You want to venture into the world of cryptocurrency or simply diversify your investment portfolio by converting a portion of your capital into this new type of asset but don’t know where to begin? Well, first you need to know what a cryptocurrency wallet really is.
What is a Cryptocurrency Wallet?
In simple terms, a cryptocurrency wallet is an app that allows you to interact with the corresponding blockchain to send and receive cryptocurrency such as bitcoin as well as monitor its balance.
There are different types of wallets, each suited for a different purpose and with varying levels of security and features. In this post, we will cover them, including some advantages and disadvantages of each. But before we delve into crypto wallets, there are a few things you need to know.
Cryptocurrency Wallet Terminology Explained
Private and Public Keys
A cryptocurrency wallet contains a collection of key pairs, each consisting of a private key and a public key. The private key is simply a randomly picked number and allows you to unlock and move your cryptocurrency, which is why it is important that it’s kept secure. The public key is derived from the private key and enables you to generate wallet addresses to receive funds.
Don't store crypto-currencies on custodial accounts (eg exchanges). Your keys, your coin. Not your keys, not your coins. How many times?— Andreas M. Antonopoulos (@aantonop) April 15, 2016
If you lose your private key, you lose your cryptocurrency. This is why choosing the correct cryptocurrency wallet is crucial at it determines how your private keys are stored.
Hot and Cold Storage
In the context of Bitcoin and other cryptocurrencies there are two types of wallets — hot and cold. A cold wallet is created and kept off the internet for maximum safety while a hot wallet is connected to the internet and may be susceptible to online cyberattacks.
There are wallets that can hold only one type of cryptocurrency, while others allow you to manage multiple digital assets. Also, wallets that allow for third-party integrations let you convert one crytocurrency into another, without moving your investment onto an exchange.
A multisig or “multisignature” cryptocurrency wallet refers to a software or web wallet that requires to be signed with private keys from multiple parties before a transaction can be performed. Think of it like a crypto joint account shared by two or more individuals that requires every members’ private key to move funds from the wallet.
Different Types of Cryptocurrency Wallets
Cryptocurrency wallets offer different ways of storing and accessing your bitcoin and other cryptocoin assets and can be grouped into four main types:
- Software wallets (desktop, mobile)
- Web wallets
- Hardware wallets
- Paper wallets
Desktop wallets can be downloaded and installed as an application on a desktop or laptop computer, providing a central point of access to your cryptocurrency stash. As the private keys are stored on the computer and not managed by a third party, you have full control and responsibility over your investment. Desktop wallets can be a safe storage solution if you keep your computer off the internet, however, security may be compromised if you keep your PC online, since computers are susceptible to malware like viruses, spyware and adware. You, therefore, stand to lose the cryptocurrency stored in the desktop wallet if hackers gain access to your computer or should it be infected by malware.
Mobile wallets are smartphone apps that act as cryptocurrency wallets and store your cryptocurrency investment on your mobile so you have access to it while being on the move. It not only allows you to send, receive and check your cryptocoins’ balances but also pay for goods and services in physical stores that accept cryptocurrency effortlessly. All you have to do is to download an app from the relevant app stores and set it up. While mobile wallets offer great convenience e.g. instead of copy-pasting wallet addresses, you can scan the corresponding QR codes using your phone’s camera, the greatest downside to them is that if you don’t use backups, you risk losing your assets if your phone breaks or disappears. Also, they are prone to malware.
Can you trust an online company to hold your cryptocurrency investment on your behalf? Several cryptocurrency exchanges and brokers offer this service with the perks of it including the ability to access these coins from any device over the internet. Some will even offer mobile and desktop apps linking your devices to their servers for even greater convenience when completing cryptocurrency transactions. The downside to this, however, is that since this service is offered in the cloud, web wallets are particularly targeted by hackers as they aim to gain access to your cryptocurrency investment. Be careful before settling on a specific online wallet – they are notorious for being hacked and require additional layers of security.
Just as the name suggests, these are small hardware devices specifically built to maintain the private keys and public address information about your cryptocoins. To beginners, they probably look like cumbersome USB-sticks, however, these devices are fitted with a screen interface, some buttons and come with special software applications that allow for a seamless connection to your computer. Hardware wallets make up for a great combination of security and convenience, since they generally store your digital assets cold, meaning off the internet, while offering the possibility to be plugged into any internet connected device and complete transactions easily. We do not recommend to buy such devices via platforms like ebay but from a trusted dealer or, to be on the safe side, directly from the manufacturer, since there have been reports of cryptocurrency theft caused by manipulated devices.
A paper wallet is literally a physical copy of your generated public and private keys, and can refer to an actual printed piece of paper. Paper wallets are considered among the safest methods for storing cryptocurrency off the internet. You can send or receive cryptocurrency by physically entering your private keys or by scanning the QR code that is usually included in the paper wallet print.
TLDR; What’s the Best Cryptocurrency Wallet?
Whichever one you pick is a matter of personal preference but before settling down on any of them, you should have a broad idea of how you intend to use your wallet.
- You can achieve this by asking yourself questions like:
- Do I need to access my cryptocurrency frequently?
- Do I need access to my wallet on the move or just at home?
- Do I need to store multiple digital assets or, for example, just bitcoins?
After you have made up your mind to assess your requirements, you can go about deciding which wallet suits you best, however, your choice of a cryptocurrency wallet ultimately ties with the reason for embracing digital currencies.
For instance, if you are investment motivated, you might want to consider settling with the more secure and long-term storage options like the hardware wallet. If, on the other hand, you hope to engage in crypto-related transactions often, go for storage options that allow for easy access to your currency, such as a desktop or mobile wallets.
Generally, there is no single right way to store your cryptocurrency reserve and that you can use a combination of multiple storage options to achieve your desired custody strategy. Regardless of the wallet you choose, backup your information regularly, make use of available security layers and always keep your wallet software up to date.