A cryptocurrency wallet is a secure digital wallet used to store, send, and receive digital currency like Bitcoin. Most coins have an official wallet or a few officially recommended third-party wallets. In order to use any cryptocurrency, you will need to use a cryptocurrency wallet.
Choosing a proper cryptocurrency wallet is the first thing you will have to do when you decide to enter the cryptocurrency world. Just like your real world fiat currency is stored in a pocket wallet, your crypto wealth will be stored in a cryptocurrency wallet. As with your pocket wallet, you want this storage location to be reliable in its coin-holding capabilities, without it being susceptible to “losing” your coins (Mt.Gox anyone?). You also want your wallet to be secure, meaning that you are the only person able to access and control the wallet funds. Wallets that don’t fulfill these requirements will not be able to store your crypto in a satisfying way. Your cryptocurrency is as safe and as accessible as your wallet allows it to be.
Cryptocurrency wallets can be loosely compared to e-mail addresses. An e-mail is a digital client that stores your messages; in a similar fashion, your cryptocurrency wallet is a digital client that stores cryptocurrency. Your e-mail has an address and password which allow you to access it and send/receive messages. Comparably to that, a cryptocurrency wallet has a public key which functions as an address on which you can send cryptocurrency and a private key which allows you to access your funds and should be known only to you.
Someone who is sending you cryptocurrency is basically making a digital statement that you are now the owner of the allocated tokens. The sender will send the cryptocurrency by creating a transaction which lists your wallet’s public key as the recipient of funds. Once these funds are received, their new owner needs to possess the private key that matches the public one to access these funds. If public and private keys match, the balance in the receiver’s digital wallet will increase, and one in the sender’s wallet will decrease accordingly. No actual coins are exchanged as the transaction is recorded via a blockchain entry and a change in balance on the involved cryptocurrency wallets.
Hot storage vs cold storage
One distinction needs to be made between all the available wallets out there: these wallets can be defined as hot storage and cold storage wallets.
Hot storage wallets are akin to carrying around a wallet in your pocket. The funds are stored on a device that has direct connection to the internet, allowing for increased liquidity and ability to instantly access your crypto funds to perform payments. Online wallets, desktop wallets, exchange wallets all fall into this category. While these wallets do simplify the transacting process, they do come with an increased risk of being hacked. Malware attacks and compromised centralized servers of exchanges have been responsible for significant cryptocurrency losses in the past, with Bitfinex and Bitgrail hacks being the best (or maybe its more suitable to say the worst) examples of that.
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Opposed to them we have cold storage wallets. These wallets don’t have a direct connection to the internet and are much more secure than their hot counterparts. Their risks are mostly related to the storage device being damaged or lost, and not a single cold wallet has been reported as hacked so far. As they provide a great safety net from hackers, people who are looking to hold a cryptocurrency for a longer period of time should find them as their best option. They do however come with the drawback of the funds not being easily accessible, even for the owner himself, thus making them a bad choice if you want to day-trade or perform instant crypto payments. Sometimes they can be a bit difficult to set up properly as well. These wallets include paper wallets and hardware wallets.
How many types of cryptocurrency wallets are actually out there?
Any cryptocurrency wallet is a combination of your private key and a public key/address to which cryptocurrency can be sent. Currently there are numerous crypto wallets out there, each with its own unique features and defining elements. And while no two wallets are identical, we can split all the existing clients into five general types:
Hardware wallets are a type of cryptocurrency wallets which store user’s public and private keys on a secure hardware device. These devices are usually pocket sized and can be connected to a computer via an USB cable. Before accessing your hardware wallet you will sometimes need to install proprietary software on your computer. They are compatible with various PC interfaces and can support one or more cryptocurrencies. Some of the most advanced hardware wallets store up to 20-something tokens which, when you consider the total amount of cryptocurrencies available, isn’t much at all.
Some wallets come software-free and require you to install a fully updated version of the wallet software onto your device, which protects it from being tampered by the salesman/delivery person. Some have screens and buttons which help you manage your wallet without a connected computer. Accessing a hardware wallet usually isn’t harder than plugging it into a computer and entering a pin.
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Hardware wallets keep your private keys stored in an offline environment, away from vulnerable, internet connected devices. As the keys are generated on the device they are fully protected, even when you connect your device to a malware-infested computer (which doesn’t mean you should do that). Even if you lose your hardware wallet, anyone who finds it will need to know the PIN code to access the funds on it. You are given an option (which you should definitely use) to create a backup code for your hardware wallet, which enables you to create a copy of your wallet and retrieve your cryptocurrency if you lose the hardware device itself.
Anyone looking for long-term “hodling” should look to invest in a hardware wallet. These devices aren’t free; their cost moves in ranges of $70 to $150 dollars, sometimes even more. While being the most expensive form of wallet, they do provide the safest option for storing your cryptocurrency. At the time of writing there were no reported cases of cryptocurrency being stolen from someone’s hardware wallet. Being this safe comes with a cost in limited liquidity and accessibility of your funds. The most famous hardware wallet options are Ledger Nano S, Trezor and KeepKey.
