What's a cryptocurrency or NFT Wallet? What are the types of crypto wallets?
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You've probably been researching NFTs and cryptocurrency and you're starting to feel a little bit more comfortable about them. You may have even thought I want to dive into the space and see what it's all about, but you don't know where or how to store your NFTs or cryptocurrency, and you don't know how to do this in a safe and secure manner.
If you don't know what an NFT is, check out this previous blog.
So today, I'm going to cover what an NFT or cryptocurrency wallet is, how these wallets work, what types of wallets are on the market, and how to keep your wallet safe and secure to protect the assets that you've bought.
For the time poor, here is a quick summary:
A Crypto Wallet is like an encrypted virtual keychain that gives you access to NFTs and cryptocurrency.
There are four levels to a Crypto Wallet:
Public address which is like a bank account number,
Public key which is like your bank account,
Private key which is like the password to your bank account, and
Seed phrase which is like the mechanism used to recover your password to your bank account.
Crypto wallet types include:
Software wallet (mobile applications, web browser, desktop software),
Hardware wallet (stores public and private keys on offline device), and
Paper wallet.
WHAT IS A NFT OR CRYPTOCURRENCY WALLET?
We store our identification, or our gift cards, or our pictures of loved ones, or even traditional currencies such as us dollar in our physical wallets. In recent years, this has transitioned to our phones or applications which are digital representations of what used to be physical items.
Now, crypto wallets can be quite confusing to understand because logically you would assume that since we are buying digital assets (such as NFTs or cryptocurrency) we would need a digital space to store those - such as a crypto wallet. However, this is incorrect and they're not anything like their physical counterparts.
Since NFTs and cryptocurrency are stored on the blockchain, everything you own can only be accessed using a private key and you can think of this like a password. A crypto wallet interacts with the blockchain by using these private keys to execute transactions.
So, assets such as NFTs or cryptocurrency never actually leave the blockchain. Instead, they're transferred from one address to another. If you don't know what a blockchain is - it's essentially a long ledger of transactions and information, and in the case of NFTs, it includes information such as buyers sellers and other metadata, which is all publicly available.
You can think of your crypto wallet as an encrypted virtual keychain which has all the information you need to access your cryptocurrency and NFTs.
HOW DOES AN NFT OR CRYPTOCURRENCY WALLET WORK?
This may not be making complete sense yet, and you still may be thinking how does an NFT or cryptocurrency wallet actually work - so let's break it down into the core elements. There are four levels to a crypto wallet:
Public Address
At the very bottom, is a Public Address, you can think of this like a bank account number. So, anyone who has this address can transfer NFTs or money directly to you. A public address is a string of alphanumeric characters or it's a scannable QR code.
Public Key
A level up from this, we have Public Keys, which can be used to generate a public address. You can think of a public key as your bank account. Now, public keys are linked to private keys in a unique pairing.
Private Key
You can think of a Private Key as a password or a pin to your bank account. When you purchase or send a digital asset, the only way to verify, confirm, and make a secure transaction is by using a unique password, or in this case a private key. This is similar to when you use your phone to pay for something so you can set it up to have a password to go ahead with that transaction. The private key is what you use to digitally sign a transaction - hence, why it is important to keep this key private as the name suggests.
Seed Phrase
The last level of a crypto wallet is your seed phrase and this is a group of 12 or more words generated from your wallet software to derive your private key. There are some bank accounts which allow you to set up a recovery question should you forget your password. This is essentially what the seed phrase is, and it's your last line of defense when it comes to protecting your wallet.
You can recover everything with your seed phrase, however, if someone else gets their hands on it they can take everything from your account. We'll talk more about how you can secure your wallet in a later section.
WHAT ARE THE TYPES OF CRYPTO WALLETS?
So, you may have heard of different terms like custodial, non-custodial, cold wallets, hot wallets. This may have also freaked you out because you've heard the horror stories of people losing their pass codes or phrases and they can't get their money. But, don't freak out let's break this down.
