If you’re like many people, you’ve taken an interest in buying and holding cryptocurrency. Now that confidence in cryptocurrency is trending towards 100%, it makes sense to invest now that it’s proven itself.
However, there’s more to cryptocurrency than signing up for a centralized crypto exchange and buying Bitcoin. You also have private wallets available to store your holdings.
So, how does a crypto wallet work, and why should you use one instead of a centralized exchange? Keep reading to learn the answers to your questions.
What Is a Cryptocurrency Wallet?
A cryptocurrency wallet is where you store your cryptocurrency. Cryptocurrency is a digital currency, which means you need a way to track how much of it exists and who holds how much. A wallet helps you do this.
A wallet is a long string of numbers and letters representing your address. Anyone with your address can send your wallet currency in whatever types of cryptocurrency wallet you have. Typically, a wallet is private to you. If you store your crypto on a public exchange, you don’t have a wallet. You use their wallet and rely on them to hold your cryptocurrency coins. With a private wallet, you can manage your cryptocurrency and keep it safe.
How Does a Crypto Wallet Work?
A cryptocurrency wallet doesn’t hold your actual digital currency. It acts as a key that lets you access your coin on the blockchain.
Modern cryptocurrency wallets have a private key and seed phrase. You’ll need both of these to access your coins and use them for transactions. You’ll need the cryptocurrency address of the person you want to send your coins to, and they will need yours to send you money.
There are two forms of wallets: hardware and software wallets.
A hardware wallet is like a USB drive. You can plug it into your computer to access it. Since it doesn’t exist online, nobody can hijack it to steal your coins.
You can also use software wallets. These exist on your browser, desktop computer, and mobile devices. They are more convenient than hardware wallets, but you’ll face a few more risks.
Benefits of Using a Crypto Wallet
Now that you understand what cryptocurrency wallets are and how they work, the question is, are they worth using? Read below to learn why you should move your crypto holdings to private crypto wallets.
Control Your Assets
One of the big problems with using centralized exchanges is that you don’t control your crypto. Yes, you’re giving a crypto exchange your money to buy cryptocurrency. But at the same time, you won’t have complete control over your assets.
That’s because a centralized exchange retains control over the cryptocurrency wallets. They keep track of how much you own, but if something bad happens on their end, your assets are at risk.
That means if an exchange gets hacked, you can lose your assets.
You have complete control over your cryptocurrency when you use a private wallet. You can still learn how to buy Bitcoin and other coins on an exchange. Just be sure to transfer those assets to your private wallet to get control.
Send Currency to Anyone
One issue with centralized exchanges is that you must supply a lot of information when signing up. Yes, most people won’t have a problem with doing this. But if you live in a location that isn’t as regulated, it may not be an easy task to register for an account.
You won’t have this problem when you use a private crypto wallet. You only need an internet connection, and you can sign up for an address.
Once you have a private address, you can receive crypto payments from anywhere. It doesn’t matter if you have an account with a centralized exchange or your location in the world.
One of the biggest draws of cryptocurrency is decentralization. There isn’t one government, business, or person in control of the currency.
However, the same isn’t true when you use a centralized exchange. Yes, you still buy decentralized assets when you purchase crypto on an exchange. But at the same time, you aren’t taking advantage of decentralization when you rely on a central entity to manage your holdings.
You can take advantage of decentralization when you use a private wallet. This means nobody can tell you what you can or can’t do with your holdings. Every action you take occurs on the blockchain, and once a transaction is made, nobody is around to reverse what happened.
There’s not much transparency with traditional financial systems. You may be able to see most of what happens with your accounts. But when it comes to things that should be public, it makes more sense for things to be in the light.
While you can have some anonymity with your blockchain address, everything action you take goes on the public ledger. This means that anyone can look at the blockchain to see what happens.
This brings more transparency and will give you a glimpse into everything that happens on a cryptocurrency network.
Create a Cryptocurrency Wallet Today
It makes sense to want to keep things simple when you buy cryptocurrency. Centralized exchanges provide an easy way to buy and sell crypto, store it easily, and cash out when you’re ready.
However, that doesn’t mean they’re the safest option available. Now that you can answer the question, “how does a crypto wallet work?” you should have what you need to set up a private wallet and keep your cryptocurrency assets safe.
Are you interested in more investing tips that will help you make the most of your savings? Check out more guides on the blog to learn more.