With the recent launch of Facebook’s Libra, there has been renewed interest in the vast potential of cryptocurrency and the impact of blockchain in the finance and payments industry. But how many of us really understand what this means, or how it works?
Here’s an introduction that we think will help clear some of the confusion:
A cryptocurrency wallet, or cryptowallet, is a device, software or a service that stores the public and private keys that allows you to send and receive digital currency and monitors your balance through its interaction with the blockchain. A public key allows you receive payments from other wallets, while a private key enables you to make payments and spend your cryptocurrency. The public key identifies your account on the network, and your private key is used to sign transactions and confirm you own the associated public key. The private key must be kept confidential at all times, as it is the only way to identify your cryptowallet.
How do cryptowallets differ from regular wallets?
Unlike a traditional wallet that stores currency, cryptowallets simply hold your keys and interface with the blockchain to conduct transactions; there is no actual exchange of currency. When you receive cryptocurrency, the ownership of those coins is signed over to a new public key. If that public key matches the private key in your wallet, then your balance increases and the sender’s decreases correspondingly. This transaction is recorded in the blockchain.
Types of cryptowallets
There are two types of cryptowallets available:
1. Hot storage wallets
Hot storage wallets are software or online wallets that are always connected and accessible through the internet. These can exist on the cloud or on a device, such as a desktop. Internet services such as Coinbase act as cryptocurrency exchanges, supplying online wallets for users.
2. Cold storage wallets
Cold storage wallets, in contrast, are not connected to the internet. These could include paper wallets, where keys are printed out or rendered as QR codes, or other hardware wallets, like a USB. These hardware wallets can be compatible with several web interfaces and can support different currencies, making it easy to conduct transactions while keeping your data offline.
Are cryptocurrency wallets secure?
Cryptowallets are secure to varying degrees, but generally, offline solutions are more secure because they are less likely to be attacked by hackers looking to exploit weaknesses in the server. Typically these involve hackers transferring the secret keys to their wallets, which effectively transfers the associated funds.
Some online wallets have been attacked by hackers in the past, resulting in the theft of large reserves of cryptocurrency. Mt. Gox, a Japanese online cryptocurrency exchange, had the equivalent of over $450 million in bitcoin stolen from their servers in 2014. Just last year, bitcoin exchange service Coincheck lost almost $1 billion of cryptocurrency to hackers.
While cold wallets are inherently more secure by not having internet access, they are by no means fool-proof. You can always enhance the security of your cryptowallet by using a two-factor authentication process that ties a registered mobile phone to the wallet. Another effective way of keeping your wallet secure is to have a hardcopy backup of your keys stored somewhere safe, allowing you to recover it if it should be stolen.
Also, it is important to note that cryptowallets are pseudonymous, not anonymous. While the wallet is not directly tied to your identity, your transactions are stored in the blockchain and are part of the public record. This transaction data can be used to identify you, and therefore, it’s important that you remain vigilant.
Popular cryptowallets and their key features
- Available as desktop and mobile apps
- Currently supports 500+ coins and tokens
- Strong encryption and custody-free solution
- Easily buy cryptocurrency with your bank cards
- Atomic Swap feature that provides cross-chain exchange without third-party risks
- Simple mobile bitcoin digital wallet, free to download from the App Store/Google Play
- Clean interface and lightweight design
- Advanced bitcoin mobile digital wallet
- Enterprise-level security
- Cold storage and integrated PDF backups
- Integrated QR-code scanner, local trading marketplace, secure chat among users
- Available as desktop and mobile
- 100+ cryptocurrency assets
- Desktop version has built-in exchange, live charts and portfolio
- Can be synced with your Trezor hardware wallet
- Easily accessed on desktop, mobile and online
- Multi-signature wallet
- 80+ cryptocurrencies supported
- Available on a variety of platforms and devices
- Connects with websites through Firefox and Chrome extensions
- Allows in-wallet trading using built-in third-party apps
- Access your portfolio, track market data and follow blockchain news
- Open-source wallet with cold storage and multi-signature support
- One-time printable backups
- Multiple wallets interface
- GPU-resistant wallet encryption
- Better suited for more advanced users
- Hardware wallet that supports 1000+ coins and tokens
- Open-source and transparent
- Windows, OSX and Linux-friendly
- Device required to send cryptocurrency
- Multi-signature hardware wallet
- Multi-currency support
- Third-party apps can run from the device
- User-friendly bitcoin wallet available via desktop, online or mobile
- Multi-signature addresses
- Two-factor authentication, quick PIN login
- Paper wallet backup
- Bitcoin wallet that can be accessed from any browser or smartphone
- Two-factor authentication, quick PIN login
- Instant crypto exchange
Calibra – a new cryptowallet from Facebook
Facebook recently released Libra, their own cryptocurrency. The Calibra wallet allows you to trade and spend your Libra via its own app as well as through Facebook’s messaging apps, Messenger and WhatsApp.
To learn more, check out our article: Is Facebook reinventing cryptocurrency with Libra?
More than cryptocurrency
Cryptowallets are primarily designed to store and manage your cryptocurrencies. However, the software can also be used to store keys to other digital tokens, which could represent anything with a digital value attached to it. All digital ledgers depend on the possession of an encryption key that can digitally sign and authorize the transaction.
This has potential in other sectors as well, such as in managing a supply chain, and could be used to maintaining and giving access to personal information, financial details, medical information, and more. Cryptowallets, therefore, have the potential of becoming more important to everyday consumers, and could impact the way we manage our data in our lives.