If you have bought or intend to buy cryptocurrency from a trading platform or an exchange you will be given a custodial wallet. This is where the platform holds onto your private keys and from what we've discussed earlier we know how important it is to protect your private key. By doing this, you rely on the company who owns the exchange to manage the security of your keys.
Furthermore, some platforms actually come with their own restrictions and specific set of rules to manage your money. Given the nature of using a decentralized system, we don't want to give a centralized company the ability to control our money.
So, we want to create a wallet which does not require a custodian or a person responsible for taking care of our money. This is where non-custodial wallets come in.
Hot Wallets
First up are software wallets and these are also referred to as hot wallets. These include:
Mobile wallets: which use applications on your smartphone to access your wallet.
Web wallets: which use a web browser, or
Desktop wallets: which use software downloaded onto your computer to access your wallet.
Cold Wallets
Secondly, there are cold wallets and this can include paper or hardware wallets.
Paper wallets: contain a blockchain address and a private key on a piece of paper or they can be a scannable QR code. Paper wallets are normally used if you don't need to access your funds for a long period of time.
Hardware wallets: are small USB-like devices that connect to your computer when you're doing transactions. So, they store both the public and private key on the actual device itself. So, this is much more secure than using a hot wallet because even if a hacker were to get into your software, they would still need the physical device to complete a transaction. Common hardware wallets include a ledger and a trezor and I've linked these down below.
HOW DO I MAKE SURE MY CRYPTO WALLET IS SAFE?
There are a few methods that range in level of difficult, here are some examples to help you protect your crypto wallet:
Maintain strong passwords
Do not repeat passwords on different accounts
Change your passwords often
Back up your passwords in secure locations not connected to the internet
Keep your software wallets up-to-date (less susceptible to hacking)
Use two-factor authentication - requires code via text, email or an authenticator app to log into your accounts
NEVER give out your seed phrase - no one will ever need this - don't fall for scams
NEVER share your screen while your wallet is open - hackers disguise themselves as tech support and scan your QR code to take assets
Don't click on links you don't trust - downloading files that contain malware may track your passwords and hackers may be able to enter your wallet
More complex methods:
Some websites will ask you to connect your wallet so you can make purchases on the website, so it's a good idea to make a separate public key and public address and to only transfer the right amount of cryptocurrency required to purchase that asset - that way if the site is dodgy you will only lose a smaller amount in the new public address you created, rather than the full amount in your wallet.
Another way is to manage your website wallet connections, my recommendation is that you delete those connections, that way you're less susceptible to any hacks should that website be breached. It also takes five seconds to set back up again so it shouldn't be an issue.
If you have the extra funds i would recommend getting something like a crypto steel capsule which uses stainless steel elements to record your 24 word seed phrase. This will prevent any accidents that would lead to the destruction of your seed phrase. For example if you were to spill coffee on the notebook that contained your seed phrase, you could potentially lose the integrity of that data.
Another option is to get a hardware wallet to get that added layer of security. Just make sure that you buy it from the original manufacturer's website and check it to ensure that there's been no tampering during delivery to your house.
ADDITIONAL RESOURCES TO GET STARTED
If you want to dive into NFTs or cryptocurrency - my action for you is to start researching some of the cryptocurrency exchanges and the wallet types, find what's best for you, make an account with them so you're ready to start purchasing, storing, and selling some of these NFTs or cryptocurrencies.
I have linked some products and resources below so you can get started.
Links to trading platforms:
Links to crypto wallets:
Links to hardware wallets:
WANT TO LEARN MORE ABOUT NFTs?
There is so much more to learn around this topic, check out some of the other NFT articles in my blog or head over to my NFT & Crypto playlist on my YouTube channel.
Reach out to me on Twitter or Instagram and let me know how these tips helped you understand NFTs better or if you have any suggestions for me.
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