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A Crypto Wallet Guide Even Your Parents Will Understand by@bybit

A Crypto Wallet Guide Even Your Parents Will Understand

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Bybit

Bybit is one of the fastest growing cryptocurrency derivatives exchanges, with more than a million registered users.

So you want to buy, sell, trade or just try out these cryptocurrencies that everyone is talking about. The fact that you’re here means that you’re in the right place, because quite simply, none of these things are possible without a crypto wallet. 

In this article, you’ll learn everything you need to know about the topic: for instance, what is a crypto wallet? What wallet types exist out there and where exactly should you store your coins? 

Fetch yourself a cup of tea and let’s start!

Firstly, a good question to ask would be what is a crypto wallet?

A crypto wallet is a software program that interacts with the blockchain of your choice by generating public and private keys, monitoring your balances and, importantly, sending and receiving cryptocurrency  — but whatever they are, these wallets, they are not part of the blockchain. 

How Do Crypto Wallets Work?

Have you ever looked at yourself in the mirror? Almost certainly you have, so you will know that what the mirror reflects is kind of you, but not you exactly. 

The same situation can be applied to cryptocurrency wallets. Whatever amount of coins you can see in your wallet, they aren’t there in the way that coins are in a real wallet; it’s just a reflection of your operations on the blockchain. 

It may sound complicated but it’s not really. Keep on reading and we’ll explain.

So we know what a crypto wallet is now, but what about its key components, public and private keys?

Public and Private Keys

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Private and public keys work in a way to conduct transactions on a blockchain – say, on the Bitcoin blockchain. 

public key, or a public address, is generated by your crypto wallet and is associated with and attributable to you — it’s kind of like your email address on the blockchain.

You can show it to people who want to send you something – most often, cryptocurrencies, but sometimes, other digital assets, too.

private key, on the other hand, is something different. It’s not visible to anyone but you and signs requests on your behalf, such as sending money. It is basically like the password to your assets. 

By using strict mathematical rules of asymmetric encryption, your private key proves that it was you who sent the request, so it’s important to keep your private key safe. If someone else gains access, they can take your coins.

That being said, if somebody tells you that you don’t need private keys to send and receive crypto they of course are theoretically right. Because But also, they mean you don’t really have full control over your money.

The Difference Between Hot and Cold Wallets

Any crypto wallet can be always categorized as either hot or cold.

A crypto wallet can never change its state: you will always know whether the wallet is hot or cold, because the difference is pretty clear.

Hot wallets are connected to the internet, while cold wallets are disconnected from the internet.

Definition of Hot and cold wallets

Hot wallets or hot storages are more convenient, but they are less secure. Although stringent security measures are put in place to stop such incidents from occurring, hot wallets are nevertheless potentially prone to hacking in a way that cold wallets simply are not. 

Cold wallets are more physical — this is probably the closest you can get to feeling like you physically own your cryptocurrency. Paper wallets, hardware wallets and, surprisingly, physical bitcoins (which works great as a gift coin, but is very inconvenient in the real world) are all cold wallets and they are pretty safe to store large amounts of cryptocurrency. 

Let’s look at these wallets in more detail. 

Hot Wallets 

There are four fundamental types of hot wallets out there: web wallets, mobile wallets, desktop wallets and crypto exchanges. 

Sometimes the functionality of one hot wallet intersects with the functionality of the other hot wallet, so the lines between them can be blurred. 

It happens, for example, to web wallets and crypto exchanges, so don’t get confused telling one apart from the other. A good illustration is Coinbase, which acts as a digital wallet where you can trade one crypto for another one, and yet, there’s a self-standing medium called Coinbase Pro, a crypto exchange where you can trade digital assets. 

When using hot wallets, the wallet holders still have control of their private keys. However, as we mentioned, they could potentially be hacked, albeit it being only a small possibility.

There are different types of hot wallets that use software out there. Let’s take a look at them. 

Web Wallets 

Web wallets are wallets you can access from your browser, whether it’s Google Chrome, or Safari, for example. 

They are well-suited for people that facilitate basic transactions often and store small amounts of money on their accounts. 

Blockchain.com, BitGo, GreenAddress, Coinbase are all examples of web-based wallets, and all of them are well-established and easy to use. The only problem again is that, by using these wallets, you trust someone with your keys. 

If it’s a custodial wallet like BitGo, you’re trusting them to protect your private keys. If the private key is password-protected, like with Coinbase, you, nevertheless, trust them to keep your keys safe on their server. 

What if something goes wrong with the custodian? What if something goes wrong with the server? 

