What is Blockchain?

Blockchain is just a fancy term that describes a running ledger of transactions. Without losing sight of this video, if you would like to learn more about blockchain and why it was developed, you can check out my video guide for beginners featured here or click this link to read the text version.

Nice! Back to wallets…

A cryptocurrency wallet has software that creates and stores your private and public keys, interacts with the blockchain, monitors your balances, and allows you to send and receive cryptocurrency.

So, to send, receive, store, and monitor your cryptocurrency balances, you need to use cryptocurrency wallets.

Instead of thinking of a wallet in the traditional sense, where cash is actually inside of your wallet or your credit cards actually being inside of your wallet,

A better way to think about a cryptocurrency wallet, is as a key to access your funds.

Because your cryptocurrencies on the blockchain, which is a running ledger of transactions distributed all over the world, are basically just assigned to your private key, so your wallet gives you access to the funds assigned to your “account” of sorts.

Let’s explore how.

So, your bank records and tracks all of the transactions going to and from your bank account, just like the blockchain records and tracks all of the transactions going to and from your public key.

Using your online banking app, you are able to check the balance of your bank account and send or receive transactions, just like a cryptocurrency wallet allows you to check your balances and send or receive crypto.

However, in order to login to your online banking app, you need to first type in your username and password, which is like using your private key to access your cryptocurrency wallet.

A public key is similar to your bank account number, in that if you provide anyone with your bank account number, they can send you funds. Keep in mind that public keys are also commonly known as “wallet addresses.”

However, having your bank account number alone would not allow someone to take funds from your account. 

This is also how a public key works – people can send you cryptocurrency using your public key or public wallet address, but they cannot take funds from you using your public key. 

Giving your online banking app login credentials to someone would allow them to send funds from your bank account to somewhere else.

This is similar to a private key – if you give someone your private key, they can access your cryptocurrency and send it somewhere else.

Unlike traditional banking, if you give away your private key and your funds go missing, you will likely not be able to recover them. This is why it is so important to keep your private key private.

Before sending and receiving cryptocurrency, you must first make sure you are sending the same type of currency to a wallet address, or public key, that supports that particular cryptocurrency.

For example, you can only send bitcoin to bitcoin addresses and you can only receive ether from ether addresses. 

If you have another person’s public key, or address, you can easily send them some corresponding cryptocurrency. And vice versa.

When cryptocurrencies are sent or received, no actual physical or digital exchange occurs between the wallets. 

Remember, cryptocurrency wallets interact with the blockchain and the blockchain is where all cryptocurrency transactions are logged. And it’s also where balances are tracked.

So, just to recap, a cryptocurrency wallet has software that interacts with the blockchain, stores your public and private keys, monitors your cryptocurrency balances, and allows you to send and receive cryptocurrency.

A hot wallet creates and stores your private keys online, while cold wallets create and stores your private keys offline. 

So examples of hot wallets include desktop or mobile app software. These wallets operate on your computers and cell phones, which are connected to the internet. 

So when you set up these wallets, your private key is generated on a “hot” device, which just means it’s connected to the internet, which could be more vulnerable to being compromised.

However, by far the least secure way to store large investments in cryptocurrency for the long term is on an exchange.

Why? Well, first of all, it’s online, therefore hot, therefore more vulnerable to hacks. And on top of it, cryptocurrency exchanges are HUGE targets for hackers since obviously there’s a ton of potential crypto that can be stolen.

With any regular wallet any of us manage on our own, a hacker has no idea how much potential loot there is to steal. While crypto exchanges are a guaranteed gold mine of sorts.

And as if it couldn’t get any more sketchy, cryptocurrency exchanges rehypothecate crypto, and without going into too much detail breaking that down, basically it means that one ether you are looking at in your account, could also be the same ether 5 other people on the exchange are looking at.

Meaning cryptocurrency exchanges don’t actually have all of the crypto backed one-to-one for all of their customers.

And if you would like to learn more about the structure of the cryptocurrency and how rehypothecation works, you can check out this video guide for beginners:

So if there was a massive run on exchanges where everyone wanted to move their bitcoin and ether to their own wallet, there would not be enough to go around.

Yeah, scary. So let’s learn about the safest, most ideal way to store significant amounts of cryptocurrency for the long term…

By creating and storing private keys with hardware wallets, your funds are safer from hackers and other potential security issues that hot software wallets are more likely to experience.

Storing your cryptocurrency on a hardware wallet is the safest, most secure way to manage your funds.

Recommended Cold Storage Hardware Wallets

Note there are two important things you need to know about buying a hardware wallet.

First, only buy hardware wallets from the real manufacturer. DO NOT buy used hardware wallets and do not buy from other companies and individuals.

This is because hackers may buy a hardware wallet, tamper with the software, and resell the hacked device to steal your funds.

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And second, as with all crypto related activities, make sure you double and triple check the URL you are accessing to buy the hardware wallet. 

Make sure the address is correct and that it has an SSL or secure sockets layer, which uses the https protocol, instead of the http.

There are a ton of phishing scams online that pretend to be the real website you intend to access. If you access a fake website, you may lose your funds or receive a hacked wallet.

Cool. Next, let’s setup a simple hot wallet together and this is where a lot of us have the eureka moment about what happens if your phone dies, or if your hardware wallet breaks, or if it’s stolen, etc.

Let’s hit it…