Guide to Crypto Trading
Introduction to the cryptocurrency space
WHAT ARE CRYPTOCURRENCIES?
Cryptocurrencies have intrigued some while simultaneously turning others off. However, the concept behind cryptocurrencies has probably baffled the general public more than anything. While some consider it to be the wave of the future, others have dismissed it as a digital trend bound to end. All in all, a large percentage of people believe that cryptocurrencies can make the world better. While experimental digital currencies started appearing in the 1980s, cryptocurrencies as we know them came into existence in 2009. At their most basic level, cryptocurrencies get their name from their underlying cryptography that makes them secure.
A cryptocurrency, or digital currency, is a virtual currency that is designed as an alternative to conventional fiat currency. It’s decentralized, meaning no single entity controls it, and it is based on blockchain technology, meaning it uses securely-stored blocks of data to maintain and power the digital currency’s network. It utilizes advanced cryptography, or digital coding, that is tamper-proof, to secure and verify transactions. One stand-out feature of cryptocurrencies is the fact that it’s not issued by any central authority. Therefore, it’s theoretically immune to government or institutional interference and manipulation. This feature of cryptocurrencies is key in its ability to revolutionize the world as we know it. Moreover, due to their cryptographic nature, cryptocurrencies are extremely difficult to counterfeit. The first blockchain-based cryptocurrency to capture public interest was Bitcoin, launched in 2009. Up to today, Bitcoin is still the most popular and valuable cryptocurrency in existence.
WHAT IS BITCOIN?
Bitcoin is the brain-child of one elusive Satoshi Nakamoto, a pseudonym used by the individual or group that created Bitcoin. It was released in 2009 as open-source software, and to most people, it’s defined as a digital currency that only exists electronically. Bitcoin can be separated into two components: Bitcoin the token, and Bitcoin the protocol. Bitcoin the token is a snippet of code that represents ownership of digital currency that, as described in the section above, is built on a decentralized blockchain network. Bitcoin the protocol represents the distributed network itself. This network maintains a ledger, or data blocks, that contain balances of Bitcoin tokens. Both the token and the protocol are referred to by the same name.
Bitcoin was created as a deflationary currency designed to combat the government’s use of inflation as a hidden tax agenda to redistribute wealth. Since Bitcoin is decentralized, it does not rely on a central issuing authority or require political oversight to oversee its circulation. Instead, Bitcoin is produced and held electronically and cannot be printed like dollars or euros. Bitcoin’s blockchain programming determines when Bitcoins are made and how many are created. The total supply of Bitcoin, or BTC, is capped at 21 million BTCs. Due to this, Bitcoin has received praise by many people for its ability to undo the currency printing powers of politicians.
WHAT IS BLOCKCHAIN?
According to Don and Alex Tapscott, authors of Blockchain Revolution, “The blockchain is an incorruptible ledger of financial transactions that can be automated to record not only financial transactions but everything of value.” It, too, is the brainchild of Satoshi Nakamoto. Simply put, a blockchain is a decentralized digital ledger in which exchanges of value are recorded publicly and chronologically. It plays a vital role in cryptocurrencies. Without it, digital currencies would not exist at all.
The blockchain can be divided into two: the public blockchain and the private blockchain. The public blockchain is open to everyone and usually has no access restrictions. Anyone with an internet connection who can run specific software can issue a transaction or become a participant on the network. Bitcoin is a perfect example of the public blockchain. A private blockchain, on the other hand, is permissioned, meaning that a new user cannot automatically join the network unless they are invited by the network administrator. Such a blockchain is usually used by institutions or enterprises incorporating blockchain into their auditing or accounting practices without broadcasting sensitive data to the public.
WHAT IS A SMART CONTRACT?
Since the blockchain is a decentralized system, it has no need or place for intermediaries or middlemen for processing transactions. For this reason, Nick Szabo, a cryptographer, realized the need for self-executing contracts that could be deployed to the blockchain. These contracts could be converted into computer code and then stored and replicated on the network. They would then be supervised by the system of computers that run the blockchain, resulting in ledger feedback such as transferring money and receiving a product or service. This, in essence, was the birth of smart contracts.
