Everyone has a purse or a wallet, right? You would not see anyone carrying all their cash and cards in their hands or pockets all the time. Just imagine how unsafe that would be! This analogy simply makes you understand why one would also require a wallet for cryptocurrencies.
Similar to a physical wallet, which one buys after browsing many options at various stores (or e-stores), a cryptocurrency wallet also needs to be generated once you have understood the type of wallet that suits your needs and once you have found a brand you like, trust and find most suitable to your cryptocurrencies.
I know it might be confusing, but we have just started. Read on, and soon, you will be familiar with the A to Z of generating your own cryptocurrency wallet. So, above, we discussed how cryptocurrency wallets are similar to real-life physical wallets. Next, we will talk about how they are different, and only better, from physical wallets.
- 1 What Is a Cryptocurrency Wallet?
- 2 How Does It Work?
- 3 Public Key, Private Key, Blockchain: Explaining the Jargon
- 4 Different Types of Cryptocurrency Wallets
- 5 How Do I Keep My Crypto Wallet Secure?
- 6 Are the Wallets Anonymous?
- 7 Are There Any Transaction Fees?
- 8 Should I Store Different Cryptocurrencies in the Same Wallet?
- 9 Tips For Having a Safe Cryptocurrency Wallet Experience
- 10 What Should I Look for While Selecting a Cryptocurrency Wallet?
- 11 Reviews of Some Cryptocurrency Wallets
- 12 Conclusion
What Is a Cryptocurrency Wallet?
We understood how a cryptocurrency wallet is quite similar to a regular physical wallet. The difference lies in the fact that a cryptocurrency wallet is much smarter. It can tell how much you have, whom you paid and for what, and any additional details you might want to add about any payment. There is no need to sit and count notes, keep a memory, or maintain a ledger manually. It does it all for you and more!
A crypto wallet is basically software for sending or receiving cryptocurrencies like Bitcoin. A wallet can store coins and tokens of various cryptocurrencies. However, not all wallets have the ability to store all kinds of cryptocurrencies. There are various types of wallets, ranging from physical to mobile, each suited to different needs. We’ll get to the details of the various types, but before that, we need to understand how crypto wallets actually function. Also, you need to strengthen your jargon game if you are stepping into the crypto world. But don’t you worry, we got you!
How Does It Work?
Here is a quick analogy to get this started. You know how every bank account has a number that is unique to it, yes? Your savings bank account number is unique; no other account shall have the same number. Similarly, every crypto wallet has a unique identification number, which is known as a wallet address.
There is no harm in sharing this wallet address with anyone for the purpose of transactions. The person who is transferring cryptocurrency to your wallet will use your wallet address to make the transfer. It’s just like sharing your bank account number to make a transaction.
What is not to be shared is your account’s password or your card’s PIN. In the exact same way, each wallet has a digital key that is known only and only to the wallet and its owner. So, if you own a crypto wallet, you should protect the digital key at all costs to keep your account secure.
What is meant by ‘protecting the key’ is that it should be a well-kept secret that only you know. This digital key is a hexadecimal code and is known as the private key. The details are explained in the next section. For your understanding, below is an example of what a private key looks like.
Yes, it looks daunting to remember. It is advisable to write it down or take a photo and keep it safe with you. If you happen to have an exceptional memory, then, by all means, do go ahead and memorize it.
Public Key, Private Key, Blockchain: Explaining the Jargon
Before moving on to more terms and technicalities, let us recap quickly. Every wallet has a unique crypto wallet address, which serves as its identification number. Along with the wallet address, every wallet has a digital key, known as the private key, which serves as the password that must be accessed only by the wallet’s owner. Now, apart from the private key, a public key also exists. Every private key to a wallet has a corresponding public key. This comes into play when you are making a transaction with your wallet.
