How Does Crypto Wallets Work?

When you buy cryptocurrency, you receive a wallet, often referred to as a hot wallet. This wallet is online and connected to the internet. Think of it like your everyday bank account, where you can access your funds.

Now, to enhance security, you can opt for a cold wallet, which is like a digital vault. It’s offline, not connected to the internet, making it resilient to hackers. To safeguard your assets, you transfer them from your hot wallet to your cold wallet.

A key concept to understand is that cryptocurrencies aren’t physically stored anywhere; they exist as data on a Blockchain. Your wallet serves as the keeper of the keys – a public key (like your account number) and a private key (similar to a bank card’s PIN).

Much like how a PIN is required to access your bank account, the private key is essential for accessing your cryptocurrency on the Blockchain. Without it, you can’t conduct transactions.

Your wallet software uses these keys to interact with the Blockchain. When you want to send cryptocurrency, you enter the recipient’s address, specify the amount, sign the transaction with your private key, add a transaction fee, and confirm the send. Receiving works the same way – the sender uses your address, and you accept the payment.