A smart contract is a computer protocol running on top of the blockchain that contains a set of rules to which permitted parties of the contract must adhere to. It is basically a contract that is executed based on predetermined rules whenever specific conditions are met, and is therefore automatic and can be automated as well. They are intended to digitally facilitate, verify, and enforce the performance of a contract. They do this without the need of a third party since they are self-executing. Moreover, the transaction rules are set in digital machine-readable code and can only be automatically executed when parties come to an agreement and enforce it. This enables users to avoid conflict and save an incredible amount of time when it comes to making transactions.
WHAT IS MINING?
Mining refers to the process of appending, or attaching, transactions to the public blockchain ledger of all transactions for a given blockchain network. The term is popular for its association with Bitcoin; however, other technologies using blockchain can employ mining. It includes creating a block of transactions that cannot be forged and is permanently linked to the preceding and the following block with cryptographically-secure codes and signatures. This protects the integrity of the blockchain without the need for a central system. Mining can be typically done on a dedicated computer with a fast CPU. However, due to increased mining complexity, such as that of Bitcoin, dedicated ASICs are in use today more commonly than CPUs. Moreover, mining Bitcoin nowadays requires high electricity usage because the cryptographic codes required to secure the network require the execution of billions of calculations, all of which need to be powered and performed on the dedicated integrated circuitry of the ASICs.
The people who validate and record these transactions are referred to as miners. These miners compete to solve a difficult mathematical problem based on a cryptographic algorithm. The solution that the miner finds is referred to as Proof-of-Work (PoW). It proves that the miner spent a lot of time and resources to solve the problem. Therefore, they get rewards in the form of transaction fees or tokens that they are mining. This helps miners maintaining the integrity of the blockchain. When a block is solved, the transaction is considered to be confirmed, and the tokens in the transaction can be spent. This is how new coins are created in the crypto space and it is one way that new value is unlocked as well.
BASICS OF CRYPTOCURRENCY MINING
Cryptocurrency mining is an important part of how the blockchain network functions. When a user wants to spend or receive cryptocurrency, they must first create a transaction and broadcast it to the entire network. For the transaction to successfully go through, it needs to be permanently recorded on the blockchain. For this to happen, miners on the network need to collect all transactions recently announced by token users on the network and compile them into a transaction block. Afterward, they need to verify that all the transactions are valid.
Of course, there is the risk of a miner creating a fake transaction block and adding it to the blockchain ledger. Therefore, the blockchain mining algorithm is designed to make mining difficult. Instead of adding a transaction block to the blockchain at will, a miner will have to solve a problematic computational puzzle referred to as the PoW described above. In essence, all miners on the network are competing to see who will solve the puzzle first. The one who solves the puzzle first broadcasts his or her solution to all other miners, and they verify that the solution is correct. The network then permanently adds the mined block to the blockchain.
The miner who solved the puzzle first gets rewarded for their efforts with newly-minted tokens. For instance, the current block reward for Bitcoin is 12.5 Bitcoins. This idea of rewarding miners is an incentive to keep miners mining and maintaining the legitimacy of the blockchain. Additionally, it prevents any single entity from gaining control of the network and ensuring that cryptocurrency tokens don’t get spent twice. Thus, the creation of new tokens continues while crypto transactions remain accurate and correct.
HOW DO CRYPTOCURRENCIES WORK?
Cryptocurrency functionality is very similar to using a bank debit or credit card or PayPal. In all these cases, there is a complex system that works behind the scenes to issue currency and record transactions. The main difference is that with cryptocurrencies, instead of banks and governments issuing new currency, an algorithm does. Cryptocurrency transactions are sent between peers via cryptocurrency wallets. The person creating the transaction uses the wallet software to transfer token or coin balances from one account to another. The transaction between peers is encrypted and then broadcast to the network and queued to be added to the ledger by miners.
