👋 Good afternoon finance enthusiasts and fellow investors!
As some of you suggested, this week we're going to dive a little deeper into the topic of crypto wallets. Next week, I'll talk a little bit about building wealth outside of the traditional system as this topic was also requested by some of you.
Let's get one thing straight: This mail will not cover the absolute basics. There is already a lot of great content out there explaining why you should have a wallet and what you can do with a wallet. I can also recommend CryptoExplorer Pro if you want to learn more about the basics of cryptocurrencies.
In this email, I want to explain the basic concepts of crypto wallets using a metaphor. People often have difficulty understanding the basic concepts of a crypto wallet, even if some already have a wallet. After this email you will not have these problems anymore!
Let’s go!
🧠 Crypto Wallets are like Boxes
I think the concept of a crypto wallet can be well illustrated by the following example. Imagine the whole world covered with little boxes. A loooooooot of boxes. To be exact: 1,461,501,637,330,902,918,203,684,832,716,283,019,655,932,542,976 boxes! (Bitcoin uses the RIPEMD-160 hash function => 2^160 available Bitcoin addresses)
Each box represents a single wallet. When you create a wallet, you basically just select a random box. With so many boxes, it can be quite difficult to find your box, so you need to write down the exact coordinates (also known as your private key). If you forget the coordinates.. well, it’s gone!
Tip: Always make sure to save your private key/seed phrase! And NEVER share your seed phrase with anyone!
🔑 Public and Private Key
Okay, now you understand the basic concept of a wallet. Let's talk about the difference between public address and private key.
Your box has two openings. At the top is the public address. Compare it with your personal address. It's public, and everyone can send something to that address, but they don't have access to the inside of your box. Here is an example of what such an address looks like:
34xp4vRoCGJym3xR7yCVPFHoCNxv4Twseo
On the bottom of the box is your private key. Only you should know it - do not give it to ANYONE! You can use it to access the contents of your mailbox.
Here's what a private key can look like:
E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262
Doesn't look like something you can easily remember, does it? :D Well, there is a concept (BIP39) that simplifies this! Introducing: seed phrases 🤯
👁🗨 Seed Phrases
We've already talked about the private key, which essentially contains the coordinates for your secret box.
A seed phrase is the translatation of that private key into 12 or 24 words, which could look like the following:
So the seed phrase is just a more human-friendly way to store your private key. Normally, that’s the information why you write down to ensure your access to the wallet in the future.
🛍 Types of Crypto Wallets
Okay, we now know what a private key is and that we need it to access our wallet. If you write it on a piece of paper, you already have the first type of wallet, the paper wallet. Simple, but a hassle if you want to actually use the wallet, since you always have to use software to access the blockchain and enter your key to stay intact with the wallet.
To avoid that, the key has to be stored somewhere. Therefore, we have two options: Either we store it on a phone or a computer - this is called a software wallet.
Or we store it on a special device built just for storing our private key - this is called a hardware wallet.
Contrary to popular belief, crypto wallets do not physically hold cryptocurrencies like the wallet in someone’s pocket. They only store the private key, which gives you access to the funds in your secret box.
🔐 Crypto Wallet Security
To keep our key safe, we need to make sure that no one has access to it.
With a paper wallet, you just need to make sure that no one steals your piece of paper and it doesn't get destroyed.
With a software wallet, you have to make sure you don't fall victim to a hack. I use software wallets a lot, but not to store the majority of my cryptocurrencies! Software wallets are perfect for connecting to Web3 services and using them on the go, for example, through your phone. I use MetaMask as a Chrome extension and SafePal as a mobile wallet.
Hardware wallets are considered the most secure. Generally, they are not directly connected to the Internet and your private key should not be able to leave the wallet (see last week's newsletter about the problems with Ledger). I use a SafePal hardware wallet and still own an old Ledger Nano S which I haven't touched in over 3 years. But don't buy a new Ledger (read here why), but a Trezor for example.
No matter which wallet you use, you should always be on guard to make sure you don't get hacked!
🎯 Action steps
You do not have a wallet, but crypto worth more than 500 USD?Then you probably store your cryptocurrency currently on an exchange! This is dangerous!
Remember:
Not your keys - not your coins!
Currently, the exchange owns your cryptocurrency - not you. If it gets hacked or files for bankruptcy, your crypto can be gone.
Make sure you get a wallet! Hardware wallets cost money, but a cheap wallet is worth the price.
You can also download a free software wallet like SafePal.
Make sure you keep your private key/seed phrase safe!
You already have a wallet?
Make sure you also have a hardware wallet, not just a software wallet.
Use the wallet! There are people who have a wallet and still leave most of their money on the exchange.
Don’t connect your hardware wallet with external services and dApps! Use a software wallet for this. A hardware wallet is like a safe - you don't take a real safe with you when you go shopping, do you? 😉
That’s it for this week! Enjoy your weekend.
Cheers
Stefan
Would you recommend SafePal or Trezor?