You have undoubtedly heard of cryptocurrencies, but it seems like a lot of people are still trying to get their heads around the concept (myself, included!) so let’s take a moment to briefly define them.
Cryptocurrencies are a kind of digital money that is not issued by any government or central bank, but rather by developers using powerful computer blockchains to generate non-breakable codes, the encryptions, to make them impossible to counterfeit. These encryptions also form the private keys to make sure only you can access your crypto funds.
Cryptocurrencies, also known as ‘crypto’ for short, are an alternative to the traditional banking system untethered to traditional institutions. They exist on the Internet so they largely ignore borders, which gives them the potential to become the most unconstrained, fastest, and least expensive method for exchanging value in the world.
A few cryptocurrencies, such as Bitcoin, are becoming more widely accepted as an alternative to regular money and can be used as a form of payment for goods and services, while cryptocurrencies as a whole are seen as an alternative asset class that can hopefully appreciate in value, which drives people to invest in them. It’s a very complicated process, which has fostered the development of highly sophisticated crypto accounting software designed to help investors manage their cryptocurrency wallets.
So, what exactly are crypto wallets, and how do they work? Similar to a physical money wallet, cryptocurrency wallets are a container from which one can access their cryptocurrencies, making them easily accessible, and also safe. There are many types, a hardware wallet takes a physical form similar to a USB stick, whilst software wallets are purely digital apps, kind of like an online credit card.
Crypto wallets don’t actually contain your cryptocurrencies the way a physical wallet holds traditional money. Cryptocurrency holdings only exist on computers and your crypto wallet is really a kind of key chain that holds and organises the digital private keys that prove your ownership, and allow you to access and use your crypto funds. Just like regular funds, if you lose your crypto wallet, you lose your money, so it’s critical to safeguard your investments!
So, how are crypto wallets actually used? It depends on the type of wallet, but the principles are basically the same. Here is some more detail about the different kinds of crypto wallets one can choose from:
Paper wallets – The most old-fashioned of all, your crypto keys are actually written down or printed on paper or some other physical medium, then stored in secret in what needs to be a very secure place!
Hardware wallets -Your crypto keys are kept in a physical thumb-drive-style device. Once again, it’s vital that this object be kept in a very safe place and one should only connect it to a computer when the cryptocurrency is going to be accessed and used.
Online wallets – The keys are stored in a software app on the Internet. Easy to use, but be cautious!