Cryptocurrency is a new form of internet money which you can spend and exchange like the money you are used to. It is also popular simply as an investment, which you can think of like holding shares in a company, though with certain key differences which we’ll explain below.
This section will list everything you’ll need to start using cryptocurrency for either of those purposes, beginning with the basics:
This section of Learn Crypto is focused solely on how to use crypto. If you find yourself asking why crypto works this way, follow the links provided, or simply read the cryptocurrency basics section first. You may find the context helps.
You’ll be reassured to know that using cryptocurrency is in many ways like using Euros or Dollars, or a payment service like Paypal. There are, however, some unique concepts and terms which you’ll need to become familiar with, which will help you navigate the different options for using cryptocurrency..
The most important of all, and where we start, is how you store and keep your cryptocurrency safe. You may want to charge ahead and get hold of some it - patience young Jedi.
As already described, cryptocurrency is a new type of money, and like any other money, your top priority is keeping it safe. With the money you are familiar with there are a couple of ways of looking after it.
Option 1 might mean a safe or vault, with a key or code that only you hold. Option 2 - allowing someone else to look after it - most likely means using a bank, who you trust to store it, but gives you convenient access via an account, and maybe an App.
With cryptocurrency you have the same two options; you can assume full responsibility yourself, or trust someone else to look after it. The term you’ll see used for this is ‘custody’. So the two options become:
At this point it is important to understand exactly what is being custodied (looked after) as crypto is entirely digital but its monetary units don't exist as files on your file or laptop.
This knowledge will enable you to choose from the different options for storage, which are listed below.
To understand what cryptocurrency storage really means, let’s look at what you are used to and draw some useful comparisons:
Your banking App/online account are tools to access your money. They don’t actually store any money, but are a representation of the amount of money your bank holds on your behalf.
You prove ownership of the funds held by your bank with credentials (such as personal details, biometrics, identity documentation, passwords, pins etc). This allows you to move or spend the money.
Your bank balance is tied to an account with unique criteria - sort code, account, IBAN - that enable you to spend and receive funds.
Cryptocurrency operates in a similar way, except there is no bank.
The equivalent of your banking App or online account is a crypto wallet, that you can access on your laptop or smartphone. The different varieties are listed below.
The credential that proves ownership of crypto funds associated with an address is called a Private Key, which can be stored in a wallet. It is a long alphanumeric string as crypto operates with no personal details. Safely storing crypto boils down to keeping your Private Keys safe.
Clever cryptography generates a version of your Private Key called a Public Key. The Public Key provides one way access only; someone can send you funds or view your address balance in a compressed version called a Public Address.
The public address is the equivalent of your sort code/account number. Your wallet will hold your Public Addresses which can be generated as QR codes.
So returning to our two storage options but with the understanding of what exactly is being stored:
It is unrealistic to remember the 64 character Private Key for every address holding cryptocurrency, as it is not uncommon to have multiple addresses, in the same way you might have multiple bank accounts with different details.
Luckily wallet designs have evolved to solve this. Hierarchical Deterministic wallets - HD Wallets for short - can derive all Private Keys from one start point known as a Seed.
A Seed is a string of between 12 and 24 unique phrases. You may also see a Seed referred to as a Recovery Phrase or Backup Phrase.
So the fundamental difference between custodial and non-custodial wallets is whether you ultimately have access to the private keys/seed or not, giving you control over the funds.
Looking at this wallet, you cannot tell whether it is custodial or non-custodial (you have full responsibility). The ‘custody’ part works in the background, but is central to security.
This is so important because there is no bank, which means no customer support. So if you take the responsibility for your funds and something goes wrong, there is no chat support or complaints process.
Conversely, allowing a service to look after your funds puts a lot of faith in their security. Just as there is no safety net for you, there isn’t a fallback for the service looking after your private keys.
This is by design; cryptocurrency gives the individual power over their money, and as we know, with great power, comes great responsibility.
With the concept of custody in mind, we can now look at the options for safely storing cryptocurrency, by looking at the types of cryptocurrency wallet.