An easier way to understand this would be to take an example of using a credit card. When you swipe a card to make a payment at an apparel store, you must also enter a PIN. The pin confirms to the payment gateway that the card you have presented and the funds it holds are yours. Similarly, the public key is available to the public. When you enter the corresponding private key, the two keys match, and your transaction is validated for completion.
The next question arises: what happens when a transaction is made? This might surprise you, but a crypto wallet, in reality, is empty. The balance available in the wallet does not correspond to any physical coins or tokens stored anywhere. So, is it all just make-believe? No, it is not.
Cryptocurrency does not work with any physical form of currency. The transactions that take place are continuously recorded in a digital ledger known as the blockchain. The blockchain contains the details of all the cryptocurrency transactions that have taken place. It is through this that how much currency a particular wallet holds at a given time is maintained.
Different Types of Cryptocurrency Wallets
There are various types of wallets for you to choose from. Your choice shall depend on how you wish to store and access your crypto wallet. Broadly, there are three kinds of wallets: software, hardware, and physical. Read on to know more.
Desktop wallets are a type of software wallet. The wallet is downloaded and installed on a PC or a laptop, and thereon can be accessed solely from that device. Once the wallet is installed, it can be accessed on this device without the Internet as well. This type of wallet is known to provide better security than most other options. It doesn’t rate too bad in terms of accessibility, either. However, if in case your computer is hacked, stolen or infected with a virus, you may end up losing funds from your wallet.
Mobile wallets, a type of software wallet, are downloaded on the phone as an app. They provide one of the most convenient ways to access the funds in the wallet. You can even use it to make payments in brick-and-mortar stores simply. It is quick and easy. However, this kind of wallet is prone to security breaches similar to desktop wallets. You may stand to lose your wallet if your mobile is stolen or afflicted with any malware.
Online wallets are yet another type of software wallet. They function on the cloud and hence, can be accessed from any device in any location. The wallet is run on a third-party app on the cloud. The involvement of a third party in your wallet access and transactions increases the chances of a security breach.
Another thing that adds to the possibility of a security threat is that online wallets, also known as cloud wallets, tend to store the wallet’s private key online for ease of access. Therefore, online wallets require an additional layer of security. So, although these wallets may provide the most convenient and easy access among all the other options, they are also most prone to security breaches.
Hardware wallets are made in the form of a USB. They are different from software wallets since they store the user’s private key. The best part about hardware wallets is that they keep the user’s wallet offline until a transaction needs to be done. Keeping the funds away from the Internet, for the most part, provides the wallet maximum security. They are also quite easy to use. If the user wishes to make a transaction, all they need to do is plug their hardware wallet into an Internet-enabled device such as a laptop.
Once plugged in, they need to access the wallet, enter their PIN, set the transaction amount, and confirm the transaction. These wallets are compatible with most web interfaces and can also store most cryptocurrencies. It is because of the levels of security, combined with the accessibility, that the prices of hardware wallets are higher than the other options.
Paper wallets provide the maximum level of security among all the options. How so? That’s because paper wallets are nothing more than a sheet of paper on which your public key and private key are printed, oftentimes along with their QR codes. In case a transaction needs to be made, all the user needs to do is refer to the paper wallet and enter the private key into the web interface.
Alternatively, they can simply scan the QR code corresponding to the private key. Even though this offers maximum security by keeping the data offline, please make sure that you keep the paper safely with you. Also, since paper is easily susceptible to damage, make multiple copies and store them safely.
How Do I Keep My Crypto Wallet Secure?
With the various types of wallets, you have now also understood that all types of crypto wallets have varying levels of security. To understand the different types of wallets from a sheer security point of view, the wallets are divided into two categories — hot crypto wallets and cold wallets. Hot wallets are all types of wallets that connect to the Internet. Hence, online, desktop, and mobile wallets are examples of hot wallets.
The more your funds are exposed to the Internet, the higher the risk they face. On the other hand, physical wallets and hardware wallets are cold wallets. These wallets act like cold storage. They put your money into storage that is not connected to any third party or exposed to any malware via the Internet. They are completely offline and hence offer maximum security to your funds.
