As you immerse yourself in the world of cryptocurrencies, it is important that you understand how to properly care for and store your tokens. This process also boils down to using cryptocurrency wallets.
Considering the many technical terms that exist around cryptocurrencies, it is natural for people to be confused by crypto wallets as well.
What are cryptocurrency wallets? Can you hold them? Where do they come from? What does a wallet for invisible money look like?
Luckily, we’re here to clear up the confusion and by the end of this article, you will know the basics of crypto wallets, their types, how to choose a crypto wallet, and how to use crypto wallets properly.
- What is a cryptocurrency wallet?
- What is the need of a cryptocurrency wallet?
- A brief history of crypto wallets
- Types of cryptocurrency wallets
- How to choose a cryptocurrency wallet
- Crypto wallet etiquette
- Wrapping up
- Frequently Asked Questions (FAQs)
What is a cryptocurrency wallet?
A cryptocurrency wallet is what you use to store your crypto coins.
However, as we all know, cryptocurrency is not an overly simple thing in itself. When you think of a wallet, your mind probably flashes to a leather accessory in your pocket or purse. But those are used for physically held paper money, coins and cards.
Now considering the fact that cryptocurrency can’t really be held physically, the definition of cryptocurrency wallet gets a bit more complicated.
A crypto wallet, technically speaking, is both your private keys and public address. A public address is the location on the blockchain in which the actual cryptocurrency is stored. From this location, tokens can be spent, transferred, and so on.
A wallet address usually looks like a bunch of random numbers and letters. Your private is a combination of characters through which the public address can be accessed. A crypto wallet cannot be said to be complete without the two because there is little point in having a place to store tokens if they can never be accessed.
Think of it as your email address; anyone who knows your address can send you an email, but emails can’t be sent from your address unless you know the password.
What is the need of a cryptocurrency wallet?
While cryptocurrency is not traditional money, it needs a place to ‘stay’ like any other valuable asset. A crypto wallet fulfills this need by giving users a place to securely store their cryptocurrency and retrieve at a later time, whether to spend or send it to someone else.
Besides, keeping cryptos safe can be hard work. According to a study conducted by blockchain analysis firm Chainalysis, around 4 million units of Bitcoin are believed to be lost forever. Think of all the worth they have now.
A brief history of crypto wallets
Cryptocurrency wallets emerged as the use of cryptocurrencies began growing in the late 2000s and early 2010s. The first wallet for Bitcoin was released in February 2009 by Satoshi Nakamoto, the pseudonymous creator of Bitcoin.
As Bitcoin entered the world, there grew the need to store tokens. However, the first wallet, dubbed the Bitcoin-QT wallet, was not very easy to use and had limited functionality. To run the wallet, the entire Bitcoin blockchain had to be downloaded and this, naturally, took up a lot of time and processing power.
Ethereum founder Vitalik Buterin stated in 2012: “Because it is a full node, the client must download the entire (currently 6 gigabytes) blockchain to operate, which can take up to a few days the first time you start the client and several minutes to an hour every time you start the client afterward, if you do not keep it running constantly.”
Thankfully, we don’t have to download several gigabytes of data to send tokens any more as wallets have become more advanced in their features.
In fact, some wallets are as easy to set up and operate as a mobile phone game (though there are no shiny animated gems to be won).
Types of cryptocurrency wallets
Now that you understand a bit about the basics and history of cryptocurrency wallets, it’s time to look at their types. Yep, even though a wallet is basically a combination of an address and a key combination, there are different ways through which they are stored and there are pros and cons to each.
1. Hardware wallets
A hardware wallet, true to the name, is a physically-held device that stores wallet addresses and keys. Hardware wallets usually look like USB devices and have an interface screen and buttons to navigate them.
Hardware wallets are also called cold wallets and this is because they are designed to store data offline. This means that most of the time, a hardware wallet will be disconnected from the internet and stored away like a handheld GameBoy from 1991.
How does hardware wallet work
When you get a hardware wallet, you choose both a PIN and a recovery phrase. The PIN helps you unlock the wallet and the recovery phrase acts as a backup for the private key and is the only one you will have.
Once this is set up, your wallet should then be connected to your computer via a cord and from there, you should log in to your account with the wallet manufacturer. Through your account, you can manage your crypto assets and access your wallet address at any time, sending or receiving tokens at will.
When your wallet is disconnected from your computer, it goes ‘offline’ and thus cannot be hacked.
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2. Desktop wallets
While hardware wallets are heralded as the most secure way to store crypto, they might not be for everyone. Maybe you don’t want to remember a PIN and a recovery phrase and want something a little more straight-forward.
There are other options for you and one of them is a desktop wallet.
A desktop wallet is a desktop application, simply put. Think Microsoft Word or Zoom on your desktop. These wallets work as applications that you sign into on your desktop and access your cryptocurrency. There are many desktop wallets, some for specific tokens, and some that allow for multiple tokens to be stored at once.
