What is a cryptocurrency wallet?
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Cryptocurrency wallet is a digital wallet in which you can receive, store or send your digital coins. The majority of cryptocoins have their customized wallets, but there are a few crypto wallets that can hold different types of coins.
There are two main types of wallets; the cold and hot storage.
- The cold storage wallets offer offline or hardware storage. They are among the safest.
- The hot storage wallets are those connected to the internet. These are not safe as they are prone to hacking.
It is advisable that you store a majority of your coins offline in a hardware wallet.
How do cryptocurrency wallets work?
In actual sense, there are no physical coins. What is stored in the digital wallet is a private key that is unique to your wallet only. You are then provided with a public key that you use to send and receive cryptocurrency. It is more or less like having an email account. The email address is the public key that you give to everyone, while your password is your private key. However, on the wallet crypto is not stored too as those are digital currencies represented in addresses. While anyone can send an email to your address, it is only you who can access the details of the sent emails.
- Only your private and public keys are stored and synced with the blockchain.
- Public and private keys must match for the transaction to be successful.
Different Types of Crypto Wallets
As noted above, there are two main types of cryptocurrency wallets. These are further subdivided into various sub-parts.
In case of desktop crypto wallets, you download a software from a coin’s official site and install it on your laptop/desktop. The only threat to your coins in such a wallet is if someone takes control of your computer physically, or your software gets attacked by a virus.
- You have full control of your private keys.
- Easy to use.
- You can have various backups for security.
- If your computer is stolen, you could lose your coins.
- Gets vulnerable once connected to the internet.
- Could be affected by malware or viruses.
- You only have access to your coins when you have your computer.
Online wallets are convenient for trading as they allow you to access your coins anywhere and at any time, they are prone to hacking. You also do not have control of your funds. The platform can close down with all your coins. Put just a few coins here much the same way you carry just a little petty cash in your pocket wallet.
- You can access your coins anywhere for transactions as long as there is an internet connection.
- Easy to set up.
- Some exchanges are very secure with their two-factor authentication.
- You are forever exposed to hackers who constantly work to steal your coins.
- If an exchange collapses or is hacked, you may lose all your coins.
A mobile wallet is a cryptocurrency wallet that allows you to store your coins in your smartphone. You need to download a specific software or application from the official site of the coin you want to store.
- You can use your coins anywhere as long as you have your phone.
- Comes with additional security features like QR code scanning.
- You can use TOR network for added privacy.
- Your phone is always vulnerable to malware and viruses so you have to be extra careful.
- If you lose your phone and haven’t backed up your security features, then you lose your cryptocurrency.
Hardware wallets are incredibly safe to use. Since they aren’t connected to the internet, hackers cannot have access to your coins. Some of these wallet’s cryptos are so advanced that you can transfer and receive coins without having to connect to the internet. Some of these wallets have digital displays, so you don’t require to connect them to a computer.
- Very secure as they are not connected to the internet.
- You can receive coins in some without having to use a computer.
- Ideal for storing large amounts of digital currency without the risk of losing your coins.
- Have a backup security such that even if you were to lose the device, it would be useless to whoever finds it.
- You have to have them physically to use your coins.
- A little difficult to operate for beginners.
- They can be expensive.
In these wallets, you generate a code that you print onto papers and keep them safe. These papers have both your private and public keys. You can simply swipe the codes or copy them manually when you want to transact.
- Secure and not prone to hackers.
- Very easy to generate.
- The papers can be stolen.
- If something happens to the paper users may lose all their coins.
Are Cryptocurrency Wallets Safe?
Cryptocurrency wallets security depends on the type of wallet and the user. Online wallets are easy and convenient to use but are vulnerable to hacking attacks.
Offline wallets like hardware and paper wallets are very secure. This is because they are never connected to the internet. For this reason, they are also referred to as cold storage wallets.
If you want to add a layer of security to your digital coins, here is what you need to do;
- You can add an encryption code. This is a master code that secures the private keys. A hacker has to bypass or crack this code to access your coins in your wallet. Check if your wallet has a two-factor authentication (2FA). This is an added security feature that requires you to use your phone to receive codes for verification. PIN codes are also important as they add a layer of security. Make sure you keep your pin code a secret.
- It is very important to backup your wallet be it a cold or hot storage. Ensure that you write the 12-word backup phrase and keep it in a safe place. In the case where you lose your password, or your device is compromised, you can always access your wallet and secure it using your backup option.
- Always keep the software in your wallet updated. Updating your wallet increases your security level as technology changes rapidly this day. If you keep an older version, it might be easily hacked as it may have the same bugs or present loopholes to hackers, so stay abreast with the current software.
What are offline wallets?
In the easiest of all terms, offline wallets are those wallets that do not require an internet connection for access to funds. Offline wallets hence, do not store the cryptocurrency on some internet server. Rather, it is stored in various different types of offline media.
There are several advantages of using offline wallets over the traditional online wallets.
Pros of using offline wallets
- You can always have control of your funds.
- An internet connection is not required to access the funds.
- No third-party involved.
- Prevents theft on the internet (greater security).
- Offline wallets can be kept secure in a lock for years to come.
- These wallets are optimized for multiple currencies.
Well, there go all the major advantages. However, there are certain drawbacks associated with offline wallets. The major disadvantage is that in case you lose your paper wallet with keys printed, you will lose your funds!