Transaction amounts are public, but the sender of the transaction remains pseudo-anonymous. However, the transaction leads back to a set of special keys. Whoever owns those sets of keys owns the amount of crypto associated with those keys. The transactions are then recorded onto the public blockchain through mining. This is the reason why the ledger is referred to as a blockchain – it is a chain of transactional blocks. All those who use a specific cryptocurrency have access to the blockchain ledger if they run up-to-date wallet software. Crypto projects and token blockchains usually provide technical documentation to users on how to set up a wallet, how to send and receive tokens, and how to interact with the blockchain network.
TYPES OF CRYPTOCURRENCIES
Today, there are many types of cryptocurrencies in existence. Below we look at four of the most popular cryptocurrencies in the market.
Bitcoin is one of the most popular cryptocurrencies as it is considered to be the oldest original cryptocurrency in existence. It is famous for receiving mainstream media attention for being an innovative technical concept. It is referred to as the ‘gold standard’ of cryptocurrencies as all altcoins market costs are matched with the price of Bitcoin. It was conceptualized in 2009 through a whitepaper written by Satoshi Nakamoto. It uses the SHA-256 algorithm, a specific mining algorithm. Different cryptocurrencies use different mining algorithms.
Litecoin, launched in 2011, is an alternative cryptocurrency to Bitcoin. Just like Bitcoin, Litecoin is an open-source network that’s free of any centralization. Unlike Bitcoin, however, Litecoin leverages the Scrypt encryption algorithm. The primary goal of Litecoin was to make transactions confirm faster than those of Bitcoin. Moreover, Litecoin’s algorithm is ASIC-resistant, meaning it is resistant to accelerated hardware mining technologies. While the coin limit for Bitcoin is 21 million coins, the limit for Litecoin is set to 84 million coins.
Ethereum is the brain-child of a young Russian developer by the name Vitalik Buterin. The Ethereum platform enables the deployment of smart contracts and the creation of DApps (Decentralized Applications) that run on the Ethereum blockchain. The advantages of this Ethereum is that it enables DApps to operate with no downtime, fraud, interference, or control from third-parties. The platform’s token, Ether, is a highly sought-after token by developers looking to develop and operate applications on Ethereum. Following a network attack in 2016, Ethereum was split into Ethereum Classic (ETC) and Ethereum (ETH).
Released in 2012, Ripple is both a cryptocurrency and a real-time settlement network that enables instant and low-cost international payments. Ripple works closely with financial institutions and banks to enable them to make cross-border payments. It differs from other cryptocurrencies in that its focus is on moving large sums of money rather than focusing on peer-to-peer transactions. Additionally, it doesn’t require mining; therefore, it reduces computing power and minimizes network latency. Therefore, one needs to purchase Ripple from an exchange platform to acquire it.
Low Transaction Fees
Cryptocurrencies offer low transaction fees compared to third-party services such as PayPal. Since transactions occur without the existence of intermediaries, lower fees can be charged to confirm transactions.
Cryptocurrencies are purely digital and are secured with cryptography. They cannot be manipulated, reversed, or counterfeited. Therefore, they eliminate the risk of fraud.
Unlike credit or debit card services, cryptocurrencies offer anonymity for users. For instance, when you use a credit card, you automatically give your information to your bank or a retailer. In cryptocurrency payment systems, the user is the only one that initiates a transaction sends an amount to the recipient. Therefore, their identity remains anonymous.
Cryptocurrencies are decentralized; therefore, they offer anyone the opportunity to access their respective networks and use them. Moreover, since access to the internet has increased, it gives a chance for the unbanked to have a way to store or transfer their money via digital currencies.
Purchasing assets involves the use of third-party services such as lawyers or banks. This results in delays and can result in errors as well. With digital currencies, third-party approvals can be removed, and settlements can be made much more quickly.
Difficult to Comprehend
The biggest drawback of cryptocurrencies is the fact that they are based on complicated blockchain technology. Therefore, they can be difficult for the tech-unsavvy to understand.
Extremely Volatile and Uncertain
The cryptocurrency market is highly volatile with the prices of cryptocurrencies fluctuating rapidly. Moreover, they tend to be unpredictable, which can make investing in cryptocurrencies extremely risky for the uneducated. For this reason, a large number of individuals refrain from dealing with cryptocurrencies.
