Cryptocurrency: Digital Wallets, Keys, and Security
Buying and selling items online has never been easier, thanks to cryptocurrency. A virtual form of payment, cryptocurrency promises efficient, safer, and more anonymous transactions. Like any internet activity, exchanging cryptocurrency can support your goals, or damper them—unless you’ve been properly debriefed first.
Encryption
For cryptocurrency, banks are out, and peer-to-peer systems are in. Each transaction you make will be recorded in a public ledger; transactions are simply entries in an online database. This might seem concerning for the privacy-focused user—wouldn’t publicizing transactions provide the opposite of anonymity? That’s where security plays a key role in the cryptocurrency realm: any transactions are encrypted to ensure the data cannot be evaluated without the proper permissions. How does this work? Cryptocurrency transactions utilize cryptography, a method of transmitting information that ensures only the sender and recipient can understand what has been communicated. First, cryptography technologies encrypt information by transforming it into hidden codes; then, the information is decrypted by the recipient, who can access the true, original information. Cryptocurrency incorporates encryption throughout the transactional process, from transmission to storage.
Digital Wallets
Cryptocurrency transactions are encrypted to protect users from hackers and other cyber criminals. But where is this virtual money kept when not in use? While cryptocurrency can be stored on the servers of online payment platforms like PayPal, users who prefer control over their coin may want to invest in a digital wallet. Digital wallets are software that act much like real wallets, except they house the encryption keys necessary to access your crypto funds. Though there are many popular digital wallets, some might be more useful for beginners, while others provide features that could appeal to the more advanced crypto holder. Additionally, certain wallets offer benefits for those who will use different types of devices, like desktops or mobile phones.
Crypto Keys
Once you’ve made the decision to invest in a digital wallet, you’ll receive a pair of keys: a public and private one. Your public key enables you to receive cryptocurrency. Because it is public, you can share this key online without fear; think of the public key as the address to your digital wallet. Instead of sending other users to a third-party to perform your transactions, they will be sent to the public key. Anyone who knows the public key can send their funds to it.
In order to unlock and access funds, you need to know the private key. While public keys encrypt a transaction, the private key decrypts it. No one else except you should know the private key. Otherwise, anyone could break into your accounts and steal your cryptocurrency. To verify your identity as the owner of the currency, you sign the transaction with the private key.
It’s important to note that these transactions occur on a blockchain—a virtual ledger that is copied to a network of computers, or nodes, which are owned by different users. The blockchain doesn’t have one single owner who approves transactions; it is run by each of the blockchain’s users. Each time a transaction occurs on the blockchain, every user on the network will receive a record of the transaction with a matching timestamp. Your transaction will need to be universally validated by the participants in that network. Otherwise, the transaction will be rejected. This decentralized validation system has also been referred to as a “proof of work” system.
Risky Business
Cryptocurrency might seem like the safest way to buy and sell items online. Layers of encryption offer security through codes that even the most advanced super computers could not break. Digital wallets and keys protect data from sophisticated data miners. But like any online activity, using cryptocurrency has its drawbacks. For instance, private keys act as complex passwords that only the key-holder knows. Yet, many users keep their passwords on their computers—perhaps in password databases or browser password managers. If a hacker gains access to your computer, they can easily steal your private key and retrieve your crypto funds.
As mentioned above, cryptocurrency flows on a peer-to-peer, decentralized system. While this offers transactional freedoms, it also means there is no standardized regulation for cryptocurrency exchanges. In other words, if your private key and cryptocurrency are stolen, you will likely have no method for retrieving them. You bear total responsibility of your cryptocurrency transactions—for good or ill.
