If you’re interested in using virtual coins like Bitcoin, Ethereum, Litecoin or any other out the over 1,500 coins and tokens currently available on the market, you’re going to need a wallet. If you are new to cryptos, this guide is your shortcut to understanding what a cryptocurrency wallet is, how they work and which one suits you best.
Cryptocurrency wallet or just a wallet is a software program that gives you access to all cryptocurrencies in your possession and allows you to manage your holdings, store, receive and send coins.
Some wallets are designed to hold only one type of coins, while others support multiple coins, which is very handy if you don’t want to limit yourself to a single asset. Some wallets have other features, such as checking live exchange rates to your fiat currency of choice.
A cryptocurrency wallet is fundamentally different from a standard “pocket” wallet as there are no coins there at all. Actually, digital coins are not stored anywhere at all as they don’t physically exist. Instead, we have records of transactions stored on a blockchain, and cryptocurrency wallet can interact with and analyze those blockchains to let you perform operations with your assets. It looks more like an Internet banking with a digital key.
Every crypto wallet has a public and a private key.
A public key is another crypto misnomer, as it is not a key but a wallet address. It’s like a bank account number that other people use to send coins to your wallet.
A private key is your digital signature and a PIN code to your crypto locket combined. It is used to access the wallet and manage the funds tied to it.
A private key is a string of letters and digits randomly generated and encrypted in the format supported by your wallet. You don’t have to go deep into technical details of how your private key was created, make sure that it is kept in a secret and secure place. Anyone who gets your private key will be able to open your wallet and take your money. Furthermore, if you lose or forget your key, you will lose your money. Forever. No matter what. No key, no money. Bear it in mind and be careful with your keys.
Technically, when someone sends youг Bitcoin or any other type of virtual currency, they assign the ownership of the coins to your wallet address. So the exchange boils down to a record on the blockchain and change of balance in a couple of cryptocurrency wallets. There is no actual exchange of coins as those coins also exist only in a digital form.
Types of cryptocurrency wallets
There are five broad types of cryptocurrency wallets. Each comes with its benefits and drawbacks and provide a different level of security. Here they are a desktop, mobile, online, hardware and paper wallets.
Any wallet is just a way to store a combination of your public address and a private key, but various companies developed multiple software solutions to improve user experience and provide additional features that serve particular purposes.
1) Desktop wallets
Desktop wallets are software programs that you download and install on a computer or a laptop. They are easy to install and available for all operating systems though some of them can be used only on a particular OS. Most desktop wallets provide you with a mnemonic phrase upon installation. It’s a long string of words that store information required for wallet recovery. You will need it to get access to your wallet if it is re-installed. So it’s vital to keep the mnemonic phrase in a safe place, far from prying eyes.
Benefits: Desktop wallets offer a high level of security as they are accessible only from the computer on which they are installed. Your wallet security is your responsibility. You don’t have to rely on other people to protect your wallet from external threats. Also, desktop wallets usually have rich functionality and offer additional tools and features. Most cryptocurrencies have a desktop wallet created for their coin.
Drawbacks: Since your computer or laptop is connected to the Internet, your and your digital assets may fall victim to viruses and malware. If your computer is hacked or gets a virus, you may lose your virtual money. So antivirus, anti-malware software and a good firewall is a must if you want to keep your coins safe and sound.
Examples of desktop wallets: Exodus, Copay
2) Mobile wallets
Mobile wallets run as an app on a smartphone or a tablet and are very similar to their desktop siblings with additional features such as QR code scanner. They are the most frequently used type of wallets, which is hardly surprising as nowadays people like to do things on the go, be able to check their crypto balances, send and receive coins anytime, anywhere. All major cryptocurrencies have mobile wallets both for iOS and Android devices, though less popular ones may have only Android versions.
Benefits: Mobile wallets are very practical. You can easily use it in a retail store to pay or send coins. They are smaller and faster, tooled for being used on the fly.
Drawbacks: Mobile wallets have only basic functionality due to limited space and capacity of a mobile device. What’s more important, an overwhelming majority of crypto wallets are vulnerable to cyber threats, viruses, and malware as they are always connected to the Internet and have weaker cryptographic security features. You also have to be extra careful about protecting your device as anyone who gets access to your phone or tablet with a crypto wallet on it, will be able to take your money away.
Examples of mobile wallets: Coinomi, Jaxx
3) Online wallets
Online cryptocurrency wallets live in a cloud and can be accessed via web-browser from any Internet-enabled computer or mobile device. They combine the functionality of desktop wallets and accessibility of mobile ones, which makes them very appealing.
Benefits: Online wallets offer faster transactions as there is no need to wait for the app to connect to the server. Many of them are integrated with cryptocurrencies exchange or allow to transfer amounts between supported coins. They can be very handy if you treat them like a digital piggy-bank for small amounts.