Not Widely Accepted
Although cryptocurrencies are a global phenomenon and have gained a substantial global user base, they have still not gained widespread penetration and adoption. Some countries such as China have completely banned the use of cryptocurrencies in the country.
Risk of Loss as Payments Cannot be Reversed
It is impossible to reverse a cryptocurrency transaction once the transaction is completed. This irreversible nature of cryptocurrency doesn’t make it the currency of choice for business dealings. Furthermore, once a Bitcoin is sent to a wrong address, it can never be recovered unless the recipient knows the personal wallet address of the sender and willingly sends the received funds back.
HOW SECURE ARE CRYPTOCURRENCIES?
What makes cryptocurrencies theoretically tamper-proof are two things: the consensus protocol of the network and the cryptographic fingerprint that is unique to each block on the network’s blockchain. The cryptographic fingerprint requires a lot of computing power and time to generate. For instance, Bitcoin uses the Proof-of-Work protocol to validate new transactions. Once these blocks are appended to the blockchain, they become immutable and cannot be altered. Therefore, making any changes in the block would require the service of powerful computers that work faster than all the nodes in the network to undo that single block. And even then, success isn’t guaranteed.
Therefore, the blockchain itself is tamperproof, providing the necessary security needed for cryptocurrencies. However, no matter how tamper-proof a blockchain is, it doesn’t exist alone. For instance, cryptocurrency hacks usually happen at points where the blockchain connects with the real world. These points include third-party applications and software clients such those used in exchanges and cryptocurrency wallets. Therefore, to answer the question as to how secure cryptocurrencies are, they are very secure, but it is the security of third-party applications and exchanges that ultimately determines the overall security of digital assets.
PRACTICAL USE OF CRYPTOCURRENCY AROUND THE WORLD
As A Store of Value
Acting as a store of value is one of the unique features of cryptocurrencies. A cryptocurrency such as Bitcoin is censorship-resistant; therefore, it provides the owner with an alternative store of wealth. Only the owner has access to their Bitcoin wallet and, therefore, authorities cannot freeze their digital assets. Furthermore, no third-party handles this money and thus it has low transaction charges whenever it is exchanged.
Investing in Early-Stage Start-ups
The emergence of ICOs, or Initial Coin Offerings (described in more detail in a section below), has enabled anyone with an internet connection to become an ICO-investor in early-stage start-ups. Simultaneously, it has enabled start-ups to acquire seed capital easily through digital currencies such as BTC, ETH, or fiat currency. Access to such funding has been made possible through the creation of cryptocurrencies.
Gaming, Entertainment, and Media
This use for cryptocurrencies is possible because cryptocurrencies are decentralized and, therefore, are not subject to government regulations. Individuals all over the world are free to play games online, make in-game purchases, pay for media and content, and create online communities powered by crypto tokens regardless of gaming, media, or entertainment laws in their region.
One of the earliest examples of using Bitcoin to pay for something was in 2011 when WikiLeaks started accepting Bitcoin donations. Individuals sometimes want to support causes that are not supported by institutions or governments. Therefore, there is a need to donate anonymously so as not to have support for those causes affecting your personal life. Cryptocurrency donations are a sure-fire way of being able to make such donations while remaining anonymous.
As Payment for Posting Content
Steemit is a service that enables publishers on its platform to receive financial rewards in the form of cryptocurrencies for posting content on the network. High-quality content gets upvoted, and the publisher receives crypto tokens in return for curating content on the network. This has made Steemit popular with a large number of users.
The cryptocurrency landscape is growing at such an alarming rate that it has captured the interest of various regulators across the world. Perhaps the most significant reason for regulation in the cryptocurrency sector has been to curb the rise of scams and pyramid schemes. Since the cryptocurrency space is decentralized, malicious actors have found ways to steal money from unsuspecting investors. They do this through the invention of fake cryptocurrencies accompanied by fake ICOs. This has prompted authorities to carefully examine the crypto world to assess how this growing sector can be regulated in the interest of the general public.