Many cases of cryptocurrency fraud have been reported where people have lost access to their wallets and lost their investments forever. It is, therefore, strictly mandatory to keep your private key safe at all times. You lose the private key. You lose your funds. However, there is more that you can do to secure your wallet. Here are a few more tips that will help you secure your crypto wallet to the maximum extent.
Do Not Keep All Your Eggs In The Same Basket
Remember how you were advised as a kid to keep your travel money distributed in various pockets of your bags and wallets? Well, this was so that if you lose one set of funds, you still have the others to rely upon. Crypto wallets should also be used in a similar fashion from the standpoint of security. It is highly advisable to keep your funds distributed in various types of wallets, both hot and cold wallets. With a chunk of your funds being in cold storage, there is a chance of losing, much less if a security breach strikes your hot wallet.
Create a Backup Plan
Software, hardware, and paper are all susceptible to some form of damage or the other. A software may crash or get invaded by malware or virus. The device on which you keep your desktop wallet or mobile wallet might stop working. Hardware may break or start malfunctioning. Paper, as secure as it is, may just get torn, worn out, or lost. The only way to steer clear of such problematic possibilities is to create a backup. Remember to create multiple backups of your wallet. This is the easiest to do when you have either a software wallet or a paper wallet.
Upgrade Your Software Regularly
Keeping your software updated provides additional security. You must update not just your wallet but also the software on the device you use. The latest updates fill in the gaps that make older versions prone to attack.
Add Multiple Layers of Security
First of all, choose a wallet that has a good reputation in the market. Read through plenty of reviews and understand which is best suited to your needs. Having a long and complex password is a good way to protect your wallet. Additionally, go for wallets that provide security provisions like two-factor authentication and extra password requirements. Some wallets also provide an option to ask for the other party’s permission to complete the transaction.
These kinds of attacks usually function by posing as a communication sent by the company. Make sure to check and keep in mind the actual website of the wallet you use, along with the exact spellings they use in their brand name and extensions they use for their email IDs.
Anything that looks similar in spelling or format but not exactly the same warrants raising an alarm. Similarly, if any email or similar form of communication asks you for your personal details and security details, do not share. Report such communications and notice the patterns to stay aware of newer forms of attacks.
Use a Separate Browser for Your Wallet
This is meant for anyone who chooses to use a desktop wallet, a mobile wallet, or an online wallet. Always make sure that you have a separate browser that is dedicatedly meant for using your wallet. Do not use your regular browser for wallet access and transactions. Browser extension malware is an incredibly common way of harming the security of your system and sensitive data like your crypto wallet. Also, make sure that the browser that you use for the wallet is updated at all times with the latest security updates.
Are the Wallets Anonymous?
In a way, yes, but not completely. All transactions are recorded in the blockchain, which maintains a public and permanent record of all the transactions that take place in the world of cryptocurrencies. However, in order to create privacy and security, the transactions on the blockchain are not recorded using the sender’s and the receiver’s real names or details. They are instead recorded using pseudonyms like the person’s wallet address.
This, however, does not provide a hundred percent anonymity. The wallet address mentioned in the transaction on the blockchain can be used to trace back to the wallet owner’s personal details. This sort of intrusion requires a high level of expertise but is quite possible. There are research projects that are working to create higher levels of anonymity and security with regard to cryptocurrency wallets and transactions so that such instances of fraud can be reduced drastically.
Are There Any Transaction Fees?
It depends. Different wallets have different systems. Oftentimes, the fee that goes as a transaction fee is a payment to the network miners who process these transactions in the blockchain. In some other cases, there is no fee involved at all. Most wallets will levy a transaction fee, but no fee exists. They offer a range of fees for you to choose from at your convenience.
