Understanding Cryptocurrency Forks
February 12, 2025
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The ownership and storage of cryptocurrencies are quite different as compared to regular currencies. It is for this reason that people who are new to the crypto universe find it challenging to understand how the storage and transfer of cryptocurrency works. Cryptocurrency wallets are one of the most popular ways which are used to store cryptocurrency online. In this article, we will provide a simplified and de-jargonized way to understand the concept of cryptocurrency wallets as well as how they operate in day-to-day life.
Whenever an investor buys cryptocurrency, they get coins that are nothing but digital tokens. These digital tokens need to be stored at a safe secure place online. Some of these digital tokens are stored at the exchange itself. Centralized exchanges provide customers with such facilities. This means that the safety of the coins is managed by the exchange. However, it also means that the control of the coins is also passed on to the exchange. This increases the risk since there is always a chance of being locked out or the exchange being hacked.
Many new investors get confused with the concept of cryptocurrency wallets. They try to equate cryptocurrency wallets with bank accounts. However, there are a lot of differences. Bank accounts hold the money whereas cryptocurrency wallets do not actually hold any funds. Since cryptocurrencies follow the concept of a decentralized ledger, the money actually lives on the blockchain. However, in order to access the money, the ownership of the money has to be verified. This is done by using a key. These keys are stored in the wallet.
Cryptocurrency wallets need two types of keys in order to function. They are called a public key and a private key. A public key is like the digital address for your wallet. This can be equated to a bank account number. Just like an investor gives out their bank account number in order to receive funds, similarly, the investor needs to give out their public key so that others can locate their digital wallet and transfer funds.
Transactions cannot be completed only by using a public key. The cryptocurrency system has been built in such a manner that a private key is required. This private key proves the ownership of an account. Only after the ownership has been authenticated can coins be sent or received from the wallet. These private keys are never on the blockchain since they are not supposed to be public information. Instead, these private keys are stored in the digital wallet.
Whenever a new digital wallet is generated, a recovery phase is also generated. This phrase is about twelve to twenty words long and can be used in order to reset passwords. Just like the private key, this information also needs to be stored safely.
Cryptocurrency wallets can be of various types. Some of the commonly used types have been listed below:
Cryptocurrency wallets can be classified using another classification. They can be classified as hot wallets or cold wallets based on whether or not they are connected to the internet.
Cryptocurrency wallets that are connected to the internet are called hot wallets. These wallets can either be online or they could also take the form of a downloadable application that can be stored on a smartphone or a laptop. However, the key point is that these wallets are connected to the internet. This internet connectivity makes these wallets susceptible to online attacks.
There are several advantages to using hot wallets. A lot of them are easy to set up and free to operate. Also, these digital wallets are compatible with a wide variety of cryptocurrencies and their networks.
There are certain problems associated with these wallets. They can often lead to transaction delays since they are run on third-party servers. Also, they need to be constantly updated which makes them inconvenient to use.
Cold wallets, on the other hand, are wallets that are not connected to the internet in any way. These are paper wallets as well as hardware wallets which were discussed earlier. Since these wallets operate offline, they cannot be hacked and hence provide better security to the cryptocurrency investor. Also, they can be encrypted with biometric information which would help ensure that only authorized users are able to undertake transactions. However, cold wallets can be expensive to set up and maintain. Also, there is always a chance of losing the paper or the device which makes this method slightly prone to risk.
The different types of cryptocurrency wallets mentioned above are suitable for different purposes. The selection of a wallet type depends upon the individual needs of an investor. Some of the factors commonly considered by cryptocurrency investors have been listed below:
The fact of the matter is that cryptocurrency wallets are no longer as new or mysterious as they used to seem a few years back. Investors have been using these wallets to transact in significant volume in the past few years. As a result, it is easy to obtain user reviews and understand the pros and cons of the wallet just by doing some primary research. The key point to be understood is that the selection of cryptocurrency wallets has long-term implications. Changing a cryptocurrency wallet is a complex task and hence investors must be clear about the factors which are important to them and then base their decisions on those factors.
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