A crypto wallet is a device for storing, sending and receiving cryptocurrency.
Let’s look at one. You’ll notice the wallet has some familiar features like a balance, currency symbols and the ability to Send/Receive funds via addresses - which we introduced earlier.
They are long alphanumeric strings, but for convenience there is usually a copy/paste button or even easier a QR code to scan. We’ll explain sending/receiving in more detail in the next lesson.
Now you are familiar with the concept of custody we can take an initial look at the different types of crypto wallet before diving into their function in detail in the next article.
We’re also going to introduce two new concepts, alongside custody:
By default a Hot Wallet is connected to the internet, making it convenient for transacting but less secure.
Conversely, a Cold Wallet is by default offline, making it more secure but less convenient to transact.
You may want a Hot Wallet for frequent transactions, and a Cold Wallet for hodling. In this way you can think of them as the equivalent of a current/checking account and a savings account.
|Mobile||Soft||Can be either||Hot|
A mobile wallet is the direct crypto equivalent of an App. It allows you to manage your crypto on your smartphone.
If you search the Apple Store or Google Play Store you’ll find a huge number listed, differing in their design and features, but the approach to custody is the key distinction (introduced above).
Non-custodial wallets can vary in terms of the options for conveniently storing your Private Key/Seeds.
Mobile wallets are by default connected to the internet so are described as Hot Wallets. All the screenshots shown so far are of a Mobile Soft Wallet.
Remember there are two approaches for custody (who ultimately looks after the funds) so Mobile Wallets will come in those flavours - custodial (the wallet provider controls the keys) or non-custodial (you are in control).
Where a Mobile Crypto Wallet is the equivalent to your banking App, a Web Wallet functions in a similar way to accessing your bank account via a browser - such as through a laptop or tablet. It doesn’t need any software to be downloaded, just the entering of credentials, so compromises security for convenience.
As you’ll see later in this section, buying and selling crypto will likely involve creating a web wallet with a service called a Cryptocurrency Exchange.
A Desktop Wallet is the pc equivalent of a Mobile Wallet in that it involves downloading an application and storing your Private Keys or Seed Phrase locally.
You can compare this to downloading a game rather than streaming it. You are in control of your Private Keys, but loss of your computer or damage to your hard drive could mean you cannot access your crypto funds. We’ll explain how to mitigate that when we dive into the actual functions.
A hard wallet is a physical device that connects to a computer via USB and runs a software application within a Dashboard..
Hard wallets are non-custodial by default - you manage your private keys via a Seed. They provide the best security because most of the time they are offline, so cannot be hacked.
If a hard wallet is lost or damaged, it doesn’t matter as remember, no funds are actually stored in a crypto wallet, it is just a way of accessing them. So long as you keep your Seed safe you can restore access with a new hard wallet.
Hard Wallets are by default offline, so are also described as cold wallets.
The simplest form of crypto wallet, and the one that really boils down storage of crypto to the bare bones is a paper wallet. A Paper Wallet is literally a piece of paper which includes your Public Key and the associated QR code, and the same for the Private Key.
Though this can be hard to wrap your head around, a Paper Wallet should actually help to underline that cryptocurrency is virtual. It simply grants you control in the most basic form.
Scan the QR code of the Public Key via a Soft Wallet on your phone and see the balance and any transaction history.
Scan the QR code of the Private Key via a Soft Wallet on your phone and control over the funds are yours.
Paper wallets are permanently offline so are the ultimate cold wallet but are a very low-tech approach to storing funds. They need to be properly protected from loss/damage - such as lamination - with adequate copies. They simply offer storage, in order to send/receive or monitor value, you’ll need one of the wallet options.
Though Paper Wallets are the ultimate cold wallet, you still need the internet to create them and a recent scam with a major paper wallet provider highlights that danger.
Though it may seem like there is a lot of information to digest around securing and storing your crypto, the most common route for beginners is as follows:
Before we get to the process of buying crypto we're going to explain some of the basic wallet functions - sending and receiving - in our next lesson.
Next step: Sending & Receiving CryptoGo to next step