A cryptocurrency wallet is a secure software program that stores private and public keys and interacts with blockchain to enable users to send and receive digital currency and monitor their balance. A wallet can contain multiple public and private key pairs. A cryptocurrency, however, is not a wallet, as it is decentrally stored and maintained in a publicly available ledger. The use of Bitcoin or any other cryptocurrency will require a wallet. What makes the digital wallet different from the physical wallet, is that it does not money; rather it stores public and private keys. Private keys are like PIN number access to your bank account, while public keys are similar to a bank account number.
How it Works
When choosing a wallet, the owner has to be careful with the individual that can have access to a copy of the private keys and thus, potential access to the cryptocurrency. The user needs to trust the provider to keep the cryptocurrency safe. When it is sent into the wrong hands, theft is bound to occur. A classic case is the Mt. Gox hack of 2014. When someone sends another person crypto coins, they are actually transferring ownership of the coins to the receiver’s address. In order to make this transaction complete, the private key stored in the receiver’s wallet must match the public address the currency is assigned to. If both private and public keys match, the receiver’s balance will increase, while that of the sender will decrease.
Cryptocurrency Wallet Categories
Hot and Cold Wallets
The difference between a hot and cold wallet is that one is connected to the internet, and the other is not. Hot wallets are connected to the internet and are less secure because of hacks and vulnerability. However, they are more user-friendly, as compare to the cold wallets.
Cold wallets are a direct opposite of the hot wallets, as they are not connected to the internet, but rather stored offline. They are more secure and pose less risk. They can be likened to a vault where a large amount of money is stored, as against a wallet you carry around for daily transactions.
Depending on your needs, a hot wallet will be suitable for day to day transactions, while a cold wallet is for more long-term holdings.
Multisignature Wallets, commonly known as “Mulitisig Wallets”, are cryptocurrency wallets that require more than one signature from multiple parties in order to complete a transaction. This process is seen as an additional security feature, as the wallet cannot be accessed without the signatures of all parties concerned.
A multicurrency wallet gives the holder the opportunity to store more than one currency. If a user has more several coins and no multiple wallets, multicurrency wallets can help store all his coins in one place. Some multicurrency wallets, however, have features that can enable a user to convert a currency into another, though this feature is restricted to specific wallets.
Public and Private Keys
All cryptocurrency entry into the blockchain is associated by a public key but moving it around either to exchange or convert it, will require a private key to unlock. The private key is the only way funds can be accessed and if this is lost, all cryptocoins are lost. In order to prevent a hack, most wallet holders keep their private keys offline, because it is less risky than having it online.
Types of Cryptocurrency Wallets
There are five types of cryptocurrency wallets: Online wallet, mobile wallet, desktop wallet, hardware wallet, and paper wallet.
Online or cloud-based wallets can be accessed from several devices with an internet connection. The offer increased convenience as users can access their funds on-the-go from any device connected to the internet. However, these types of wallets are highly susceptible to theft and therefore requires extra security. Users have to also be very careful about choosing an online wallet provider, and they have a substantial scam history.
- It is the fastest way to complete transactions.
- It is highly convenient.
- It is an ideal choice for holding small amounts of cryptocurrency.
- Some of them have the ability to store and manage a range of different currencies and also allow different transfers between them.
- TOR (The Onion Router) network can be used for more privacy.
- Online wallets are very susceptible to a phishing scam, malware, DDOS attacks and the risk of being hacked.
- Online wallets are not an ideal place to store a large amount of money.
- The risks associated with doing anything online, are very high and your system is very vulnerable to a virus which can affect the wallet.
- Control of your wallet is completely out of your hands and coin information is stored on a third party, which is very risky.
Mobile wallets are very handy, as they are an app on your smartphone. All that is needed is to install the app on your phone and open an account. They can be used as payments in physical stores. Some apps allow users to use their smartphones’ near-field communication feature, which means that they can simply tap their phone against the reader without having to provide any information whatsoever. As convenient as the mobile wallet is, it comes with high-security risk. Assets can also be lost if your mobile device breaks down.
- Mobile wallets are one of the easiest wallets to use, and much more practical. They can be used on the go, which is very helpful if you make regular transactions.
- Additional features are offered by mobile wallets which are unavailable when using other wallets, such as OR code scanning.
- TOR network can also be used.
- Mobile phones are highly insecure, and if anything happens to your device, nothing will save your cryptocurrency.
- Mobile phones are susceptible to viruses, malware, and keyloggers.
