How do wallets work for digital currencies

Cryptocurrency: How do the wallets for digital currencies work?

Cryptocurrencies won't work for you if you don't have a wallet. Because without your "private wallet" for digital currencies, you cannot access your coins or tokens. We'll explain why you also need a wallet, what a wallet is and what types of wallets there are.

  1. What is a wallet?
  2. Types of wallets - online or cloud wallets
  3. Types of wallets - mobile wallet
  4. Types of wallets - desktop wallet
  5. Types of wallets - hardware wallets
  6. Types of wallets - paper wallets
  7. The security

What is a wallet?

A wallet is of course not a purse or purse in the conventional sense and you cannot just put it in your pocket. Rather, a wallet stores the keys, the digital keys, with which you can access your public blockchain address, for example with Bitcoin. The information for checking and confirming a transaction is also stored as a digital key in a wallet.

These keys are the "public key" and the "private key". The easiest way to explain the keys is with examples from the "offline" world. Imagine the coin slot of a snack machine. You can insert money, but you cannot get the money that goes through this slot into the cashbox of the machine. This is your "public key". Do you have a key to this vending machine and can you also get the money in the cassette? Then this is your "private key". In short: the public key is the address that anyone can use to send you money, while the private key is used to send money to someone else.

Therefore you should absolutely no way lose your private key. You can find out more about security in dealing with cryptocurrencies and wallets below.

Types of wallets - online or cloud wallets

Web-based wallets, also known as online or cloud wallets, are the easiest to use. All you need to create is an account with an online wallet provider. The keys are then stored online on a server. The advantage: You can always access your online wallet from anywhere, as long as you have an active Internet connection. The disadvantage: Your keys are managed by an external party, the provider of the wallet.

So you have no guarantee that the server on which the keys are stored are completely secured. So in that case you have to trust the provider. In theory, the provider also has full control over your cryptocurrency holdings. Therefore, you should only store as much money there as you need for future transactions or purchases.

Types of wallets - mobile wallet

Do you spend a lot of time on the road and are you always looking for new opportunities to shop with cryptocurrencies in "offline" stores? You also want to always have your wallet with you? Then a mobile wallet is just right for you. This stores the keys to your wallet directly on your smartphone. Some mobile wallets even support NFC technology. Cashless payment in shops that accept a crypto currency as a means of payment is therefore easily possible. Wallet apps are available for iOS and Android.

Mobile wallets are convenient and easy to use. However, they have one major disadvantage: If the device breaks or is lost and the wallet cannot be restored, the keys are lost and you can no longer access your currency. There is also the possibility of a hacker attack on your device. They could install a Trojan horse to read the keys. This would give criminals access to all of your crypto savings.

Types of wallets - desktop wallet

A desktop wallet is interesting for users who are more into online shopping from home. The wallets are available for Windows, Linux and Mac and target different areas. These include increased security and anonymity. There are also many different providers who specialize in different cryptocurrencies.

Unfortunately, there is the same problem here as with the mobile wallet: If no backup was saved and you can no longer access the wallet, you will also lose access to your cryptocurrency. There is also a problem with malware. So you always have to remember: You yourself are responsible for the security of your wallet.

Types of wallets - hardware wallets

Hardware wallets are physical devices, mostly a USB stick. Popular hardware wallets are the current Ledger nano-S, KeepKey or Trezor. These support a variety of crypto currencies and many users swear by a hardware wallet. But even these types of wallets are not always secure. Due to loss or damage, you no longer have the opportunity to access the data. However, as long as you don't lose your recovery keys, this shouldn't be a problem. In addition, you always need a lot of trust in the company that they will not read your stored keys.

Types of wallets - paper wallets

As the name suggests, paper wallets are made of paper. You write your public address, public key and private key on a piece of paper and stow it in a safe place. In the following text, you can find out how you can safely stow and manufacture a paper wallet and what the advantages and disadvantages of a paper wallet are:

The security

For the most part, it takes trust and a certain amount of self-discipline. Trust in a company that provides an application, or someone close to you, who will keep your recovery key to the wallet. You should also always check your own caution and security in handling the highly sensitive data. Because in principle it is like your house key. As long as no one has access to your keys, no one can break into your house and steal your television easily.