What is a blockchain wallet and how does it work?

If you had to describe a wallet to someone, you’d probably say something along the lines of “a pocket-sized case for holding your cash and bank cards”. In the crypto world, however, a wallet is a much more sophisticated concept.

Rather than being a physical item that stores your money, a blockchain wallet is a programme or service that lets you buy, sell, store, monitor, and manage your cryptocurrencies.

Since the creation of Bitcoin in 2009, the number of blockchain wallets has been increasing rapidly. According to Statista, there were nearly 32 million blockchain wallet users at the end of December 2018.

What is a blockchain wallet?

At a very basic level, a blockchain wallet is a digital version of the wallet you use to carry your cash and cards around. But there is a lot more going on behind the scenes.

Blockchain wallets use technology to keep your digital assets secure. This layer of security is known as tokenisation. You store your data with a wallet provider who then sends payment information in the form of a token. This token enables the wallet provider to match the transaction with the correct account.

Some people liken blockchain wallets to email accounts. When someone sends you cryptocurrency, the transaction is recorded in a distributed ledger and assigned to your wallet “address”. This address will be a string of numbers and letters.

You could also think of blockchain wallets as a type of bank account for your crypto – minus the bank of course.

Some blockchain wallets are software wallets, which you install on your computer or smartphone. They give you complete control over your digital assets. In contrast, web/hosted wallets are hosted online by a third party and accessible through internet-based browsers. You store your crypto on the server of your chosen wallet provider.

How does a blockchain wallet work?

To understand how blockchain wallets work, you need to have a decent grasp of blockchain technology. As you might be aware, the blockchain is a type of digital database which keeps an unalterable record of data operations grouped into blocks.

Blockchain transactions are based on asymmetric cryptography – an encryption scheme that uses two mathematically related keys: a public key and a private key. Your private key acts like your digital signature. When a crypto transaction takes place, the public key and your private key must match, enabling the cryptocurrency to be signed off to your wallet’s address. The transaction gets recorded on the network and the crypto appears in your wallet.

Let’s imagine someone wants to send you some Bitcoin. The sender effectively assigns ownership of the Bitcoin to the address of your blockchain wallet. As long as the private key in your wallet matches the public key that the Bitcoin is assigned to, the balance in your wallet will increase.

Why do I need a blockchain wallet?

Acquiring and storing digital currencies is very different to cash because they don’t exist in any physical shape or form. This means they can’t strictly be “stored”. By having a wallet and a private key, your ownership of crypto can be tracked and you can receive and/or spend cryptocurrencies.

Next steps

Now you’ve got an understanding of what blockchain wallets are and how they work, the next step is to choose your wallet.

There are new software and web-based wallets emerging all the time, so it’s worth exploring which one best meets your needs. In general, a wallet that offers a high level of security and privacy and which is easy to use is likely to stand you in good stead for your crypto trading future.