Desktop wallets are more secure than the online and mobile wallets. Desktop wallets are downloaded and installed directly o your PC or laptop and this makes it accessible from the installation device. If you have an old laptop that has never been connected to the internet, it would be a useful tool to store your wallet, as it is not opened to theft or hacks associated with an internet connection. It can be used as a cold storage method.
- Less risk is involved if the PC or laptop has never been connected to the internet.
- It is the ideal cold wallet to use if you are seeking to store a large amount of currency.
- Private keys are not stored on a third-party server.
- A TOR network can also be used for desktop wallets, which provide privacy and anonymity.
- PCs or laptops that are connected to the internet have a higher a risk of having virus which can affect your currency.
- Taking your computer to a repair person puts your saved cryptocurrency at risk, as such a person can gain access and steal your coins.
- Your PC/laptop is still open to malware and viruses which can make you lose your coins.
A hardware wallet stores the user’s private keys in a secure hardware device, typically a USB drive. They also make online transactions. Hardware storage is very convenient due to its ability to send and receive currencies just by plugging them into the internet enabled device and authorizing yourself. One of the greatest strengths of hardware wallets is that they are stored offline, which makes them immune to computer viruses and funds cannot be transferred out of the device in plain text. Most times, their software is open source. Hardware wallets are the most expensive of all wallets but are one of the safest options.
- Some hardware wallets come with a screen, which makes them the most secure way to store cryptocurrency for a long time.
- Hardware wallets offer greater security compared to others.
- It is safe to store large amounts of coins.
- Hardware wallets are difficult for beginners are quite expensive. Because of its high level of security, it hardware wallets are not always available as they are often sold out.
Paper wallets offer the safest option to store digital assets. They are physical copies of your generated public and private keys and can transfer to a printed sheet of paper, with some services offering a tamper-resistant design or an option of ordering holographic labels. They are also printed in form of QR codes which can be quickly scanned and keys added to a software wallet to make a transaction.
- It is completely immune to hacker attacks, viruses, and malware, as they are not digitally stored anywhere, making it the most secure option for storing cryptocurrency.
- You do not have to worry about private keys being stored on a third-party server, because they are on a physical document.
- If the paper wallets are not properly protected, they can be exposed to water, dampness, or wear and tear.
- They require more effort if cryptocurrencies are to be moved around
- Technical understanding is required, which can be difficult for beginners.
There are different wallets that suit different needs; however, there is no best option available for everyone. Getting a wallet is dependent on different needs, such as:
- Do you need access to your wallets every day?
- Do you want to use several currencies?
- Do you want to store your coins for a long time?
- Do you need to access your wallet on the go?
- Which cryptocurrencies do you trade? Bitcoin or altcoin?
The answer to any of these questions will determine the type of wallet you would use. Below are some wallet providers:
Jaxx, known as the multi-currency wallet developed by Decentral, is a cryptocurrency that is available for download on eight platforms. Jaxx came into the cryptocurrency scene in February 2016 and is a leading digital wallet that supports up to seven different cryptocurrencies including Ethereum, Bitcoin, and Dash. It boasts of an easy-to-use interface and strong security practices that prevent hacking and keep money safe, and it is well known for its cross-platform pairing feature, amazing design, native camera scanning, master seed backup, end-of-switch between stored coins, etc. It is also very accessible, as users can access coins with extreme ease. Users are granted permissionless access to their cryptocurrencies, and it requires no information or verification. It, however, doesn’t have two-factor verification.
Coinbase is an established cryptocurrency exchange which is a Bitcoin and Ethereum wallet and is supported in more than 30 countries. It is regarded as the industry leader for cryptocurrency exchange and they have a great user interface that is easy to use. When you sign up, you would need to verify your identity by providing one or more pieces of identity, depending on how much you buy. Coinbase offers one of the most popular online wallets accessible by mobile
Referred to as the “Rolls Royce” of hardware wallets, the Ledger BLUE is by far the most advanced hardware security gear in the market. The wallet is lightweight and comes with a color large touchscreen, Bluetooth, and a rechargeable battery. It also works with multi currencies and is extensible with other apps.
Trezor is an industry-leading hardware multi-currency wallet. It was the original hardware wallet and it claims to be the most secure. The wallet combines an easy setup with a small, durable token for authenticating and storing cryptocurrency. The token also acts as a security key for the new U2F authentication process.
Founded in July 2016, this free desktop wallet offers support for multiple cryptocurrencies which includes live chart tracking features. It is the first desktop software wallet to have ShapeShift built into the interface in order to allow for rapid conversation between different altcoins and cryptocurrencies. It also lets the user store his private keys in one application with a customizable user interface.