Different regions have set up different regulations with regards to cryptocurrencies. For instance, in some regions, cryptocurrencies are regarded as commodities, while in others, they are treated as securities. Therefore, both regions treat, tax, and regulate them differently. Additionally, some countries have set a blanket ban on the use, trading, and mining of cryptocurrencies. A good example is China where even social media channels supporting cryptocurrencies are often banned. In some regions, ICO regulation is in a grey area, especially in developed countries. Developing countries, on the other hand, are setting themselves up as blockchain and cryptocurrency hubs.
WHAT IS AN INITIAL COIN OFFERING?
For traditional firms, there are a few ways that the funds necessary for expansion and development can be raised. The most common method for well-established companies to raise funds is by going public and earning capital from investors through an Initial Public Offering (IPO). An Initial Coin Offering (ICO) is the equivalent of an IPO in the cryptocurrency world. It is form of fundraising whereby a new company looking to create a new token, app, or service issues tokens in exchange for funds. Investors buy into the ICO using fiat currency or other digital currencies such as Bitcoin. In exchange, the investor receives new tokens specific to that ICO.
Such tokens are very similar to shares that are sold to investors in an IPO. The trade-off for investors is the hope that the token will perform exceedingly well and will provide them with significant returns on investment. If the funds raised for the ICO do not meet the minimum funds required by the company, all the funds are returned to their investors. However, if successful, the company uses the capital they raised as a means for starting its cryptocurrency, launching its product, and fulfilling its goals. ICOs are used by companies as a way to bypass all the rigorous and centralized capital-raising process required by banks or VCs (Venture Capitalists).
WHAT ARE THE BENEFITS OF INVESTING IN AN ICO?
A High Return on Investment
One of the main benefits of investing in an ICO is the opportunity of earning a high ROI. Most ICOs are launched with the intention of transforming a specific sector in one way or the other. If the ICO becomes successful, it can have a direct impact on the investor’s tokens, the value of which will significantly grow as the project grows. The only thing required on the investor’s part is careful analysis and choosing the right ICO.
Early Token Purchase
Funds received in an ICO are transparent and verified. They provide as much information as possible as to investors as to where the funds will be spent. Therefore, in the ICO stage of a company, early investors will have more liquidity and higher chances of rapid capital growth. Moreover, holders of the newly-issued tokens will be able to trade them once they are listed on cryptocurrency exchanges.
Not Limited to Boundaries
ICOs are not limited to specific countries or regions. They are open to the whole world where everyone and anyone can participate. Moreover, once the ICO project is launched, it’s open to a global user base.
Decentralized Access to New Services
ICOs are generally open to everyone globally. Additionally, blockchain projects are typically decentralized and give everyone around the world to access their new, decentralized services from anywhere. These projects, with the exception of formal regulation, are not impacted by bank or central government involvement either.
Multiple Token Advantages
Often, an ICO is accompanied by cryptocurrencies or tokens that are exchanged for other currencies that are contributed by investors. These tokens, depending on their type, usually have multiple applications, including tradability on crypto-exchanges. Furthermore, the coins can be consolidated or divided, too.
WHAT IS A DISTRIBUTED LEDGER?
A distributed ledger, often referred to as DLT (Distributed Ledger Technology), is a ledger of transactions or contracts that are shared and synchronized across multiple locations and people. Unlike traditional databases that are stored on a single, central server somewhere, DLTs have no central data storage or administration functionality. All of the information stored on the DLT is publicly accessible to users, all of whom can own a copy of the information. Due to this, the DLT is harder to attack than a centralized ledger as hacking it would require hacking the database copy stored by everyone on the network. Moreover, any changes made to the ledger are reflected and sent to all participants in a matter of minutes. This makes the DLT resistant to malicious changes by a single participant.
WHAT ARE CONFIRMATIONS?
Every public blockchain makes use of blockchain confirmations. When a transaction is first broadcast to the blockchain, it starts with zero confirmations. The number then increases as more information is added to the initial block. The block then gets confirmed and given a permanent place on the blockchain and is followed by more blocks. Confirmation, in this case, refers to when the transaction has been received by the blockchain and cannot be reversed. These ‘confirmations’ help users know that their transactions on the network have been permanently secured. As such, confirmations are vital as they are a way of verifying and legitimizing information that later becomes immutable.
