the blockchain networks to send and receive digital assets.
Cryptocurrency wallets are game changers. But as we know, innovation takes time to feed through the social fabrics of society. The rate of adoption for cryptocurrency wallets is and will be directly dependable to the speed of progress in the day to day use of Bitcoin as a method of payment or as a viable vehicle of investment, similar to Gold or any other traditional asset.
The easier it is to buy, store, send and receive cryptocurrencies, alongside greater degrees of tolerance by governments to welcome them, the brighter the future will be for the cryptocurrency wallets as a byproduct of the blockchain-powered global movement.
If you're new to Cryptocurrency trading we've created a couple of quick reads to help you diversify your cryptocurrency portfolio and kickstart your Bitcoin strategy.
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