Following the ruling of the Reserve Bank of India lifting the ban on cryptocurrency payments, they have gained traction in India. We explain some key concepts in a series of explainers by talking to experts. We start with cryptocurrency wallets and how they work.
What is cryptocurrency wallets? As the name implies, these wallets help you store crypto assets and tokens. A wallet can be a separate device or a software program on your phone. They use blockchain technology to securely store your crypto assets, as well as facilitate the sending and receiving of cryptocurrencies.
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Types of wallets: These can broadly be categorized into hot and cold wallets. Hot wallets are connected to the internet and can be accessed at any time. They include online cloud wallets, most mobile wallets, software wallets, and crypto exchanges.
Cold wallets are not connected to the internet and let you store your crypto offline. Money can be accepted at any time, but only after the cold wallet is disconnected from the network will you sign the transaction with your private key so you don’t show your private key to ‘ the internet. Cold wallets include hardware and paper wallets.
A hardware wallet provides the perfect balance between security and convenience when storing crypto. Hardware wallets are designed to protect your private keys from online storage methods, such as on computers and phones, that can be accessed by a hacker. Since your private key never leaves the device, it cannot be hacked. If your hardware wallet is missing or broken, you can access your bitcoin from a new device as long as you know your recovery seed words.
Paper wallets are stored on printed sheets of paper and are one of the safest options available. Crypto can be transmitted by entering the private key or scanning the QR code on the paper. They cannot be digitally hacked or stolen as they are not stored on a computer or mobile phone. You also don’t need to rely on a third-party server. Crypto owners never have to photograph their paper wallet or seed words using their phone. That will expose them to the network and defeat the purpose.
When should you hold crypto in a wallet? Cold wallets are undoubtedly the safest way to store your cryptocurrency. They are immune to viruses and online hackers and ensure that you do not rely on third parties for storing your data. However, unless you store large quantities of crypto that you don’t need on a day-to-day basis, most crypto investors can find them unnecessarily expensive.
Beginners may consider a hot wallet as an interchange as they are easier to use.
What are the risks? Online or web wallets are the most susceptible to online attacks and scams. If you’re using crypto exchanges, you need to make sure you can trust them with your assets. Do your research and look out for past breaches of security. Cold wallets are safer from online attacks and hacking, but put the responsibility completely on you. If you damage or lose your hardware cold wallet and don’t remember or have another copy of your paper wallet containing your recovery seed words, you may lose your crypto forever .
As told to Neil Borate by Vikram Rangala, chief marketing officer at ZebPay.