A very common way to talk about this delicate matter looks like this: “Coinbase is a hosted wallet service, which means we manage your private keys for you, securing your funds with a password, device confirmation and 2-factor authentication.” 

However, as it turns out, not so many users sweat it about not owning their private keys. Because the service is well-reputed and very easy to use.

Mobile Wallets 

Not a spoiler alert at all: mobile wallets are crypto wallets installed on your phone as apps from Google Play or App Store. 

What you need to know about them is that sometimes mobile apps and the corresponding online wallets complement each other as it goes with Coinbase, BitGo or RobinHood. 

However, mobile wallets sometimes don’t have their browser analogues, which is perfectly fine, too, for example, such is the situation with Copay or BRD. 

With Copay, you get multi-signature, 2FA, HD wallet and full control over your private keys. With BRD, it’s slick design, HD wallet and full control over your private keys, too.

So, you see, by their very nature, mobile apps are a little bit safer than online wallets. They are designed to be isolated from the operating system of the phone, which provides a certain level of protection against malware, and gives you control over your keys. 

Desktop Wallets

Desktop wallets are wallets you install on your device from a website of a developer. 

There are two types of desktop wallets existing out there: full-node wallets and lightweight/thin wallets. 

Bitcoin.org has a decent way to define the difference between them: “Imagine a scientist reading about an experimental result and then repeating the experiment for herself. Doing so allows her to trust the result without having to trust the original scientists.” 

If you download the whole blockchain with your wallet and “repeat the experiment for yourself”, you’ll run a full-node client. If somebody else keeps the blockchain on their side for you, you’ll just “read” about the experiment and keep it lightweight.

The first bitcoin wallet was a full-node client developed by Satoshi Nakamoto himself, the legendary psyedunmous creator of Bitcoin and blockchain. It’s called Bitcoin Core, and, as Florence + The Machine sings, “has a heavy heart to carry”, namely, 320.76 GB, so yes, it’s not a mainstream kind of product.

However, it still exists, and if you own it, you don’t simply own a wallet, you are a verifier who takes part in the global process of money decentralization 24/7. You can mine crypto if you add to your setup super-powerful mining rigs, you approve blocks and transactions, plus, no-one can really trick you into accepting fabricated transactions. 

Mostly, people use lightweight wallets, though, such as Electrum, Exodus and Mycelium. A thin client connects to the bitcoin peer-to-peer (P2P) network but doesn’t fully validate transactions or blocks. If you use lightweight/thin clients, you use the third-party software that helps you interact with the initial blockchain from time to time.

Storing your digital assets are relatively convenient with a thin wallet. You don’t have to download all the blockchain to your computer, you don’t have to update the client all the time. Besides, thin wallets like Electrum let you keep your private keys, provide you with anonymity and guarantee a backup.

Are they less secure? Well, these wallets are vulnerable if the network is overpowered by an attacker, as Satoshi says in his white paper. But it is possible to verify payments without running a full network node. As such, this kind of verification is reliable as long as honest nodes control the network. 

Cryptocurrency Exchanges 

The greatest problem with all the wallet types mentioned above is that it’s very difficult to exchange between dollars and bitcoins on top of them. You can’t easily add your credit card to your account. That’s where you may want to need cryptocurrency exchanges.

A cryptocurrency exchange is an online or a mobile platform with a built-in trading functionality that lets you buy/sell and store cryptocurrencies. These platforms often have charting functionality built in, together with other useful trading tools. 

You don’t have to be a broker or own a huge sum of money to start trading on cryptocurrency exchanges. Relative anonymity is also the reason why many individual traders prefer cryptocurrency exchanges. 

The regulators slowly get there, but still, in very many cases there’s no need to verify your identity if you want to start moving small chunks of money between different addresses. 

Keep in mind, though, if you want to withdraw or deposit fiat money (USD or Euro), you will normally have to provide cryptocurrency exchanges with some verification documents, such as a utility bill, bank statement, or ID.

There are many crypto exchanges on the web. CoinMarketCap consists of at least 300 platforms with Binance, Huobi, and Kraken leading the race.

Cold Wallets

As we’ve mentioned before, cold wallets are probably the most secure way to store larger sums of crypto, since these wallets are disconnected to the Internet. 

So, which wallet types of cold wallets exist out there?

Let’s take a look!

Hardware Wallets

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A hardware wallet resembles a USB stick in appearance. It is a device that keeps your private keys in a safe offline environment. Yet, you might have to install some software on your machine to use it.

Despite the fact that these wallets are the safest in the market, there’s a fair number of possible problems with this storage type.

