What Is the Purpose of a Cryptocurrency Wallet?

As most cryptocurrencies are decentralized, that means that our wallet files are as good as cash. Without access to a wallet, you simply cannot spend, receive or store cryptocurrencies.

While it seems rather absurd to keep a significant amount of money on a digital file, its strong cryptographic algorithm assures that it is unique and safe. This assumes that you keep your public & private key pair safe.

How do Public & Private Keys Work?

With a basic wallet, you have two Alphanumeric strings that look like gibberish. One string is your public address and the other is your private address. The combination of these two strings produces your wallet and the private key is never shared to the world. The technology used is similar to the Pretty Good Privacy (PGP) standard,

With Bitcoin, for example, a wallet client will able to randomly generate address pairs and will exist on the wallet.dat file. If the option of wallet encryption is available, a password should appended in order to unlock it. If a hacker obtains your plain-text wallet.dat file, they essentially have your entire bank account.

To receive cryptocurrencies, you only need to have your public address on-hand in order to receive funds. If you ever wish to spend your coins, you will need your private key to unlock it. Every transaction is stored and redundantly verified on the blockchain.

Different Types of Wallets:

Desktop Client - This is what Bitcoin and early altcoins started out with. You install an executable program on your computer and there will be an all-in-one suite on your machine.

Browser-based Web Wallets - These wallets are most the commonly used, especially on exchanges, yet have the poorest level of security. Some wallets will allow you to retrieve and send funds while restricting access to the private key. Since a server may always shut down, it is best to transfer your funds into your cold wallet as soon as possible.
Paper Wallet - This is an offline wallet that is basically your public & private keys printed onto a piece of paper in the form of QR codes. Thanks to BIP38 encryption being standard in most paper wallet software, thieves will need more than just your piece of paper.

Hardware Wallets - These are offline devices that contain your cryptocurrency keys and often have multiple software and hardware security mechanisms. To spend your funds, you must plug these USB devices into your internet-connected computer and use proprietary software to make transactions.

How to Keep My Wallet Secure

In general, if your wallet is stored on an internet connected device, you should consider it a "hot wallet". A hacker only needs to swipe your wallet file and log your keystrokes to unlock your funds.

It is standard practice to have your "hot" wallet with small amounts of currency while hoarding the rest in your offline "cold wallet". A cold wallet may be a paper wallet, a hardware wallet, or even an encrypted portable drive.

If you boil it down to bare basics, the goal to keep your private key out of the wrong hands. Even if you believe that your wallet is behind multiple layers of security, sharing this alphanumerical string with your loved ones can be your downfall.

Conclusion

A cryptocurrency wallet serves the important purpose of a user "being their own bank" and storing their wealth in a decentralized network. While there is a myriad of methods to store and use one's wallet, it is still the user's responsibility to keep funds secured. There is no customer support, government interference or insurance found in the world of cryptocurrencies.