They are usually cheap, often free, and are one of the less-complex options on the market. However, it is necessary to have a secure desktop ecosystem before you use desktop wallet softwares.
How does desktop wallet work
Desktop wallets work first by downloading the software onto your computer and running it. Once installed, you open the application and sign in or sign up to create your wallet and set up security protocols. After this is done, you can begin sending and receiving tokens as you like.
3. Paper wallets
While other methods like hardware wallets are considered very safe, paper wallets have the distinction of simultaneously being one of the safest and yet most dangerous ways to store your private keys.
Paper wallets are perhaps the most ‘basic’ way to store your private keys and public address. As the name implies, paper is involved. In this case, you might decide to print or write down your private keys and public address on a piece of paper and store it.
While this means that your information is secure (a piece of paper can’t get hacked over the internet), it requires a huge amount of caution on the part of the owner.
Case in point, in 2020, an Irish drug dealer lost millions of dollars after the paper with his private key on it was thrown away in the trash.
And because this method doesn’t have a recovery phrase, your tokens will be lost forever if the paper is lost. Needless to say, if you’re the type to lose things or keep a lot of random paper around you, this might not be advisable.
How does paper wallet work
To create a paper wallet, you would need to access a website for crypto wallet generation. After this, download the webpage as an HTML and then disconnect from the internet. Then, have a completely random new address generated for you. Once this is done, print the address and private key and store them safely.
4. Mobile wallets
A mobile wallet works in a similar vein to a desktop wallet except that they are installed and operated on mobile devices.
Some of these applications for cryptocurrency wallets give users control of their private keys and are generally easy to use. Through these applications, tokens can be stored, sent, and received. These wallets are hot wallets, in that they are always connected to the internet and as such, carry more risk than hardware wallets.
How does mobile wallet work
First, you visit the app store for whatever device you use and scroll through the available selection of mobile crypto wallets. Once installed, sign up with the application and begin using your wallet. If you are given control of your private keys, make sure to back them up immediately.
5. Web wallets (hot wallets)
Web wallets are cryptocurrency wallets that are always connected to the internet and are accessed via URLs. in many ways, they are like opening an email account and logging in to check your messages.
The private keys for these wallets are also stored online and this makes them very prone to hacks and attacks as they are hot wallets. There are both hosted and non hosted web wallets, though hosted wallets are considered a better choice. This is because they give the user full access to their funds.
How does web wallet works
These wallets are quite easy to set up. All you have to do is visit their website, sign up, and begin using your wallet. Of course, your private key should be backed up offline if possible. You will also be given a wallet address through which you can receive and send funds.
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How to choose a cryptocurrency wallet
Now that you understand the various types of wallets and how they work, you’ll probably want to know how to choose the right one for you. Just like anything else, a crypto wallet should be chosen based on a number of factors that are unique to you.
Some wallets can be opened for free and some, like hardware wallets, can cost over $100 each. If you have a lot of money to work with, you might opt for a hardware wallet and if not, a cheaper or free wallet would be best for you.
Experience and intended use
For those just starting out with cryptocurrency, an advanced hard wallet might prove rather complicated. In this case, a free online wallet might be a better starter option. At the same time, if you plan to handle a large amount of cryptocurrency, you should go for the most secure options on the market.
If you are just testing the waters and will only handle a small amount of crypto, that might not be necessary.
Your average techie might relish the idea of a hardware wallet. Scatterbrains might be wary of putting the key to their funds on a piece of paper. Some people work better with apps. There is no one size fits all for cryptocurrency wallets and it is best to choose according to the option you feel most comfortable with and can handle.
Crypto wallet etiquette
Once you’re signed up with your wallet, there are some best practices to keep in mind:
Keep your private key safe
For the love of all that is holy, please back up your private key!
If you are using a hardware wallet, write it down somewhere, along with your recovery phrase. There is no shortage of people who lost their private keys and recovery phrase and lose small and large amounts of money. A corporation worth millions of dollars couldn’t get their cold wallet opened once its CEO (the only one who had the key) died.
Keep your hardware wallet safe
If you are using a hardware wallet, keep it as safe as possible, especially if you move around a lot. Depending on how much money is stored in your wallet, some people even put theirs in safety deposit vaults.
Do your due diligence
Before you choose any wallet provider, do your due diligence. Read reviews, watch tutorial videos, and compare experiences. A good idea would be to Google “[Crypto wallet] hack” and see if the wallet is truly impenetrable. There have been instances where popular cryptocurrency wallets were accessed by hackers, either for malicious reasons or to expose design flaws.
Follow all security protocols
If you are using a hardware wallet, follow all precautions and instructions given by the manufacturer. If you are using a hot wallet of any kind, make sure anti-virus and anti-malware software are installed on your device. Be wary of phishing scams and make sure your device is secured at all times.
A crypto wallet is one of the most important investments you can make when entering the cryptocurrency market. They not only give you a place to store your tokens but keep them safe from hackers and thieves. Before you head out to get your wallet, however, consider the various types and make sure you do your due diligence.