How do cryptocurrency wallets work?

Cryptocurrency wallets are designed to hold digital assets securely, here is a guide to explain how cryptocurrency wallets work...

Why you should store assets in a crypto wallet

Storing digital assets in a crypto wallet, as opposed to on an exchange, is by far the safest way to store coins and tokens.

Cryptocurrency wallets work by adding layers of security to ensure the digital assets are kept securely and away from the prying eyes of potential hackers or thieves.

There are a number of different cryptocurrency wallets available, ranging from printed-out paper wallets to online wallets and even hardware wallets, which are considered to be the safest.

Sticking to the main wallet providers – Ledger, Trevoz, MyEtherWallet and Jaxx – is the safest option as they have protection against hackers. But it is also worth noting that while these wallets are secure, it’s pointless if a user is careless with their private keys.

Private keys

Think of a private key like a key for a safety deposit box filled with valuable commodities. If you lose the key, or accidentally give it to someone else, you won’t be able to access your holdings. It works in the same way with crypto, lose your private key and your crypto is as good as gone.

Storing private keys is a critical part of securely storing cryptocurrency, never write it down in a word document and have it unprotected on a PC desktop, with advanced malware frequenting the internet these days that is a sure-fire way to having your keys ‘phished’ or stolen.

The safest way would be to write down private keys on paper, then store it in a safe or safety deposit box.

However, in a worst case scenario, most wallets also have a feature that allows you to reset your private key, this is done by generating a 24-word mnemonic code, which must be written down upon initiating the wallet. This seed is valuable, it would be advised to write 12 words on two pieces of paper, and store them separately without letting anyone know the location.

Wallet address

A wallet address is a 34-character code that can be shared publicly. This can be used to send and receive cryptocurrency. Not to be confused with private keys, a wallet address is like the sort code and account number on a bank card, no one can access the wallet with only the public wallet address, they can only send funds to it if they wish.

Wallet addresses can also be searched in block explorers. Inputting a wallet address will show every transaction that wallet has sent out and received, from which users can assess the history of the coins and how many wallets they have passed through.

Security

Aside from storing private keys and mnemonic codes securely, there are various implemented security aspects that ensure cryptocurrency is stored on wallets without the potential to be stolen. For example, setting up two-factor authentication means that a wallet will only be accessed while in conjunction with an app like Google Authenticator, which generates a unique code every 30 seconds. This ensures that no one else, even if they somehow have access to a user’s private keys, can access the wallet without typing in the code.

Hardware wallets like Trezor and Ledger S are undoubtedly the safest options. Private keys will never be exported from the device and they are completely un-hackable. The only way in which a user can transfer assets is by having the device in their hands and manually confirming the transaction, this coupled with the rigorous pin number login process makes it an utterly impenetrable device.

For more comprehensive guides on cryptocurrencies, blockchain technology and exchanges, click here.

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