Cryptocurrency wallets, or digital wallets, are software programs that help us collaborate with the blockchain networks, allowing us to safely store, receive, and send cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).
Crypto wallets store your digital assets in the same way that traditional wallets store your credit cards and fiat currencies. The main difference is that while fiat currencies are kept in a bank, digital currencies are kept on the blockchain. So if you want to withdraw your paper money, you just have to use a debit card and withdraw it from the ATM, but if you want to access your cryptocurrencies from the digital ledger, you need a cryptocurrency wallet.
In this article, we’ll briefly explain how cryptocurrency wallets work and discuss the most popular types of crypto wallets. Then, we’ll give you the answer to the burning question: how to make a cryptocurrency wallet and a cryptocurrency wallet app.
How Does a Cryptocurrency Wallet Work?
Unlike a bank account, a cryptocurrency wallet doesn’t store physical things. Rather, it stores a one-of-a-kind private key or digital password that allows you to make transactions on the blockchain. In simpler terms, you have to own a cryptocurrency wallet so you can use your cryptocurrencies.
Crypto wallets store the user’s private and public keys. A public key resembles a bank account number. It’s an encrypted address that you use when receiving crypto assets. Your crypto wallet address is a hashed version of the public key that identifies your account on the blockchain and allows you to receive cryptocurrencies. It means that anyone that knows your wallet address can send you digital currencies.
A private key, on the other hand, is an encrypted address that plays the role of a PIN code, so you shouldn’t reveal it to anyone else. The private key gives you access to your assets on the blockchain. Together, the two keys make digital currency transactions more secure.
Simply put, this is how a cryptocurrency wallet functions:
- Firstly, a cryptocurrency wallet stores all the cryptocurrency transactions on the distributed blockchain ledger, and it contains both your public and private keys. You’ll use your public key to receive assets to your wallet, and your private key to view your assets or send them to another party.
- If you want to send your cryptocurrencies to someone else’s wallet, you’ll transfer the ownership of the tokens or crypto coins to the wallet address of the receiver (public address), but you need to verify the transaction using your private key in order to unlock and utilize the cryptocurrencies.
- When you want to receive cryptocurrencies, you’ll need to provide your public key to the sender, and then using your private key, you can check/utilize your cryptocurrencies in your crypto wallet.
Types of Cryptocurrency Wallets
There are numerous types of cryptocurrency wallets, but they are primarily divided into three distinctive categories:
- Software wallets
- Hardware wallets
- Paper wallets
Let’s take a look at each type.
A software wallet, or hot wallet (hot storage), is a type of crypto wallet that is connected to the internet, in other words, that’s online. These digital currency wallets are very easy to set up, which makes them suitable for users who want quick and frequent access to their assets. Additionally, online wallets can be further broken down to:
- Web wallets
- Mobile wallets
- Desktop wallets
This type of wallet is quite convenient as it allows you access to the blockchain using a browser without the need to download and install anything. You can find web wallets on websites and browser-based wallet providers.
In some cases, when you make a new wallet, you can set a personal password to access it. However, what this means is that the service provider keeps and maintains the private key instead of you, so you don’t have full control over your digital assets. At first glance, this might seem more suitable for users that aren’t very experienced, but in practice, it can be dangerous, as the website – and therefore, your funds – can get hacked.
In order to resolve this problem, some web wallets enable you to take control over your keys entirely, i.e. allow you to use a multi-signature wallet that requires two or more private keys in order to sign and send a transaction.
A desktop wallet is a software that you have to download and install first before you can run on your computer. Desktop wallets are available for most operating systems, like Windows, Mac, and Linux. This type of wallet gives you complete control over your public and private keys and therefore, your assets.
To create a new wallet on your computer device, you’ll need to download a file named wallet.dat. It’s your job to protect this file with a personal password because it will contain the private key data used to access your digital currencies.
Due to the wallet’s encryption (to ensure the security of your funds), every time you want to run the software you’ll need to enter the password in order to read the wallet.dat file. Therefore, if you somehow forget the password or lose the wallet.dat file, you won’t be able to access your assets – which is a pretty big problem because it basically means you’ve lost them.
