Wallets store Private Keys
When you are learning about cryptocurrencies one of the first concepts you will need to understand as a beginner is, what is a cryptocurrency wallet? Like a standard wallet a Bitcoin or cryptocurrency wallet is where you would store your money. However where things vary a little is that you do not store the actual coins in your crypto wallet like you would in the physical world but the access code or private key that allows you to authorise or confirm transactions. Let’s look a little deeper at how cryptocurrency wallets work.
A wallet with no money in it is a little abstract so lets rewind a little to how cryptocurrencies work so that we can understand this. First of all there are no real physical coins in cryptocurrency, there is just a digital record of all the coins that have been created, spent and received. This record is called the blockchain and whilst it will contain many thousands of transactions you can think of it as being similar to your bank account recording what you have received and spent and therefore your balance.
How Wallets Work with Public and Private keys
Since you don’t have physical ownership of your coins and they are just a digital record of your balance on the blockchain you need a way to authorise the spend of these funds that no one else knows about, almost like a password. Cryptocurrencies use cryptography instead of passwords to unlock and spend your funds using a secret code known only to you called a private key. Since the only piece of information you need to authorise a transaction is the private key held in your wallet it is important to protect your wallet.
Whilst private keys allow crypto to be spent wallets also contain public keys which act as addresses for allowing funds to be received. The private key (secret code) is related to a corresponding public key through a cryptographic algorithm, way beyond the scope of this post but if you want to read more look at cryptocurrency public and private keys.
Types of Crypto Wallets
Whilst all wallets have the same objectives they come in several types
Desktop – software you install on your desktop
Mobile – software you install on your mobile
Hardware – a hardware device designed specifically for storing cryptocurrencies
Paper – a print out of the private key on paper
This is discussed in detail in our cryptocurrency wallet types guide.
Wallets do not contain physical coins but private keys which you can think of as secret codes which are used to authorise any cryptocurrency spend you wish to make. Wallets not only allow you to spend but also receive cryptocurrency to a public address. In summary you can think of your wallet as your portal to the cryptocurrency world it allows you to receive, spend and check the balance of your crypto. It is your interface to digital money.