Examples of online wallets: MyEtherWallet, metalmask
4) Hardware wallets
Hardware wallets are fundamentally different from all the other types of wallets discussed above. They store your private keys on a separate offline device, like USB. If you need to send money, just plug the device in a computer with an Internet connection, make a transaction and disconnect the wallet. Some models have LED screens, which means that you can get one without a computer at all. Popular hardware wallets allow you to store over 22 cryptocurrencies and hundreds of ERC-20 tokens. They are the best option for saving large sums of cryptocurrency that you keep as a long-term investment and don’t plan to move around too often.
Benefits: Hardware wallets focus on security. They offer the highest level of protection against cyber threats because they only make transactions online, but the keys are stored offline. You won’t lose your money as long as you make sure that you don’t lose the device itself.
Drawbacks: Hardware wallets are less user-friendly They are usually compatible with several web-interfaces, but their functionality pales in comparison to software wallets. Hardware devices cost about $70-$150 and often sold out in a split second, so if you might find it difficult to get one for yourself.
Examples of hardware wallets: Leger, Keepkey
5) Paper wallets
Paper wallets are an early prototype of a hardware wallet. You create it via dedicated service, print your private keys and public addresses on a piece of paper- either as a string of letters and digits or as a QR-code – and start transferring coins from your software wallet to this one. If you need to spend some coins, you need to move funds from your paper wallet to your software wallet. This process often called ‘sweeping.’
Benefits: It is cheap and secure at the same time. Strange as it may seem, they are considered to be one of the most hacker-proof types of a wallet as they are not stored on a computer or any other Internet-connected device.
Drawbacks: Paper wallets are not for newbies. You need some technical knowledge, patience and a high level of caution to create and use it afterwards. Paper is not very durable material, so you have to take extra care to keep your wallet from fire, water, and a shredder.
Examples of paper wallets: ethaddress Wallet, WalletGenerator
Cryptocurrency wallets can be hot or cold, depending on whether or not they are connected to the Internet.
Hot wallets are always online, which makes them less secure but more agile, fast, and user-friendly. They give you instant access to your digital assets, wherever you are as long as you have a device connected to the Internet. But this comfort comes at a cost: they are intrinsically insecure and vulnerable to theft due to constant Internet access. Sometimes you don’t even control the security of your wallet, as it depends on the practices of your wallet service provider. Hot wallets are like a leather purse: it’s perfect for petty cash to cover your everyday expenses, but you won’t put all your savings in there. It’s an ideal solution for keeping small amounts of cryptocurrency that you want to have at hand at any time.
Cold wallets are interned-disabled physical devices with robust security and improved anti-theft protection. You plug them into a computer when you need to make a transaction and then take to back to the safety of the offline world. They are pretty much hacker-proof, you just need to make sure that it is not stolen, destroyed or wrecked. Cold wallets are cryptocurrency alternative of a vault or a safe deposit box where you keep your long-term holdings. They are best used for storing large amounts of cryptocurrency that you don’t intend to spend in the nearest future.
How to protect your wallet?
While some wallets are more secure than the others by their nature, users shall always take precautions and be careful while working with a wallet. Complacency and negligence may cost you dearly.
Diversify. Keep small amounts for routine expenses at hand in a hot wallet, online or on mobile and store the bulk of you cryptocurrency holdings in a secure place in a clod wallet as far away from the Internet as possible. Hardware or paper wallet will protect your money from hackers, malware, and viruses and allow you to recover data if your computer or mobile device dies.
Keep a backup. Making a backup of your wallet is a good practice, that will help you to regain access if something happens to your computer. It is better done on an offline device, such as a USB drive as online storage can be hacked or compromised. Also keep hard copies of your mnemonic phrases, passwords, usernames and other access data just in case.
Keep up with updates. Make sure that your wallet software is up to date as developers often release security enhancements to protect your wallet from new threats.
Use the best security practices. The safety of your money is solely your responsibility, so try to add additional layers of security to your crypto wallet. Start with a strong password on all the devices you have a wallet software installed. Choose wallet service providers with strong security policies like two-factor authentication and pin code request at every time a wallet application is opened.
The 7 Best Bitcoin Wallets of 2019
- Best Overall: Coinbase. Courtesy of Coinbase. …
- Best for Security: Trezor. Courtesy of Trezor. …
- Best for Desktop: Electrum. Courtesy of Electrum. …
- Best Online: Blockchain.info. Courtesy of Blockchain.info. …
- Best for Free Buying and Selling: Robinhood. Robinhood. …
- Best for Intuitive Desktop Use: Exodus. …
- Best for Mobile: Mycelium.
BY DEDE ELORM ADJANKE
BUSINESS DEVELOPMENT TEAM LEADER