Cryptocurrency: Withdrawals, wallets and deposits
This is our fourth instalment of crypto basics. In this series, you'll learn about what crypto is, how it comes to the world, and the types of altcoins available today.
If you've followed our crypto basics series closely, you should be a budding cryptonaut by now. You know all about what a cryptocurrency is, how it works, and all the different types of coins that are available. This time, we’re going to be talking about moving and storing crypto, and why you might do that.
But first, a reminder
While we believe that crypto should be accessible to all, we also know that crypto trading isn’t for everyone. The prices of crypto can be very volatile, which means there are always going to be risks involved when buying or selling crypto. Past performance isn't an indicator of future performance, and cryptocurrencies are unregulated. Your capital is at risk, so please consider your personal circumstances and do plenty of research before getting involved.
Now, let's continue with the regular programming.
Storing and withdrawing cryptocurrency
Most of us are likely to be getting exposure to cryptocurrencies through exchanges; platforms which facilitate the purchase or sale of crypto. You may have seen articles in the news discussing crypto lost to hackers or passwords going missing. Stories like this have caused lots of people to think carefully about how and where they want to store their crypto.
Once you’ve bought your crypto you can choose to keep it on your exchange, or withdraw it to a wallet or what we call 'cold storage'. Just like with a traditional currency, a withdrawal is a transaction that allows you to move your cryptocurrency balance off one platform to a destination of your choice, for example an external crypto wallet that you control.
Holding tokens in a crypto wallet
A crypto wallet is essentially just a keychain of public / private key pairs. The public keys are used to create public addresses that act like an IBAN does for a bank account. When a user wants to perform a crypto transfer, they specify one of these public addresses as the destination of the transfer.
Let’s break that down a little more.
Public / private key pairs
A public key is like an “account number” that you use to receive Bitcoin. This “account number” is very long, so it’s transformed into a shorter version known as a Bitcoin address, both for security reasons and for ease of use. A public key is created by using your private key using some cool mathematics. It’s impossible to reverse engineer a private key from a public key because of the way those calculations work. A private key acts like a password for your public key (account number) and also acts like a proof of ownership for funds stored at a certain address.
Let’s take a look at an example address that you might send your crypto to. A Bitcoin address is an identifier of 27-34 alphanumeric characters, beginning with the number 1, 3 or bc1, that represents a possible destination for a bitcoin payment. It is essentially (some simplification here) a SHA 256 hash of the public key. An example Bitcoin address looks as follows:
Hot wallets and cold storage
Hot wallets are connected to the internet and can be accessed very quickly, useful if you want to know that you can get to your crypto at any time. As with anything connected to the internet, this does slightly increase the risk of a hack. If you prefer a more secure solution, cold storage is available which basically ensures that your private keys never touch the internet. There are various forms of cold storage, including hardware wallets, where your private keys are stored on a secure element on a thumbdrive. You could take it one step further with paper wallets, where the private key is printed on paper and usually stored in a bank vault.
It’s all about your needs. Some people are using crypto on a daily basis, and creating transactions often, so a hot wallet is a convenient way to create these transactions without losing time. However, if you’re a HODLr (someone who’s looking to Hold On for Dear Life to their crypto through good times and bad) then cold storage may be an interesting solution for you to “set it and forget it”. You should carefully consider what solution works best for you taking into consideration your own needs, financial circumstances and appetite towards risk.
It’s not a one way street, though. Just as you can take your crypto off an exchange, you can also put it back on. Depositing crypto into an exchange means you’re handing over the custody of your funds to the exchange and they handle security on your behalf. You might feel as though this is an easier option than managing your own crypto security, or you might be preparing to sell. You always have the option to take your crypto where you feel most comfortable at any time.
This article doesn't aim to provide financial advice. Please do your own research before committing to a purchase or sale. Nomics will give you updated data on all of our tokens. If you're unsure, please consult an independent financial advisor.
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