Cryptocurrency Wallet Fees
Digital coin wallets have no fixed fee. It all depends on the route you decide to take. If you are using an online wallet linked to an exchange, you might be required to pay a little commission for that particular service. Some exchanges charge when you transfer coins from their platform to a different wallet.
It is good to note that for any transaction to take place on the blockchain, the peers on the network have to be incentivized for them to add a transaction on the blockchain. These are the rewards that the miners get.
Wallets, like your addresses, have to be confirmed by the network of the particular digital coin. This applies to both personal wallets as well as those held or those connected to an exchange. The charges, in this case, will depend on that particular network.
Are Cryptocurrency Wallets Anonymous?
Most wallets are stored publicly on the blockchain. These wallets do not have the actual names of the owners, but the pseudonymous names. A few wallets like Jaxx, Bitlox, Samourai, and Multibit are partially anonymous. Users are never asked for their email addresses or any other personal information.
Despite these wallets’ attempt to keep you anonymous, you still have to transact. All transactions are recorded on a public ledger and can be traced back to the source, albeit after bypassing some security measures.
Though it is still difficult to obtain complete anonymity, developers are working hard to ensure its possibility.
What is the Best Crypto Wallet?
It is not possible to determine the best crypto wallet. Choosing a wallet will depend on the following factors;
- The digital coin you intend to store.
- Whether it’s cold or hot storage.
- The amount of coins you want to keep.
- If you wish to keep different coins in the same wallet.
- How often you wish to use the coins.
- Convenience (ease of access).
Here are some of the top wallets you may want to consider:
Ledger Nano S is a hardware wallet with a screen. This means that you store your keys in an offline device where hackers cannot access. It costs about $65 and it was ranked as the most private Bitcoin wallet in 2016 by the Open Bitcoin Privacy Project. It supports bitcoin, Ethereum/Ethereum Classic, Dogecoin, Dash, Stratis, and Litecoin.
- Recovery phrase is usually displayed on the device’s screen and not on your computer screen.
- Has two buttons that you have to press at the same time to confirm a transaction hence cannot be hacked.
- Features a metal casing protecting it from physical damage.
- Compatible with MyCellium, GreenBits, Copay, Electrum, and MyEtherWallet.
- Provides advanced passphrase option where you can customize your 24-word recovery.
- Your device can be stolen, but if you have a pin code, then your wealth remains safe.
- Not cheap for some of us.
KeepKey was launched in 2015 primarily as a bitcoin hardware wallet, but can now support altcoins.
- Features a digital screen and a metal casing.
- Uses a PIN code for extra security.
- It is an HD wallet. You can back-up your wallet with a 12, 18 or 24-word seed phrase.
- Supports Dash, Litecoin, Bitcoin, Namecoin, Ethereum, Dogecoin and other altcoins.
- It is 100% open source.
- They are still working to fully support ERC20 tokens.
- Not very convenient for quick transactions.
This is a multi-chain wallet that you can store a variety of digital coins. This is a wallet that you can use in various devices seamlessly (cross-platform pairing). Jaxx is free and you can download it to your smartphone or computer. You only get to pay a minimal transaction fee. This is one of the Go-To wallets today.
- Compatible with Windows, Apple, Linux as well as Android and iOS tablets and mobile.
- It has a great design and the user interface is superb.
- Supports Ethereum/Classic, Dash, Augur, Zcash, DAO and Litecoin among others.
- Gives you access to the largest crypto market cap (coins here are highly liquid).
- Features the ShapeShift service for converting between blockchain tokens and coins.
- Stores keys on your device giving you full control.
- It’s not open source.
- Susceptible to hacks.
- Some clients have complained that it had been bugged making it slow.
Trezor is a hardware wallet with a screen and uses an open source code. Like all hardware wallets, you will keep your private keys and sign your transactions offline.
- Second screen protection.
- OLED screen display to show your 24-word recovery phrase. This phrase is never displayed on your computer or phone. You are the ONLY one who can see it.
- The 24-word seed is always generated offline.
- Works on a Zero Trust approach (multiple layers of security).
- Does not use batteries, has no cameras, Wi-Fi, Bluetooth or any other communication interface with external devices.
- The wait between each incorrect attempt to log in to this device is increased by a power of two.
- You can customize the 24-word seed for extra security. Always keep the passphrase safe.
- It has a complicated security system.
- You must have a computer to make any transactions (not suitable for transactions on the go).
- It’s expensive.
- The increase in the power of two minute wait time after every incorrect attempt to log in could really keep you waiting, so you should always keep your security details safe.
This is a simple iOS Bitcoin wallet designed for armature investors but still suitable for experienced users. It is a mobile wallet that doesn’t rely on any server for its transactions.
- Has a very active help center.
- Uses the SPV (Simplified Payment Verification) mode for quick and fast transactions.
- Open source code (it is open for everyone to make adjustments to their own liking).
- Doesn’t support multisignature.
- Doesn’t have a two-factor verification security system.
Mycelium is an Android and iOS open source wallet. This mobile wallet was developed in 2008. It is among the oldest mobile wallets in the market and was awarded the 2014 Best Mobile App.
- The application is free but is subject to miner and transaction fees.
- HD security.
- 12-word backup security phrase.
- Supports bitcoin only (read more about bitcoin wallets).
- Not the safest.
- Does not have a desktop interface.
We’ve strived to give you as much information as possible in a simplified manner. We hope you get to learn something new about crypto wallets from this article.
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