If a transaction on the blockchain is deemed fraudulent, it is excluded from the blockchain. In a way, confirmations act as a measure of security. Every block that is added to the chain reduces the chances of the initial block being reversed and therefore, makes it more secure. Therefore, if anyone wishes to corrupt or reverse a transaction, they have to get through that block’s security by decrypting all its data. Additionally, they would have to decrypt the data of other blocks behind the previous block since they are all linked together in a chain. This is where blockchain gets its fraud-resistant feature of the immutability of its transactions.
WHAT IS A DEX?
A DEX is a decentralized P2P exchange. It allows people to place orders and trade digital currencies without the need of an intermediary. Since they are decentralized, they do not require the services of a third party to retain customer funds or store information. Instead, a DEX allows users to find one another and trade directly on the blockchain. It operates so through automated open-source software that facilitates exchange operations. Therefore, DEX platforms are usually crypto-to-crypto trading platforms with no support for fiat currencies. Every transaction is directly written onto the blockchain. A great example of a DEX platform is EtherDelta.
WHAT DOES HODL MEAN?
The term ‘hodl’ appears on most cryptocurrency Reddit threads, telegram groups, slack channels, and most popularly, memes. While crypto enthusiasts have an idea of what the term means, beginners tend to have a hard time understanding the meaning of hodl. The first time the term ‘hodl’ ever appeared online was on a Bitcoin talk forum in 2013 from a user named GameKyuumbi. The thread was under the term ‘I AM HODLING.’ From the look of the post, the user was drunk and wanted to convey the fact that he was holding his Bitcoins despite the fall in prices since.
Since then, the term became extremely popular in the cryptocurrency world. It became crypto slang for holding cryptocurrency believing that one day, the cryptocurrency will become profitable. The term ‘HODL’ initially started as a typo but has become a humorous acronym that means ‘Hold On for Dear Life.’ The idea behind it is never to let go of your coins in the hopes that one day, their value will significantly increase, giving the user significant profits.
WHAT IS A DAPP?
A DApp is short-hand for Decentralized Applications. These refer to applications that run on a decentralized P2P network of computers. A DApp is designed such that it doesn’t run on a single computer and is not controlled by any single entity. DApps are often associated with Ethereum and, therefore, rely on smart contracts to access the blockchain and execute transactions and provide services on it. This is the same way that centralized applications such as Facebook and Twitter depend on centralized servers to operate. Examples of successful DApps launched on Ethereum include Golem, Melonport, and Augur.
WHAT ARE PUBLIC/PRIVATE KEYS?
Both private and public keys are integral parts of encryption that ensure encrypted data remains protected during transmission from one party, network, or wallet to another. Both these keys contain two uniquely related cryptographic keys which appear as long, random numbers. They work in two encryption systems; symmetric and asymmetric. Symmetric encryption leverages the same key for encryption and decryption purposes. On the other hand, asymmetric encryption uses a pair of keys such as a private and public key to encrypt messages with the private key and to decrypt it with the public key.
A private key is a secret key that decrypts encrypted information and remains solely confidential to the key owner. On the other hand, the public key is the key that converts the information into an unreadable format. Both keys are mathematically related. What is encrypted by the public key can only be decrypted by its corresponding private key, and vice versa. For this reason, public keys are freely shared, allowing users a convenient method of encrypting content. Private keys are kept secret, allowing owners to create digital signatures and decrypt the content while remaining anonymous.
WHAT ARE ADDRESSES AND WALLETS?
A Bitcoin address and a Bitcoin wallet may sound like the same thing but they are not the same. The address represents the public key of the asymmetric key pair. The address is the public key to which crypto tokens can be sent. It’s reasonably similar to having a bank account number. The wallet, on the other hand, resembles the bank account itself. It contains the pair of public and private keys. The owner of the wallet uses the private key to access and sign transactions to prove ownership of the wallet and all its contents. Therefore, if you have a physical wallet, you have both keys, and you are the sole owner of any assets contained in the wallet.
