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How are cryptocurrencies stored, sent and received?

Cryptocurrency wallets are an essential part of storing, sending and receiving cryptocurrencies.

It’s similar to how your bank account works. You can access your online bank account (crypto wallet) and see all the numbers but your money isn’t actually physically there. Instead, your money is stored somewhere in the bank’s database (blockchain). 

Bitcoin coins sticking out of a wallet.

Likewise, there aren’t actually any cryptocurrencies stored inside the crypto wallet. What is stored instead, is a bunch of relevant information, called your private and public keys, that reference your crypto holdings within the blockchain. It is your crypto wallet that interacts with the blockchain to track ownership and give you access to your cryptocurrencies.

Lesson 05

Hot & cold wallets

There are two main types of crypto wallets you should know about – hot wallets and cold wallets. Hot wallets are essentially always connected to the internet, while cold wallets are not (this is often hardware that looks like a USB drive).

A simplified way of thinking about this would be comparing them to safety deposit boxes (cold wallets) and online bank accounts (hot wallets). It might be more challenging to locate and access a deposit box than it might be to hack your online bank account – and that’s why cold wallets are typically considered safer.

Most beginners just start off with hot wallets, because they find it’s more convenient and easier to access. However, it is always recommended you move your funds to a cold wallet for more security.

How is crypto sent & received?

Crypto transactions are only made possible with the use of public and private keys. Here’s an analogy: 

Your online bank account is your cryptocurrency wallet. People need your bank account number (public key) in order to send you money. And if you want to send money or transact, you need your password (private key) to access your bank account to do so.

Exchange wallets

When you buy crypto off-exchange or a custodial platform, there is usually an option to just store your digital currency directly within your account – this is called an exchange wallet.

Most beginners that start out small keep their holdings directly in their exchange wallet because it makes it easier for them to buy and sell crypto without having to do multiple transfers between wallets.

If you wish to have extra security and full control over your funds, it is always advised that you store your cryptocurrencies in your personal crypto wallet instead of an exchange wallet.

This means that every time you buy crypto on an exchange, you’ll have to manually send the crypto to your external wallet. And vice versa, when you want to sell, you need to transfer the cryptocurrency from your external wallet back into your exchange wallet before you can make a trade.

Did you know? Private and public keys are cryptographic for security reasons, as such they are a randomly generated set of letters and numbers. Something kind of like this:  1A1zP1EpSIGaoi2DMPQfTL5S.