No wallet-No cryptocurrency
To buy cryptocurrencies like Litecoin or Peercoin, you must first obtain a digital wallet from online brokers or crypto exchanges or by purchasing a hardware wallet.
Your wallet holds your private key, which is your personal key, rather than storing the Bitcoins & Co themselves. This can be a string of numbers and letters or a QR code. The user’s private key is the user’s PIN, so to speak, for all crypto businesses. Like users’ PINs, the user should never give out the user’s private key.
Verifying cryptocurrency transactions within a wallet
Your public key is generated based on the private key, i.e., your public key. Other users can send cryptocurrencies to this public key – just like conventional transfers to the IBAN from your current account. But to finish business, it must be authenticated with the private key. This is precisely what happens in your wallet.
This means that anyone who has your private key could buy or sell cryptocurrencies on your behalf. Therefore, it is essential for cryptocurrencies that you secure your private key as well as possible. This is where the different wallets come into play.
Even if you protect your private key well, any cryptocurrency investment is hazardous: cryptocurrencies are entirely unregulated, and their value fluctuates wildly.
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Hot or cold?
When you register with a crypto exchange or an online broker with a crypto offer, you usually automatically receive a wallet. These purely digital wallets are also called hot wallets. You are always connected to the Internet. So you can buy or sell cryptos quickly and conveniently on your smartphone. However, the internet connection also makes digital wallets vulnerable to cyber attacks.
With hot wallets, ensure your private key is not with the provider but with yourself. Otherwise, you will lose all access to your cryptocurrencies, for example, if there is a problem with the stock exchange.
Alternatively, there are the so-called hardware or cold wallets. Hardware wallets often look like USB sticks. This is a different device that you only connect to the Internet at the time of the transaction.
Since hardware wallets are not always online, they are relatively safe from cyber attacks. In return, you must always have your hardware at hand if you want to make a transaction.
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How to use a hardware wallet
When you receive your hardware wallet, be sure to check that the packaging is sealed correctly. This is the only way you can be sure that nobody has previously tampered with the device to gain access later.
Setting everything up usually requires a program or app from the provider that guides you through the process. Hardware wallets can only do with the Internet right from the start.
When everything is set up, and you want to confirm your first transaction, you can either press certain buttons on the device or navigate through the menu on a touchscreen, depending on the model. It is usually done with just a few clicks.
Recovery Seed: In case of loss
During installation, the wallet generates a private key and an English phrase with up to 24 words. By utilizing the Recovery Seed, also commonly referred to as the recovery phase, you can access your cryptocurrencies if your wallet becomes damaged or misplaced.
Therefore, you must write down your recovery seed and keep it safe, preferably isolated from your hardware wallet. Ideally, you don’t write down the source on paper but in a password manager. Namely, if someone gets their hands on this phrase, they can take control of your cryptocurrencies.
Hardware wallets are, therefore, well protected against cyber attacks, but if the hardware itself is lost, things can become problematic.
Good to know
At the latest, in November 2022, the collapse of the multi-billion dollar crypto exchange FTX showed how insecure cryptocurrencies can be, especially for investors who rely solely on an exchange.
Hardware wallet costs
In contrast to the primarily free hot wallets, you have to pay for the additional care of a hardware wallet. The cheapest hardware wallets start at around 60 euros. Depending on which functions you want to use, there are more expensive variants, for example, with a color touchscreen or more storage space.
There may also be costs to secure your recovery seed: Some providers of hardware wallets sell a fireproof protective cover or a metal card as a storage medium for an additional charge.
What else should you consider when buying
Aside from price and features, hardware wallets can also differ in which cryptocurrencies they support. After all, there are already more than 20,000 of them – and the trend is rising.
Prior research is essential, particularly if you have a particular new crypto in mind. This is due to the fact that wallets may take some time to support it. Therefore, it is essential to conduct preliminary investigations to ensure that the wallet you plan to use will help your preferred cryptocurrency. However, if you use commonly used cryptocurrencies like Bitcoin, Ethereum, or Litecoin, any hardware wallet should suffice for your needs.
For whom is a hardware wallet worthwhile?
Hardware wallets protect your private key against cyber attacks by not staying constantly wired up to the Internet. In case of device loss, you can use your Recovery Seed to regain access to your Peercoin or others. Consider hardware wallets to keep your Litecoin and others safe longer. However, you need to ensure the device’s safety (and, ideally, the digital note containing the recovery seed) and refrain from conducting transactions solely through your smartphone.