Cryptocurrencies are digital money. And, as a form of money, the tools used to store them are called wallets. But crypto wallets don’t work like your regular physical wallet, precisely because of the nature of cryptocurrencies and blockchain technology.
Much more goes into ‘holding’ digital assets in a crypto wallet than putting fiat notes in a physical one. So, what does it actually mean to store cryptocurrencies?
What Is a Crypto Wallet?
A cryptocurrency wallet can be a software application that you install on your computer, smartphone, or tablet. It can also be a hardware device, complete with its own custom software, specifically designed to store your private key. Some people even use paper wallets, which are crypto wallets that have a private key printed on paper.
How Do Crypto Wallets Work?
Overall, no matter what kind of wallet you are talking about, they fundamentally work in the same way. Wallets use cryptography to let you access and manage your cryptocurrencies. There are two types of cryptographic keys involved in this process. These are the private keys and public keys, with the latter being derived from the former.
A public key is a unique string of characters representing your wallet’s address on the blockchain. It essentially identifies the ‘location’ of your wallet and is used by others to send crypto assets to it. This is why it’s also known as the public address.
You can think of it as the email address that people use to send you emails. It is public, meaning it can be freely shared with anyone.
Private keys, on the other hand, are a unique string of characters that serve as the wallet owner’s digital signature. It is used to prove ownership of the funds in the wallet and digitally sign transactions to authorize the transfer of outgoing assets. Because of this, private keys are confidential, like the password for your email address.
Private Keys and Seed Phrase
Most crypto wallets, except for paper and core wallets, have a seed phrase. It’s a sequence of 12-24 words that is used to generate the public and private keys. It also acts as a mnemonic phrase, a word or phrase designed to help you remember information that is much more complicated.
Private keys typically consist of a random combination of characters. It’s really hard for the average human mind to remember that many. So, rather than give you the private key in its raw form, you receive 12-24 random words (the seed phrase) that you can then record and store somewhere safe.
In this case, the seed phrase is a human-readable version of your private keys. Like the private keys, it acts as proof of ownership of the wallet and the funds associated with it.
That’s what allows seed phrases to be used in crypto recovery. If you lose access to your wallet for any reason, you can use the seed phrase to recover its public and private keys, allowing you to access all the funds associated with it.
Core Wallets VS Regular Software Wallets
Most software wallets that you find on the web, like Metamask, Trust Wallet, TronLink, etc., have similar functionality. They are compatible with certain blockchains and can store certain cryptocurrencies and tokens. However, there is another class of more advanced software wallets.
The most notable of these is Bitcoin’s Core wallet. Like other software wallets, it uses private and public keys and can store and manage crypto assets (Bitcoin in this case). But it’s also so much more than that.
Bitcoin Core also serves as the software client of the Bitcoin blockchain. Users can run a full node of the blockchain network on their computers. As a node, the wallet will require you to download the entire blockchain history and regularly sync with the network.
Bitcoin Core is much larger than a regular software wallet, currently about 500 GB in size. It also requires an additional 5-10 GB of storage per month for syncing.
Now that we have this foundational knowledge of crypto wallets, we can look at how and where cryptocurrencies are stored.
Where Is Cryptocurrency Actually Stored?
Crypto wallets exist to help users store and manage their digital assets. But contrary to what the name and definition of a ‘crypto wallet’ may suggest, these applications don’t actually store cryptocurrencies. They just let you access them.
Cryptocurrency and tokens are just bits of data. That data is stored on the relevant blockchain network. So, no crypto assets are actually in your wallet. All Ether (ETH) tokens are stored on the Ethereum blockchain as data, all Bitcoin (BTC) on the Bitcoin blockchain, Binance coin (BNB) on the BNB Chain (BSC), and so on.
Each transaction on the blockchain is associated with multiple public addresses. All your wallet has to do is scour the blockchain, find all the data associated with its address, and add them up. Your wallet balance is actually a sum of all the crypto transactions associated with your particular public address.
When you send cryptocurrencies, you’re not really moving funds from your wallet to the recipient’s wallet. What you’re actually doing is changing which public address the assets are associated with from your wallet’s address to the recipient’s address. Your wallet will use your private keys to sign off on this transaction.
How Do Centralized Exchanges Store Your Crypto?
Crypto storage options can be non-custodial or custodial. Non-custodial options are what you get with wallets like MetaMask, Trezor, Ledger, and Trust Wallet. They give you your wallet’s private keys. You have full control over the wallet and its funds.
Custodial options, on the other hand, manage the wallet holding your cryptocurrencies on your behalf. They don’t give you the wallet’s private keys. Therefore, you don’t have full control over it. This is what you get with centralized exchanges like Coinbase and Binance.
Centralized exchanges facilitate the buying and selling of cryptocurrencies by acting as intermediaries between buyers and sellers. These platforms typically require users to open an account and deposit their funds.
You can still access your funds via the account. However, the crypto coins/tokens are not held in the account. What you have in your account are IOUs. The real funds are held in the exchange’s own wallets, which users have no direct control over. The platform holds the private keys associated with those wallets.
Giving custody of your funds in this manner offers many conveniences for trading. But it also carries significant risks. You are, after all, relying on another party to safeguard your assets. And considering that the FDIC does not insure crypto assets held on crypto exchanges, if the platform collapses, you stand to lose all your money.
We recommend using non-custodial wallets if you plan to hold cryptocurrencies for a long time.
Professional Crypto Recovery – The Crypto Wallet Pros
While it is commonly said that wallets store cryptocurrencies, they don’t technically do that. All your crypto is stored on the blockchain as bits of data. Your wallet, on the other hand, is just the tool that lets you access and manage it.
If you ever have a problem with your crypto wallet, all is not lost. The experts at Professional Crypto Recovery can help you recover your assets.