Yes, you read that right. The amount of fee you wish to pay per transaction is completely up to you to decide. There is, however, an upside and a downside to this situation. The upside is quite obvious — you can choose to pay as much as you wish to. It’s completely your decision! Now, the catch here is that the higher you pay, the higher the priority your transaction gets. This means that the higher the fee you pay, the quicker your transaction gets completed. If you choose to pay less, your transaction will get processed slowly; it may even get stalled for days!
The gist of the matter is you need not worry too much about the transaction fees because these days, the transaction fees on cryptocurrency wallets are either minimal or non-existent, or as explained above, they are completely what you decide to pay.
Should I Store Different Cryptocurrencies in the Same Wallet?
As per a count done in August 2018, there are over 1,600 cryptocurrencies that exist, and the number is only going upwards. Each of these cryptocurrencies has its own ecosystem and infrastructure. Many people consider investing in various different cryptocurrencies. The next thing multi-currency owners look for is a wallet that allows them to store all their various currencies in the same place.
Makes sense. It’s all about ease of monitoring and accessibility. There are now a whole lot of options out there that can provide you with the option of storing a vast majority of the cryptocurrencies. It is, however, a bit difficult to find a wallet that has the option of storing all possible cryptocurrencies.
Thinking more practically, you would not actually have every cryptocurrency that exists. So, a good option is a multi-currency wallet that holds the various currencies you own and has a good reputation in terms of security and usability. All it takes to be sure is some research.
If you are a single-currency owner, for example, if you only own Bitcoin, then the best advice would be to use only the currency’s official wallet. For Bitcoin, for instance, it would be a good option to go for one of their official wallets like Bitcoin Core Wallet or Mycelium.
Tips For Having a Safe Cryptocurrency Wallet Experience
Private Keys: It cannot be emphasized enough how important it is to keep your private keys secure. If you lose the private key to your wallet, you will end up losing all your funds. There is no one to understand why or how the key was lost, and it certainly cannot be regenerated. The only option is to keep the one you have extremely safe. The same goes for the possibility of having your wallet hacked or inflicted with malware. Once you lose control over your wallet, your funds are gone forever.
Protection against Malware: Never ever download a wallet from a source you do not trust. Many malware present themselves in disguise as wallets, and then, the rest of what happens is quite self-explanatory. The easier way to go about this is to start by using the currency’s official wallets, which are more reliable and have good user ratings. Once you get the hang of the game, you can start experimenting, albeit safely.
Hot or Cold: It is mentioned above in the section about security that one should not keep all their funds in hot wallets. How do you decide how much to keep in the hot wallet and how much to put away in the cold wallet? A simple way to understand it is that you keep in your hot wallet only enough funds as you would safely keep in your real wallet. The remaining money that goes into the cold wallets should be imagined as storing your funds in your savings bank account. So, to sum it up, keep a majority of your funds offline.
What Should I Look for While Selecting a Cryptocurrency Wallet?
Do your research and find a wallet that strikes a balance on your following requirements:
- Do you plan to possess a single currency or multiple currencies?
- If you are looking to store multiple currencies, does the wallet provide the option of storing all those currencies?
- Do you need the wallet for daily use and purchases or only for currency storage and investment purposes?
- Does the wallet have a good reputation in terms of security?
- What is the level of accessibility you require? Do you want a wallet that can be accessed anywhere at all times or a wallet that can be accessed only from a singular place or device?
- Does it have a good user interface?
- Find out about the kinds of additional charges associated with the wallet, like the transaction fees, for instance.
Reviews of Some Cryptocurrency Wallets
Atomic Wallet is a desktop wallet with a good security system in place. The private key of the wallet is encrypted onto the desktop, so the control over funds is with the user at all times. This wallet’s desktop app is compatible with Windows, Mac OS, Ubuntu, Debian, and Fedora. It can store over 300 coins and tokens — BTC, LTC, ETH, and TRX are some examples.
