Cryptocurrencies do not exist in a physical form like cash or fiat. They are only present on blockchain as a piece of code that holds information. The concept of crypto wallets is also very different from a regular purse.
Crypto wallets are a tool to interact with the blockchain. Besides, having your digital money inside the wallet makes it secure and out of reach for unauthorized persons.
On the basis of security and convenience, we can categorize crypto wallets into hot wallets and cold wallets.
Crypto wallets are used to send and receive digital currencies across the blockchain. The wallet contains a public key and a private key.
The wallet also represents the location where users can receive crypto from other users. Location is represented by an alphanumeric address that you can share publicly.
Private keys should never be shared with anyone as it is for you to access your cryptocurrencies. You can use the keys to access your coins from any device. In the case of decentralized wallets like Metamask, you have a seed phrase that helps you reach your assets in the wallet.
You can never take cryptocurrencies truly off the blockchain. Crypto coins are simply transferred from one address to the other. Hence, it is important to have a wallet for storing cryptocurrencies. There is no other way for you to have coins in your possession.
Wallets are also crucial for crypto trading. The crypto exchanges require users to either connect their wallet to the exchange or use the hot wallet provided by the exchange to start trading money.
Now that we understand the importance of digital currency wallets, let’s look at the difference between hot and cold wallets.
Hot wallets are the wallets available on the internet. Most exchanges provide hot wallets to their users. You can deposit funds in the hot wallet and start trading in no time.
Hot wallets are convenient for users. However, their online availability makes them less secure. There were multiple incidents in the past where hackers managed to steal assets from hot wallets on the cryptocurrency exchanges. Mt. Gox hack is a case in point.
For more security, users have the option to use Cold Wallets.
Cold wallets are hardware wallets that store private keys to the wallet. They are available offline in physical capacity. Cold wallets are often used by long-term hodlers, for holding crypto. Ledger devices are examples of cold wallets.
Due to their non-existent connection to the internet, Cold wallets cannot be hacked. They are considered a much more secure alternative for storing cryptocurrencies. However, they are slightly less convenient.
Wallets are an important tool for trading and storing cryptocurrencies. Depending on convenience and safety, you can either choose a cold or a hot wallet for your digital assets. Also, you can have a centralized exchange wallet or a decentralized one with browser extensions. They both allow you to trade currencies on crypto exchanges.
Crypto is no longer a secluded industry with a small fan following. It is everywhere now. I bet you have heard or read about crypto multiple times in the last year. News Channels are realizing the importance of Crypto and demystifying it for the general masses. Almost all popular channels have created some sort of guide or news package on “What is Crypto?” However, some people still struggle to understand how the crypto industry works.
This guide will explain cryptocurrency and blockchain for beginners and discuss the features of this technology.
The word Cryptocurrency is a combination of two separate words ‘Cryptography’ and ‘Currency’. Cryptography is the method of securing the information so that no unauthorized personnel can access it. Whereas currency is the medium for transferring value.
Cryptocurrency is digital cash that you can use to transfer value. You can pay it for buying Pizza or lending money to your friend. Unlike traditional money, cryptocurrency is not owned by any banks or central institutions. There are computers around the world that act as banks and store crypto transactions information. This storage facility for crypto info is also known as Blockchain. More on that in the next section.
Digital money has some cool features that separate it from fiat currencies. These include:
Crypto payments are completely secure through cryptography. Breaking into crypto ledgers and changing information is nearly impossible. Therefore the transfer of money is guaranteed. Moreover, the crypto is sent over the internet in minutes. It doesn't require confirmations from banks or any other entities.
Cryptocurrency is decentralized which means the people using it are also the maintainers of the system. There is no central authority that can freeze your wallet or stop you from sending money. This feature of crypto makes it useful during times of turmoil in countries. For instance, the closure of Banks in Afghanistan during the political crisis urged Afghanis to turn towards crypto.
The cost of sending crypto is also less than sending Fiat. There is no middleman or intermediary when you are doing transactions. This eliminates fees and other system maintenance charges.
Crypto transactions are anonymous and do not reveal the identity of the sender or recipient. This feature is sometimes construed as the negative aspect of crypto because it facilitates money laundering. However, most crypto exchanges take measures to curb such transactions.
Bitcoin is the king of all cryptocurrencies. It was introduced in 2009 by a programmer or group of programmers with the pseudo name Satoshi Nakamoto. Satoshi published a White Paper detailing the functioning of Bitcoin in 2008. One year later the software was released and the rest is history.
Bitcoin or BTC is a decentralized cash system. It is run by thousands of computers around the world. Your computer can be a part of this system by running open-source software.
The information of bitcoin transactions is stored on the blockchain which is like a shared data sheet with multiple copies stored on computers around the globe.
Well, we have given you some idea about blockchain at this point. Let’s dig a little deeper and understand the working of it.
Blockchain is a database that contains transaction information. It is like a spreadsheet but there are some cool features that differentiate it from an ordinary excel sheet.
You can only add information to the blockchain. You are not allowed to delete any previous data. This is called the append-only feature of blockchain.
The whole blockchain is linked cryptographically. Every new entry contains a hash (fingerprint) of the old entry. Hashing of data blocks is necessary to make them a part of the blockchain. This feature makes it impossible for anyone to add fake entries to the blockchain.
Cryptography makes blockchain extremely secure. Data is protected in such a way that no one can change it without breaking into multiple computers at the same time. Therefore, Blockchain is called an ‘Immutable Ledger’.
Blockchain and Cryptocurrency are used in multiple industries at the time. It is a replacement for traditional centralized operations in the internet world. But beyond that, crypto is massively popular among the younger generation for short-term gains.
Crypto trading is the activity of buying and selling crypto to make a profit from market volatility. There are hundreds of crypto trading pairs available on cryptocurrency exchanges like Coinbase and Binance.
Automated crypto trading is also gaining popularity in the world. It is an excellent side hustle for passive income. Trading tools like Digiebot allow you to trade efficiently 24/7 with minimal input. You can head over to this blog to learn more about digiebot.
Crypto provides a hedge against inflation. It is a non-traditional asset for investment. Countries and institutions around the world are adopting crypto and blockchain technology. In short, we are entering the era of digital currencies. One simply cannot ignore crypto and its impact on the global economy. Hence we need to keep learning about crypto and its applications in our lives.