Video transcription below.
Cryptocurrencies, indifferently, Bitcoin or Altcoin, are also digital currencies, and they can’t be store in your regular wallet, as they are not physical objects, and as of now, they also can’t be stored in a regular commercial bank. Actually, that would be a very bad idea if you ever decide to do that.
But then, how to store them, what are the safe ways to do it? What are the different types of crypto wallets, and how do they work?
Those are just some of the questions we’ll answer in this video. So make sure to like and subscribe, and don’t forget to turn on that bell notification so you don’t miss out on any new video from the Crypto Odyssey. And if you’re real fan, join our telegram group and follow us on Instagram, links in the description.
To understand a crypto wallet, we must first understand what the blockchain is. I won’t go into the details here, as we already cover that in another video, link to that in the description.
But, for the sake of this video, all you need to know is that the blockchain is composed of blocks and addresses. Blocks are used to store transaction information and are created by miners, who get rewards for doing so.
And addresses are unique sequences of numbers and letters that refers to a specific destination on the network where cryptocurrency can be sent to and from. That means every address in the network is like a bank account for crypto assets.
Bitcoin addresses for example start with either a ‘1’ or a ‘3’ or a ‘bc1’ and are 26 to 35 alphanumeric characters in length.
Private key and public key
An address is composed by a private key and a public key, both are encrypted codes, but each one serves a different purpose.
The private key is used when you need to send funds out of an address. It functions as a secret password that allows the user to sign a cryptocurrency transaction and transfer funds to another address. So, if you don’t own the private keys, you don’t control the funds stored in that address.
This is where the notorious sentence comes from: “Not your keys, not your coins.”
Although most cryptocurrencies work in a similar way when it comes to wallets, you can’t send a Bitcoin to an Altcoin address. And speaking of altcoins, a great way to exchange crypto to crypto is using Coinvertlly. Coinvertlly is a non-custodial crypto exchange, meaning you control your keys, where you can easily swap your coins for other coins without having to create an account or register anything, the process if fully anonymous. All you got to do is visit Coinvertlly.com, select the coin you are swapping from, the amount you want to exchange and, the coin you want to get in return. Then, just follow the on-screen instructions, where you’ll be asked to add the destination address, that is the wallet where you want your new coins to be sent to. Coinvertlly will then generate a unique deposit address, where you’ll send the coins you’re swapping from and in a couple of minutes, you’ll get your new coins sent to your destination wallet. Coinvertlly also offers the possibility to buy and sell crypto using your credit card or even Global Bank Transfer (SEPA or SWIFT). Visit Coinvertlly.com today and start trading!
Now back to the keys. Differently from a private key, a public key is, as the name suggests, public! And is used every time the user wants to send funds to the address of that key.
Here is an example. Let’s say you need to send 1 bitcoin to your friend Jerry. Jerry provides you with the public key for his bitcoin address. You then send 1 bitcoin to that address and sign this transaction using your private key, so the network can validate that 1 bitcoin left your account and went to Jerry’s.
So that means a wallet is nothing but an address? Well, you can think it that way, but to be more precise, no. A wallet does not store the actual amount of cryptocurrencies a user owns, but holds the private and public keys and therefore allows users to access their holdings stored in an address.
You can create as many wallets as you want. In fact, most people who own cryptocurrencies use several wallets to ensure maximum protection in storing their cryptocurrencies.
When you create a wallet, you’ll usually get a mnemonic phrase, also known as seed phrase, that represents your private key. “Mnemonic” just means a memory aid such as rhymes, abbreviations and songs that help you remember something else. A mnemonic phrase is a group of words, often 12 or more, created when a new wallet is made. Losing this phrase means losing access to your wallet, thus your private keys and finally, losing access to your funds. As cryptocurrencies are decentralized, there is no central authority or bank you can go to try and retrieve access to your funds. You are your own bank.
Wallets are just a software that stores your secret key, which is your mnemonic phrase, and allows you to spend your coins. For example, if you create a wallet in your phone, then store your mnemonic safely on a piece of paper. If you then drop your phone into the ocean, never to be seen again, you could simply buy a new phone, download the wallet app again, input your mnemonic seed, and recover access to your funds. Notice that it doesn’t even need to be the same app, you can use a different one.
The same goes if anyone has access to your private keys, or your mnemonic phrase, that means they now have access to your funds, and can do whatever they please.
The key point here is: avoid at all costs, losing your private keys or mnemonic phrase. No one can help if you do.
Types of crypto wallets
Now let’s understand how the different types of wallets work, and what purpose each one of them serve.
The most basic and easiest option you have is to store your cryptocurrencies on the platform or exchange through which you bought them. These are referred to as hot wallets.
The pros of using a hot wallet is that it is the most basic way to get started, you don’t need to create your own wallet and care for it, and it makes it easier to exchange your assets, once they are already in the exchange, and also they are fast and easy to use, specially for crypto beginners.
The cons are that you don’t really own your keys, as they are in possession of the exchange. And an attack to that exchange may compromise your funds, as well as if the exchange acts in bad faith.
Just to remind you, Coinvertlly dot com does not hold your funds, thus these risks are not present when trading on their platform.
A software wallet offers high usability and good security while storing your funds on your computer or smartphone. You have immediate access to your crypto and complete control over your private keys. This solution creates a single wallet file, where private keys are stored. For added security, this file is also encrypted, which means that a customized passwords can be used to access it.
The problems are that it can potentially be hacked if you lose access to your phone or computer. And can also be vulnerable, like a hot wallet, when connected to the internet, especially on public wi-fi.
Hardware wallets extremely secure, and probably the best way to store cryptocurrencies for most people. Your private keys are stored on a cryptographically-secured hardware device. Because keys are stored directly on the device and can’t be read in plaintext, it is almost impossible for attackers to obtain them, even if your computer is infected by a virus.
To ensure that hardware wallets have not been compromised in any way before you buy them, you should never purchase used hardware wallets and always buy them directly from trusted manufacturers.
The down sides of using a hardware wallet are the price and that they are not as convenient as the other type of wallets previously mentioned.
The idea of a paper wallet is simple, but not easy to achieve, specially in a complete safe way. With a paper wallet you’ll generate your own private and public key, there are free websites that can help you do that. All you got to do is print a QR code version of your keys and store them in a safe place.
The problems are, you could be hacked at the moment you’re creating your keys on the website, or at the moment you’re sending the files to be printed, or by a malware that lives on your computer. On top of that, there is absolutely no way to recover your wallet in case you lose that paper.
Paper wallets, along with hardware wallets, are also called cold wallets, in contrast to the hot wallets mentioned before.
Now you know what the safest ways are to store your cryptos, as the pros and cons of each one of them.
You also learned what private and public keys are, and what they are used for. But most importantly, you learned that if you don’t own your keys, you have no control over your funds.
Many other topics were mentioned in the video that we barely touched their surface. If you want to get into more details on those, please check the list of related videos we left on the description. And feel free to comment on anything you wish to see here in the Crypto Odyssey.
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