How to set up a Wallet

Cryptocurrency is stored in wallets, just like you store cash, (sort of).

Cryptocurrency, like Bitcoin and Ethereum, is stored in a wallet. You may have dollars, pounds or Euros, (“Fiat” currency), in wallets as well. Fiat wallets store banknotes and coins. Crypto wallets store keys.

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In most cases, a crypto wallet stores one type of crypto. You may have a Bitcoin wallet, an Ethereum wallet, a Cardano wallet. Each holds its specific type of cryptocurrency. There are multi-currency wallets but we will skip those for now. There are also “local” wallets that you maintain yourself and “exchange” wallets which act like a bank.

Note that some cryptocurrencies, like Ethereum and Cardano, have associated tokens that are tracked in the main wallet. In a way, this is like having a master wallet of “Dollars” that might contain US, Australian, New Zealand and Canadian funds, except that tokens are tightly linked to the main crypto. More on them later.

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While a fiat wallet might contain a $20 bill, or a £5 note, or a C$50 bill, a crypto wallet is electronic only. There are no physical units in the cryptocurrency wallets. Instead, a crypto wallet is a computer file. Among other items, the crypto wallet holds the wallet address and the private key.

Wallet Address Example: 1GGVL1XfbCpC7gr1hJGnhT2SLFC5o65nzi

Anyone can see a wallet, and its contents, if they have the wallet address. In the example above, you can see that the wallet has been involved in 651 transactions and has a final balance of 20.44 Bitcoin. (Or it did on January 1, 2020. It may have changed since.)

A wallet, such as the above, represents a ledger. The actual balance in the wallet is stored in the Bitcoin blockchain in a series of transactions. This might look like:

July 6, 2020 +0.0995
July 7, 2020 +0.008

… 648+ transactions

January 1, 2021 -0.005

The value of the wallet is the simple sum of all credits, less the debits. In the above case, the final balance is in excess of 20.44 Bitcoin.

While we are able to see the credits and debits of the wallet, we have no control of the wallet. We don't know who owns the wallet. We don't know where the wallet was created in the world. Most importantly, we don't have the ability to spend the wallet contents because we don't know the key, (the password), of the wallet.

The owner of the wallet is the only person who can spend the contents of the wallet. Presuming that they know the key, (and no one else knows it), they can spend the Bitcoin amount, or a portion. Spending is accomplished by sending a quantity of Bitcoin equal to, or lower, than the current balance of the wallet. Spending is only possible by someone who can enter the wallet's key. The key is a long binary number which can't be guessed because it contains security provisions.

A wallet key might be expressed as a long value like:

E9873D79C6D87DC0FB6A5778633389_SAMPLE_PRIVATE_KEY_DO_NOT_IMPORT_FFC233AA33262

If even a single character is changed in the key, it will not be valid and will not allow access to a real wallet.

Extreme caution must be observed by anyone who owns the key to a cryptocurrency wallet. First, if your key is ever found by anyone, they can have complete access to your crypto balance. This might happen if the wallet key is written on paper and found by someone.

Second, if the key is lost by the wallet owner, the crypto balance is lost and cannot be recovered. The key is designed to be extremely difficult to be guessed, or hacked. It contain security provisions such as encoding the creation date, and other unique items. It cannot be emphasized enough that a lost key means a lost wallet, and therefore lost crypto. It is estimated that up to 20% of the current number of Bitcoin, some 3.5 million units, have been lost, according to this article.

Third, if you send wallet contents to another wallet, it is completely your responsibility to ensure that you are sending to the intended recipient. While this seems simple, mistakes can happen. Perhaps you send 0.1 Bitcoin to a person in a transaction. Later, you intend to send 0.005 Bitcoin to someone else, but you forget to change the destination address in your second transaction. Unfortunately, your action might result in the first recipient being credited with both transactions. You have no recourse in this case.

If you make a mistake with your wallet, you have absolutely no recourse. In the previous example, two transactions were inadvertently sent to the same recipient. As a result, the recipient has complete control of the value of both transactions. The sender cannot reverse a transaction. If a mistake was made, the only possible remedy is to plead with the unintended recipient to return the crypto in a new transaction. However, they are under no obligation to do so. Many cases like these have been resolved satisfactorily, buy many have not. The sender must always be aware of the intended recipient, and must take extreme steps to ensure that the transaction is sent to the correct wallet.

Wallets can be backed up by the actual owner. Backing up wallets is extremely advisable. Of course, the backup of the wallet must be protected. Anyone who can decipher a wallet backup can have access to the wallet key. With the key, as explained above, the person can control the wallet funds.

See: The difference between a personal wallet and an exchange wallet.