A basic understanding of Public Key Cryptography (aka Asymmetric Cryptography) is helpful to making sense of blockchain and cryptocurrencies. Public Key Infrastructure (PKI) introduces the concepts of public/private key pairs, hashing functions, and encryption.
Crypto assets are represented by cryptographic public/private key pairs. A private key is a string of characters that should be kept a secret. Knowledge of the secret effectively transfers ownership of the asset. Hence protecting a crypto asset comes down to protecting its private key. The corresponding public key is used for transactions without assuming information protection.
Simplistically, when you first buy a crypto asset online on an exchange (e.g. Coinbase), a private key is assigned to you to represent your asset ownership. The private key is controlled by the exchange until you take full ownership of it by transferring it to a crypto wallet off the exchange. If the exchange is hacked, your private key can be compromised or lost without recourse.
You can think of protecting your crypto assets using two types of crypto wallets – a software wallet, such as an app on a smartphone or desktop PC; or a hardware wallet. A software wallet holds your private key in software, which is subject to hacking. A hardware wallet binds your private key to a cryptographic root of trust within a physical chip, making it nearly impossible to steal by hacking.
When you are first starting out with crypto assets you might initially decide to use software wallets for their ease of use. However, when you invest the time to learn how to use hardware wallets, you’d find they are not much more difficult to use, but provide superior protection. A simple analogy might be to think of your software wallet as a checking account, and your hardware wallet as a savings account.
Setting up a hardware wallet for the first time does take some effort. However if you are considering significant allocation of investment capital to crypto assets, you are likely to end up deciding to use hardware wallets. The sooner you start learning about hardware wallets the better!