Malware on your PC could trick your device into sending Bitcoins to the wrong addresses. The gadget could be vulnerable to a corrupted production process, that gives chances for crooks.

It is wise to keep your eggs in as many wallets as possible. Popular options include Ledger Nano, Trezor and KeepKey.

Paper Wallets

A paper wallet is an offline crypto storage with QR codes and corresponding keys printed out on a piece of paper. 

Proper paper wallets are often a very secure way of storing bitcoins, since they are not typically exposed to malware. They can also be easily stored securely in safes and safe deposit boxes.

Don’t forget, though: paper wallets are made of… paper which means they could be stolen, lost, get soaked or even burnt, so maybe you’ll need a few copies.

But remember in order to generate such a wallet and start using it, you normally have to follow a few simple steps: 

  1. Generate your paper wallet, such as with Bit Address in the link given above
  2. Send Bitcoins to a mobile wallet such as Copay that “sweep” paper option.
  3. Start sending Bitcoins to your paper wallet public address by scanning the QR-code on your paper wallet – here you go, you paper wallet is now a valuable piece of paper
  4. Once you want to send your money back from your paper wallet, just scan the QR-code again by using the “sweep” paper option” in your mobile wallet.

How To Keep Your Crypto Safe

Before choosing a wallet, see if there is a 2-factor authentication (2FA) option. This is a technology that has one more piece of data for you to insert before you log in to your account. To use this, you will need to download an authentication application to your phone.

There’s also the multisig feature that makes it harder for crooks to spend your money. Just appoint another person or a wallet protection service to sign your transactions together with you — and you’re safe even with a hot wallet!

Don’t lose a seed, a 12-word or a 24-word string almost every HD wallet generates once you create it. In theory, if something happens, with the help of that seed you can easily restore key pairs on any HD wallet that supports this seed feature. Still, it is strongly recommended to only use the same HD wallet program with the same HD related settings for a particular seed.

Bitcoin Core Developer Pieter Wuille originally created hierarchical deterministic wallets (hierarchical deterministic wallets) to provide higher levels of anonymity for those who often send and receive digital currency. HD wallets keep the information of how much you spend on a transaction safe.

How To Send and Receive Crypto

It will vary slightly, of course, but in general the situation is always the same.

Just find or generate a public address in the settings of your wallet and show it to the person who is about to send you money. 

As for sending your own funds, open your wallet, enter the destination address as well as the amount and press “Send”.

It will take some time before you or your recipient gets money, because miners will need to confirm the transaction. So don’t worry, it’s perfectly normal. 

How Much Should You Pay in Fees?

Once you transact crypto, your transaction has to be added to the network for it to be successfully completed or valid. Miners spend vast amounts of computing power and energy doing this and expect rewards, so you kind of have to persuade them into writing your transaction in their blocks.

For that, you’ll need to pay fees, and, guess what, miners of course have a financial incentive to prioritize the validation of transactions that include a higher fee. 

If you’re looking to send funds and get a quick confirmation, the appropriate fee can be higher than the average one. As of writing, it’s 26.16 USD/tx, but you can always check the fees for yourself. 

Can I Store Different Cryptocurrencies in One Wallet?

There are wallets out there that can store one or multiple cryptocurrency types. For instance, Exodus offers quite a huge lineup of coins, such as Bitcoin, Ether, EOS, Dash, and others.

In MetaMask, however, you can only store ERC-20 tokens, that we were talking about earlier, but the general sentiment is – yes, of course, you can store different cryptocurrencies in one wallet. You just have to choose which one is well-suited for you.  

Some of the most popular multi-cryptocurrency wallets available include Guarda, Exodus, Trust Wallet, and Trezor.

The Bottom Line

That’s about it when it comes to cryptocurrency wallets. Now you should know that a wallet is a software program that interacts with the blockchain with the help of public and private keys. 

There are hot wallets and cold wallets out there, and the most secure ones are those that never, or almost never, interact with the internet. Is it possible? Not always.

And yet, the best way to keep your funds safe is to keep them in a cold storage. This way, your funds are not prone to hacking in a way that they might be if they are stored in a hot wallet. There is, however, 2FA and multisignature technology that gives an extra layer of security.  

Not sure how to send and receive crypto coins? Don’t worry, it’s quite simple. Just check if the sender has the right public address when you want to receive money and check if you send to the right address if you’re sending yourself.

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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by Bybit @bybit.Bybit is one of the fastest growing cryptocurrency derivatives exchanges, with more than a million registered users.
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