Cryptocurrency isn’t a physical currency like paper money that you can put in your wallet or purse. It exists solely on the blockchain, and you won’t find any physical representation that you can touch. Nevertheless, you still need to understand how to claim ownership of your cryptocurrency assets and be able to check how much you have, just like you would with a bank account balance. This is where crypto wallets come into play.
What is a crypto wallet?
A crypto wallet allows you to verify your account balance, giving you a clear view of how much cryptocurrency you own. It also enables you to send and receive cryptocurrency transactions, much like a traditional bank account lets you handle transactions. For many users, a crypto wallet serves as a main tool for managing your cryptocurrency balances.
Practical use cases of crypto wallets
Crypto wallets play a crucial role in making crypto assets and cryptocurrencies functional for you, whether you’re an individual or part of an organization. It’s similar to how your bank account is fundamental for managing regular currency.
Managing cryptocurrency: It helps you keep tabs on your cryptocurrency asset balances so that you are always in control of your financial status.
Transactions: Crypto wallets are your gateway to sending and receiving cryptocurrency payments, a pivotal function for conducting financial activities.
Connecting to dApps: To engage with Web 3.0 decentralized applications (dApps), you’ll need a crypto wallet, as it acts as your bridge to the decentralized world.
Identity: When it comes to cryptocurrencies, everything is recorded on the blockchain. A crypto wallet simplifies the process by allowing you to use a username linked to a public key address on the blockchain for transactions.
Key management: Cryptocurrency fundamentally exists on the blockchain as a public key address. Your crypto wallet helps you manage the private encryption keys required to access this address and carry out transactions securely.
How do crypto wallets work?
With a physical wallet, you can keep normal currency, bank cards, and credit cards for accessing funds. In contrast, a crypto wallet doesn’t store cryptocurrency itself. Instead, it safeguards the crucial access credentials, known as private keys, required to interact with a specific cryptocurrency’s blockchain.
In the traditional banking system, users are provided with bank accounts and associated account numbers. In the world of cryptocurrency, the concept of a public key is analogous to a bank account number. However, merely possessing a bank account number or a public key isn’t sufficient for conducting a comprehensive range of transactions. So, what does one do? Well, both the public key and the private keys are meant to be known only to the individuals who own a particular asset or cryptocurrency. To access and transfer cryptocurrency, you must have both keys. Just as a private personal identification number (PIN) is used to access a bank account with a bank card, a private key is essential for accessing your assets on a blockchain.
Crypto wallets safeguard your private key and related information, while public keys are stored on the blockchain. By combining these public and private keys, a crypto wallet empowers secure actions, allowing you to verify balances and send or receive cryptocurrency transactions.
Types of crypto wallets
When you use a crypto wallet, you have the freedom to select not only the service or provider that offers the wallet but also the method of deployment.
You’ll find essentially two main types of crypto wallets: hot wallets and cold wallets.
Hot wallets are typically the ones that are online and connected to the internet at all times, while cold wallets, also known as cold storage, are usually offline and only connect when necessary.
Cold wallets can be further categorized into two primary types.
- Hardware wallets: With a hardware-based crypto wallet, you store your cryptocurrency’s private key on a physical device, often a USB drive. Because this device remains disconnected when not in use, it ensures a level of isolation and security for your key.
- Paper wallets: A paper wallet is a straightforward, low-tech solution where you write down both your public and private key information on a physical piece of paper.
Within the hot wallet category, you have three types to choose from.
- Online wallets: Perhaps the most common type, online wallets are hosted by online services like crypto exchanges. These services store your public and private keys, and you access your wallet by logging into the online platform.
- Desktop wallets: Desktop wallets store your cryptographic keys within a software application installed on your computer.
- Mobile wallets: These are mobile apps that allow you to store your public and private keys for convenient access and use of your cryptocurrency on your mobile device.
When navigating a divorce, it’s important to categorize cryptocurrency as an asset rather than income on your financial disclosures. The value of cryptocurrency can change due to fluctuating exchange rates, so this variability should be taken into account when assessing its worth. The way property is divided in a divorce can differ from state to state, but generally, dividing cryptocurrency follows a process similar to dividing other assets among the involved parties.
Vivek is a published author of Meidilight and a cofounder of Zestful Outreach Agency. He is passionate about helping webmaster to rank their keywords through good-quality website backlinks. In his spare time, he loves to swim and cycle. You can find him on Twitter and Linkedin.