Register for Scaling New Heights to continue your accounting industry education.
 

Cryptocurrency: What Are Wallets and Keys?

Cathy Roth
Posted by Cathy Roth on Sep 21, 2021 2:27:05 PM

Cryptocurrency doesn't have any physical attributes that you can wrap your hands around - a fact that has long been an intellectual stumbling block for me. Instead, cryptocurrency is simply a digital asset and cryptocurrency transactions are the movement of those digital assets.

With traditional purchases and traditional money, many of us use debit/credit cards almost exclusively. This means we also aren't usually wrapping our hands around cash and instead rely on banking institutions to manage it for us. But there is still that piece of plastic that provides a tangible connection to the money that is "in your account", which you intuitively understand is based on those green pieces of paper.

With cryptocurrency, you have to completely accept the fact that there is nothing physical about it. Cryptocurrency is a digital asset and cryptocurrency transactions are merely nothing other than the movement of data on the internet. 

Once I finally understood what cryptocurrency is, I was ready to move on to learning the tools that are used to own, give, receive, and trade cryptocurrency. 

What is a cryptocurrency wallet?

To me, nothing smells as good as a high-quality leather wallet. Equating a crypto wallet with my favorite leather wallet allowed me to finally begin associating cryptocurrency with "money." Of course, you really don't keep your cryptocurrency in your cryptocurrency wallet. Let me explain.

At its most basic, a crypto wallet allows you to interact with the decentralized ledger. There are different types of cryptocurrency wallets - hardware, software and paper wallets - which can be even further differentiated. Although different types of wallets are best used for different types of transactions, they all come back to one fundamental purpose. They allow you to make transactions, i.e., store and retrieve cryptocurrency "keys" (more about that below).

A cryptocurrency wallet should be looked at in two ways. First, the wallet is a tool that generates the information needed to send and receive cryptocurrency. Second, the wallet provides a single, secure location to store your cryptocurrencies. Keep in mind, just like with "real" money, it isn't necessary to have a wallet; however, there are strong benefits to having one.

What are keys? 

In an earlier article about understanding cryptocurrency, we talked about how blockchain is the secure way of organizing the decentralized ledger where transactions are recorded as blocks. Each block contains information about the transaction including the parties, amount, timestamp of the transaction, and the unique transaction identifier. 

So, here is the big question. How does cryptocurrency transaction information get sent to or received by the correct person or entity? By keys. There are two types of keys - public keys and private keys.

The public key is used to receive cryptocurrency. It is an alphanumeric string of characters that allows people to find you to send cryptocurrency to you. The public key does NOT allow anyone to access your cryptocurrency assets. Many people call their public key their cryptocurrency address.

The private key is a longer alphanumeric string (64 characters) with strong encryption. There is only one private key for an address and it is completely unique. Keep in mind, anyone with access to your private key also has access to your assets. 

One of the resources I've found (aptly titled Cryptocurrency for Dummies and authored by Romj Amon) explains it like this. "Cryptocurrency and blockchain are inseparable. So when you buy cryptos, you can’t really take them with you. So, how does cryptocurrency work if it doesn’t leave the blockchainIt’s all about private key custody. As long as you control and secure the private keys to your crypto assets, nobody could steal your funds."

Topics: Finger on the Pulse

Do you have questions about this article? Email us and let us know > info@woodard.com

Comments:

Most Recent