Well, when it comes to cryptocurrencies, whenever you want someone to transfer coins to you, you have to give them your wallet address. This is due to the fact that no two wallet addresses are the same and there is not a chance that someone else would get your funds instead of you.
This address typically uses a combination of letters and numbers, both in uppercase and in lowercase. These wallets do not reveal the identity of the owner.
Now, each individual cryptocurrency wallet address has a unique private key, and a unique public key.
This private key allows the owner of that wallet to access the funds that are stored there. A public key is a key that is mathematically linked to your wallet address.
The beauty about most wallets is the fact that you as the user do not really need to know exactly how everything works in the same way software engineers do, as the software typically does all the heavy lifting for you, just in the same way you use Gmail to send emails every day.
Now, due to the fact that bitcoin, ether, or other cryptocurrencies are not physical money, they are digitally stored on the blockchain.
As such, the blockchain can be seen as a giant accounting ledger that stores all of the transactions that have ever occurred throughout the usage of that specific system. This also includes the total account balances of each of the public addresses. The software of the cryptocurrency wallet you end up using will be directly connected to the blockchain and allow you to submit transactions to the ledger.
The crypto wallet itself is the protocol that generates the public and private keys, and without it you will not be able to access your funds at all.
Comparing Hot Wallets and Cold Wallets
By now you might have heard of the term “hot wallet” or “cold wallet”, so let’s take a deep dive into both types.
A hot wallet is a wallet that is connected to the internet in some way. When you create an account at an online exchange that has its own cryptocurrency wallet services and send your funds to those wallets, you are depositing into that service’s hot wallet.
These wallets are extremely convenient to set up, which is one of the main reasons why many people like them, and the funds can be accessed at any time, making them easy to use for buying, selling, or trading cryptocurrencies in quick successions.
A cold wallet is a wallet that does not have any type of connection to the internet. These wallets typically use a physical medium to store the keys offline, which makes them resistant to online hacking and one of the most secure ways to store cryptocurrency.
This is the preferred way of storing bitcoin for long-term investors, or in other words, people who purchase cryptocurrencies in bulk and leave them in store for quite a long time, until the market rises, and then decide to eventually sell them.
Obviously, since a lot of people tend to use online exchanges, they have to figure out ways to make hot wallets more secure, and as such, on many platforms, you will find that an online wallet there only stores a small percentage of coins within these hot wallets, while the remainder is kept in cold storage devices that are not connected to the internet.
Software Wallets Explained
Software wallets are essentially all wallets that are stored in applications written in code, that are not physical real-world devices, and are connected to the internet in some way shape or form. These are hot wallets to their core.
These are split into three categories, including web, desktop, and mobile wallets.