- User-friendly interface
- Significant security measures in place
- Supports more than 300 cryptocurrencies
- The exclusive Atomic Swap feature allows large savings on fees
- No third-party involvement
- Allows buying cryptocurrency with USD and EUR, with the best exchange rates
- The user is responsible for the safety of the wallet
- Not all coins support Atomic Swap
Mycelium is a mobile wallet for Bitcoin, available for both Android and iOS. It is one of the oldest crypto wallets, along with the Electrum wallet, and holds a great reputation in terms of security and user experience. It is, in a way, one of the most evolved crypto wallets in the market, with features like cold storage, a local marketplace, a QR-code scanner, encrypted PDF backups, and a secure chat. What’s even better is that Mycelium does not involve any third party, so all your funds are under your direct control.
- Better than most wallets in terms of security and privacy
- Fast connection to the Bitcoin network
- Open-source software
- Lots of user-friendly features
- No desktop interface
- Not ideal for beginners
Copay, created by Bitpay, is one of the most diverse wallets out there. It can be accessed on a desktop or a mobile device and even online. Despite being free, it is loaded with features that are suited to everyone, from beginners to advanced users. Being open-source, it allows its users to provide feedback whenever there is some scope for bettering the platform. The most amazing thing about Copay is that it is a multi-signature wallet. This means that more than one person can co-own the funds in a wallet.
- Good security and privacy
- Multi-signature transactions allowed
- It can run on multiple platforms and devices
- Suitable for beginners
- Limited and slow user support
- Two-factor authentication is not available
Trezor is known to be the oldest hardware crypto wallet. It supports more than a thousand kinds of cryptocurrencies and is more affordable than competitive variants. It has long been one of the leading hardware wallets due to its security system. The additional layering of passwords and security pins makes it significantly resistant to hacking. Also, Trezor is suitable for holding a large number of coins, so if you are looking to store a large chunk in cold storage, this is the answer!
- Good security system
- Holds large amounts of bitcoins
- Supports over 1,000 cryptocurrencies
- Compatible with Windows, OS X, and Linux
- Built-in screen
- Suitable for beginners
- Device required for transactions
- Costly as compared to software wallets or paper wallet
Ledger Nano is a hardware wallet that comes in the form of a USB drive. It is most suited to cryptocurrency investors who are looking to store large amounts of crypto. This wallet, too, offers storage for a wide range of currencies. Its two-layer security protects it from any attacks. This is one of the more affordable, value-for-money hardware wallets available in the market. Ledger Nano launched Ledger Nano X in March 2019, which only requires a Bluetooth connection to set up on any Android or iOS mobile device.
- Comes with a screen, protected with a light metal swivel cover
- Supports multiple currencies
- Easy connectivity with mobile devices
- Economical than other hardware wallets
- Not as advanced as software wallets
- Lacks a password manager
- Supports a good range of cryptocurrencies
- Simple user interface
- Allows buying and selling of Bitcoins
- Multiple payment methods for buying Bitcoins
- Supported in over 55 countries
- Customer support is not too active
- Complex fee structure
The reviews you have seen above are only some of the many wallets that exist out there. If you have gone through this guide carefully, you will know how to find your ideal wallet. Let us take a quick glance again to remind you of some key pointers. The first and foremost thing about owning a crypto wallet is that you need to keep your private key absolutely safe and not reveal it to anyone. If you lose access to your private key, you will likely lose all your funds irreversibly. Depending on factors like safety, accessibility, the currency you use, and the way you wish to distribute your funds, you can make an informed choice about the wallet that will work for you. Please make sure to go through the above section about security to make sure how you can best secure your wallet. Some other factors you should look out for while deciding on a wallet are the transaction fee structure, the privacy and security provisions if you are going to be Bitcoin mining, and the customer service that the brand provides.
So, we hope you are now ready to start your cryptocurrency wallet experience. Equipped with safety tips and valuable recommendations regarding choosing the right wallet, you can now get yourself the perfect crypto wallet.