However, you can avoid this by backing up your wallet.dat file and keeping it in a safe place, like your D (data) drive instead of your C drive, as it’s less often the target of cyberattacks. You can also transfer the matching seed phrase or private key to another computer, and access your assets from there if your computer doesn’t work. Desktop wallets are relatively safe, but you have to be sure that the computer that you’re using to set it up isn’t affected by malware or viruses.
When it comes to the password, it’s a good idea to write it down somewhere only you’ll have access to, so you don’t forget it and malicious individuals don’t get a hold of it.
These wallets can be used for Ethereum, Bitcoin, Litecoin, and other cryptocurrencies, and at this moment, they are the most widely used type of wallet. They are great for everyday use as they’re installed on the smartphone that you always carry with you. Mobile wallets allow you to receive and send digital currencies using QR codes. Mobile wallets are developed specifically as mobile apps and most of them are compatible with both Android and iOS.
However, just like computers, mobile devices are also exposed to malware and hacks. Therefore, we recommend protecting your mobile wallet with a password and performing a backup for the private keys in case your mobile device gets broken or lost.
Hardware wallets are one of the most secure options. These wallets are physical devices that create private and public keys using random number generators (RNG). They usually look like a USB drive. When you want to make a transaction, you simply connect them to your laptop or computer and then remove them when you’re done. The private keys aren’t stored online on the computer but on the device itself which remains disconnected from the internet. This makes hardware wallets considerably more resistant to online attacks.
You can take using a hardware wallet into consideration if you want to store a large number of digital assets or if you want to store them for a long period of time. In fact, it’s best to combine a hot wallet for daily transactions with a hardware or paper wallet (coming up) for long-term storage.
As the name itself says, this wallet is a piece of paper containing the cryptocurrency address, its private key, and the corresponding QR codes. You can scan these QR codes using your phones’ wallet software in order to make blockchain transactions.
There are a few paper wallet websites that allow you to download their code in order to create a new address and key offline. So what you need to do is download their wallet generator as an HTML file and create the paper wallet while being offline. This makes these wallets very secure as they cannot be attacked by hackers online, and you can consider them as a cold storage alternative.
Securing Assets in a Crypto Wallet
Here, we’ll give you some useful advice on how to secure your digital assets in a cryptocurrency wallet:
- Keep your private keys and passwords somewhere secure and don’t share them with anyone.
- Use two-factor authentication because it’ll give you an additional layer of security. This means that your assets will be safer because if someone has access to your private key and password, they still won’t be able to use your wallet without the additional secret code sent to your phone.
- Don’t store all your assets in one wallet. Divide up your assets into multiple wallets, so you can disperse the risk of losing all of them.
- Regularly update the software of your wallet to keep your assets safe.
- Choose a multi-signature wallet and one that stores your private key information offline.
How to Make a Crypto Wallet
Here’s a quick guide on how you can make your own crypto wallet:
- The first step is a configuration of the wallet application programming interface (API). For this, you need open-source code from platforms such as GitHub.
- Encrypt the wallet with a password and don’t share it with anyone.
- Set up a private key, so that only you have access to the assets.
- Now, make an outgoing transaction.
- Create a new wallet address.
- Try out the user interface in detail.
- Finally, store your digital assets in the wallet.
How to Make a Bitcoin Wallet App?
These are the three main steps to developing a Bitcoin or cryptocurrency wallet app:
- Use Bitcoin libraries (libraries that work with the Bitcoin protocol) for iOS and Android. Since almost every digital currency is open-sourced, instead of creating a personal crypto wallet, you can use libraries such as Coinbase SDK or Bitcoin SDK.
- Use application program interfaces to synchronize the cryptocurrency wallet to the blockchain. Some of the best APIs are Bitcore, Coinbase, and Factom.
- Set up Bitcoin (or another crypto) as a payment option. In order for the users of your app to be able to pay with Bitcoin on any website, you have to set up Bitcoin as a payment option on your digital currency wallet using BitPay or BitPOS.
A Few Words Before You Go…
Hopefully, we’ve managed to give you a brief insight into how cryptocurrency wallets work, the types of crypto wallets offered on the digital asset market, and how you can make your very own crypto wallet. In any case, consider the properties of each type of wallet when deciding which one is just right for your needs.