Now that we know what wallets, addresses, and keys are, it would be useful to take a deeper look into some of the different types of wallets out there.
DIFFERENT TYPES OF WALLETS
Hardware wallets are hardware devices specifically built to store private and public keys. They resemble USB drives but with OLED screens and side buttons for easy navigation. They are usually offline but can be connected to a PC or mobile device for establishing an online connection. Once plugged into a device, they can be used to send and receive cryptocurrencies and digital assets. They typically cost between $70 and $150. However, they are worth it when you consider the fact that they come with built-in security firewalls and can support more than 22 cryptocurrencies. Famous examples of hardware wallets include Trezor and the Ledger Nano S.
Paper wallets are another safe way of storing cryptocurrencies offline. They can best be described as physical copies of public and private keys. Typically, you print your private keys and public address on a piece of paper and transfer cryptos to that address. Withdrawing or sending cryptos is as easy as scanning the QR code on the paper wallet. Even though not all cryptocurrencies offer paper wallets, these wallets are a reliable, low-tech way of securing your crypto assets.
Desktop wallets are installable software packs available for most desktop operating systems such as Windows, Mac, and Linux. Many desktop wallets are provided by crypto projects themselves and can be downloaded and launched from the project home page. There are currently many desktop wallets available for popular cryptos that offer an alternative to storing crypto on exchanges. Although these wallets go online once the desktop is online, they can still be used as offline storage when the laptop is offline. Popular examples include Electrum, Bitcoin Core, Jaxx, and Exodus, among others. They are essentially a service that can be used to generate legitimate keys and addresses for certain cryptocurrencies and instead of sending your tokens to an address generated by an exchange, you send them to the address generated by the desktop wallet and then store your assets in that wallet. You can send and receive assets to and from the wallet just as you can from an exchange using Send and Receive buttons built into the desktop wallet UI.
These wallets are typically referred to as hot wallets. They are always connected to the internet and can be accessed via your browser. Private keys to these wallets are always held online. When it comes to matters of security, they are the least secure type of wallet as they are prone to DDOS attacks. Therefore, it is recommended that you do not store the bulk of your crypto in these wallets. These wallets are generally used for executing frequent but small crypto transfers. Famous examples include MyEtherWallet, CEX.io, Coinbase, and MetaMask.
Hot Wallets Vs Cold Wallets
The principal difference between a cold wallet and a hot wallet is whether or not the wallet is connected to the internet. A cold wallet is typically a wallet that’s kept offline for higher security. Most people use them for cold storage. They are comparable to real-life vaults as opposed to the daily wallet you carry in your pocket. Hot wallets, on the other hand, are wallets that are connected to the internet. They are riskier and less secure compared to cold wallets. People often use both kinds of wallets – they use cold wallets for long-term holding and hot wallets for day-to-day transactions.
The term ‘multisig’ is often used in place of multi-signature. Therefore, multisig wallets refer to crypto wallets that require the input of several parties to complete a transaction. They resemble shared bank accounts whereby all parties registered as owners or signatories to the account have to enter their PIN for a transaction to be approved executed. Multisig wallets are ideal for family holdings of crypto or for use in a business environment.
What Exactly is Cold Storage?
Cold storage is a term that refers to storing cryptos in an offline wallet. Through cold storage, cryptos are kept away from the internet. This is a measure used to protect your digital assets from cyber-attacks, unauthorized access, or any other vulnerability associated with a system that’s online. The most common form of cold storage is the use of a paper wallet. Hardware wallets are also an example of cold storage. An offline software wallet splits the wallet into two platforms – the online platform and the offline platform. The offline platform contains the private keys while the online platform stores the public keys.
The way it works is that the online platform generates new and unsigned transactions and projects the user’s address to the receiver or sender on the other end. The unsigned transaction is then communicated to the offline platform and signed with a private key. The now signed transaction is then reported back to the online platform and then broadcast to the network. Since the offline wallet remains offline all the time, its private keys remain secure and away from unauthorized reach.