How Crypto Works

Crypto is different from equities because with equities you are buying a piece of a company but with crypto you can think of the token you buy as the “fee” to use the block chain which it operates. It’s a little bit confusing at the start but you’ll get it later on.

For now, each “crypto asset” operates on their own “blockchain” network. For example, if you want to send Bitcoin to someone else - you will use the Bitcoin blockchain and use your Bitcoin to pay the fee (done automatically).

It’s important to understand that you cannot send Ethereum on the Bitcoin blockchain because they are entirely different. You can only send certain assets on their own chain.

Next up is the concept of a wallet. A wallet is where your coins will be stored and consists of a username (called the wallet address) and the password (called the private key). Each blockchain will have its own separate wallet so you can’t send Ethereum to a Bitcoin wallet. It’s really important to understand this.

When it comes to your wallet, the address will be public and you can give that away but never give away your seed phrase. We will address the seed phrase when talking about hardware wallets since you won’t be dealing with on the exchange level.

Hot & Cold Wallets

When you want to take custody of your coins, which means that only you and only you (hopefully) will have control over the coins you have to move it to either a hot wallet or cold (hardware) wallet. 

As mentioned earlier, the wallet is where you store your coins on a particular blockchain. So a Bitcoin wallet will be different from an Ethereum wallet and an Ethereum wallet will be different from a Terra wallet. 

A wallet consists of an address which is comparable to a username and a private key which is comparable to a password. Anyone can see your wallet address but it’s the private key you need to protect.

The private key is usually a combination of a 12 or 24 letter word called the seed phrase which you need to protect and never share with anyone for any reason. When you set up a new wallet they will give you the seed phrase which you should write down on paper, make multiple copies and store it somewhere safe and accessible.

Places where you can store your seed phrase:

• A safe

• Bank safety deposit 

• An old phone that is never connected to the internet

• 1Password (somewhat risky)

• Split it in 2 parts and store at different people’s houses

• A metal plate

Place where you can’t store your seed phrase

• A picture in your phone

• Just lying around in your computer

• On the Cloud

• Somewhere you won’t find it later

• Anywhere the ink will fade over time

When you want to make a transaction from your wallet, be it send crypto, interact with a protocol or make a trade you will need to have the private key. On a hot wallet, the private key is stored on a computer that is connected to the internet but with a cold wallet the private key is stored in the wallet and you have to connect the wallet to your computer in order to interact with it.

So simply put: 

Hot wallet -> you can make a transaction directly from the wallet app

Cold wallet -> you need to connect your hardware wallet to your phone or computer to make the transaction

Hot wallets are not recommended for large amounts of money and can be hacked. Cold wallets are as safe as you keep the seed phrase and are very safe.