- Extremely safe way to store cryptocurrency
- Easy to backup and secure
- Easy setup, even for crypto newbies
- They aren’t free
- Could be lost as it tends to happen with small physical objects
- Funds not accessible easily
Paper wallets are somewhat more technical and harder to set-up and are therefore not suitable for the utmost beginner in the crypto world. However, anyone willing to learn and employ a bit of caution should have no major problems in setting up one. There are plenty of tutorials online which go into detail on how to properly set up a paper wallet for cryptocurrency. A paper wallet is often touted as the safest way of storing ones cryptocurrency, and that isn’t without a good reason.
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An owner of a typical paper wallet can just print his private keys and public addresses on a piece of paper and start transferring his cryptocurrency on it. This wallet keeps your private keys offline and offers similar safety to a hardware wallet. The keys are printed as a QR code which can be scanned to complete transactions. All a user needs to do is worry about is how to take care of a piece of paper. Paper wallets are classified as cold storage, as they clearly have no way of accessing the internet.
Certain risks come with these wallets. Your paper can be stolen or someone can take a picture of your keys. The printer you use to print out your keys might not work well or might be an ink-jet one (which never work well, do they). Finally, paper is very fragile and can be damaged by water, fire or heavy usage. It is recommended that a user creates multiple copies of his keys to avoid losing the wallet. A way of circumventing the paper’s fragility is using wallets that are engraved on metal plates. While these are much more durable, they can still be susceptible to natural elements and wear and tear.
- Easy to use and store
- Easy to replace a lost wallet
- Extremely safe
- Easy to lose/damage
- Difficult to set up
- Low liquidity of funds
Desktop wallets are wallets that can be downloaded and stored on your computer. They are basically software that supports storage and transacting of cryptocurrencies; most can be downloaded for various operating systems like OSX, Windows and Linux.
Desktop wallets store your public and private keys on the device the software is installed on, aka your PC. This means that your funds are as safe as the PC itself. If you install a desktop wallet on a PC that is used for daily internet browsing, having strong firewalls, anti-malware and anti-virus software is highly recommended.
PC’s are usually connected to the internet which means that desktop wallets are considered hot storage. As such, it is recommended to store only small amounts of funds on these wallets. As your average PC isn’t exactly very mobile, people mostly use desktop wallets for trading and home shopping. Sometimes people use desktop wallets as cold storage by installing the proprietary software on computers that aren’t constantly online. These devices aren’t used for daily browsing and will be connected to the internet only to update its balance or perform transactions.
There are many desktop wallets available on the market and products like Electrum, ArcBit, Exodus and Bitcoin Core are some of the most popular ones.
- Easy to use
- Widely available and free
- Secure if proper caution is applied
- High liquidity
- Keys stored on the device
- Less safe if connected to the internet
- Require internet connection to sync with the blockchain
- Hardware failure can result in a loss of funds
Mobile wallets are software applications that can be downloaded through an app store and installed on your mobile device. Both Apple and Google Play stores offer a wide variety of mobile wallet clients. It is interesting to note that Apple store outright banned cryptocurrency wallets in 2014, but has since lifted said restrictions. Mobile wallets are usually much smaller and simpler that their desktop siblings, mostly due to the limited storage capabilities of mobile devices.
With mobile wallets, your keys are stored on the device itself. While this is better than storing them online it can still be an issue if you lose your phone. These wallets can be restored with the help of a wallet seed that was originally used to generate the wallet keys. Mobile phones are also susceptible to malware and viruses, maybe even more than PC’s due to the bare-boned nature of mobile security software. As every phone is almost constantly online, these wallets are considered hot storage.
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Mobile wallets usually have active and large development communities, as it is relatively easy to start coding for Android/IOS platforms. The funds on a mobile wallet are easily accessible and can be transferred with a few button clicks. Some of the most popular mobile wallet clients are Mycelium, Coinomi, Electrum, breadwallet, Edge, Bitcoin Wallet etc.
- Light and easy to use
- Widely available and free
- Good back-up options
- High liquidity of funds
- Mobile device can easily be lost
- Not the safest option for long-term storage
- Sometimes questionable quality of development and coding
An online wallet is a wallet that runs on the cloud and can be accessed via a web browser like Chrome or Opera. Web wallets are managed by a third party, meaning that the private/public keys are stored on service provider’s servers. This makes these wallets light and easily accessible, as the user isn’t required to download a massive client.
The advantage of online wallets – apart from the general simplicity – is the ability to bundle transactions together before pushing them onto the blockchain. This can significantly lower the transaction fees. They can also perform internal transfers for zero fees. This creates a payment ecosystem within the payment ecosystem which can pull in customers and increase the user base with its advantages.
Third party storage enables a faster service but at the same time means that users don’t have control over their private keys. The third party that holds your keys is entirely responsible for the integrity of your wallet and you need to trust them that they won’t run away with your money. This third party will store the user keys on a centralized server, meaning that a server hack could expose a massive amount of funds to malicious players. Mt. Gox, Bitstamp and Bitgrail have shown the crypto world what the dangers of centralized key storage are. Another vulnerability of these centralized services are DDoS attacks which can slow down the servers and result in a bad user experience.
Online wallets appear as either exchange wallets or as separate third-party wallets that can store your funds. While every exchange offers it’s own wallet, the most often cited third party wallets include Green Address, BitGo, Coin.Space, Coinapult, MyEtherWallet, Metamask etc.
- Highest liquidity
- Low fees
- Low storage space required
- Can be accessed from various platforms
- Lowest safety
- Third party control over you private keys
- Can become slow in times of high usage
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