What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a software program or hardware device that allows you to securely store, manage, and interact with your digital currencies. It doesn’t actually store the coins themselves but holds the private keys required to access and control your funds on the blockchain. These private keys are essential for authorizing transactions and are what make ownership of the crypto possible.Types of Crypto Wallets
- Software Wallets: Software wallets are applications that run on devices such as desktop computers, laptops, smartphones, or tablets. They can be further categorized into:
- Desktop Wallets: Installed on your computer, these wallets provide full control over your private keys. Examples include Electrum, Exodus, and Atomic Wallet.
- Mobile Wallets: Designed for mobile devices, these wallets offer convenience and accessibility on the go. Trust Wallet, Mycelium, and Edge are popular mobile wallet choices.
- Online/Web Wallets: These wallets operate on the cloud and can be accessed through a web browser. While convenient, they are considered less secure as the private keys are stored on the web. Coinbase Wallet and MyEtherWallet fall into this category.
- Hardware Wallets: Hardware wallets are physical devices specifically designed to secure cryptocurrency. They store private keys offline, offering the highest level of security. Hardware wallets are resistant to malware and hacking attempts. Notable hardware wallets include Ledger Nano S, Trezor, and KeepKey.
- Paper Wallets: Paper wallets involve printing your private and public keys on a physical piece of paper. As an offline storage option, paper wallets are highly secure against digital threats. However, they require caution during creation, as any physical damage or loss can result in permanent loss of funds. Websites like bitaddress.org and WalletGenerator.net facilitate the generation of paper wallets.
- Brain Wallets: Brain wallets allow you to memorize a passphrase or seed phrase that can be used to regenerate your private keys. While this option offers convenience, it is also prone to human error and may be vulnerable to dictionary-based attacks. Creating a strong and unique passphrase is crucial for the security of brain wallets.
Important Considerations:
When choosing a crypto wallet, consider the following factors:- Security: Ensure the wallet has robust security measures, including encryption, multi-factor authentication, and regular updates.
- User-Friendliness: Look for wallets with intuitive interfaces and easy-to-follow setup instructions.
- Development and Community Support: Check the wallet’s reputation, user reviews, and active development community.
- Compatibility: Ensure the wallet supports the cryptocurrencies you intend to store.
If you bought bitcoin recently during the mad rush, you now need to familiarize yourself with the concept of “cold storage.”
Since bitcoins are a digital asset that you can’t touch or hold physically, owning bitcoins really only means that you have access to the coins. You access your coins using multiple keys, which are strings of numbers and letters.
Let’s say you bought bitcoin on Coinbase, the most mainstream website for buying bitcoin. If you bought bitcoin there and then did nothing else, you are allowing Coinbase to be the custodian of your coins. Your coins are on a wallet that lives on Coinbase, and the funds are instantly accessible to you when you log in. But that also means they’re more vulnerable to a hack.
The safest way to store your coins is through “cold storage”: keeping the access keys somewhere offline, not accessible to the Internet in any way. (In other words, not “hot.”)
Cold storage by crypto exchanges
Many crypto exchanges can do their own cold storage of your coins, if you ask it to. When you create a wallet, crypto exchanges give you the option to “vault” the wallet. If you do so, the funds are not as instantly accessible to you on the site to sell or transfer, but they are safer—exchanges are keeping your keys somewhere offline using its own chosen method.
In fact, many cryptocurrency exchanges store approximately 98% of customer funds, using paper backups of the keys that are “distributed geographically to safe deposit boxes.” Sound elaborate? It is, because it has to be in order to protect the coins from thieves.
When the bitcoin exchange Bitfinex fell victim to a hack one year ago worth $65 million in bitcoin at the time, it happened because Bitfinex, which had originally been using cold storage for customer keys, had switched its security system to “segregated multi-sig” (multi-signature), where keys are divided up among multiple owners to mitigate risk. The wallets were protected by an outside security provider, BitGo. When hackers sent coins off of Bitfinex, BitGo auto-approved the withdrawal.
But the purest form of cold storage is writing down the keys on a piece of paper somewhere safe, and doing it yourself, rather than trusting Coinbase to do it.
Paper wallets, hardware wallets
Yes, there is an obvious irony to the notion that the safest way to protect your digital asset is using plain dead-tree paper.
You could also write or etch your keys onto a physical object (like a commemorative coin), or save them in a word document on an external hard drive that is not connected to the cloud.
Another form of cold storage is a “hardware wallet,” which are fobs that plug into your computer through the USB port. There are a number of hardware wallets on the market now, including Ledger, KeepKey & Trezor. When you plug in a hardware wallet to your computer, it forces you to enter your pin before you can do anything, and you also have to know your bitcoin wallet address to send or receive any funds, so there are multiple layers of safety.
Ledger Nano S vs. Trezor vs. KeepKey
Ledger Nano S |
Trezor |
KeepKey |
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| What’s in the box? |
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| Dimension & Weight | Height: 98 mm
Width: 18 mm Depth: 9 mm Weight:16.2g |
Height: 60 mm
Width: 30 mm Depth: 6 mm Weight:12 g |
Height: 38 mm
Width: 93.5 mm Depth: 12.2 mm Weight:54 g |
| OLED Display & Buttons | Yes | Yes | Yes |
| Compatibility | Windows (7+), Mac (10.8+), Linux | Windows, Linux, OS X (10.8 or higher). | Windows, Mac, and Linux |
| Cryptocurrencies |
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| MOST RECOMMENDED |
Cons of Bitcoin Hardware Wallets
While the brighter side of hardware wallets is that they keep your keys safe offline, they also come with some drawbacks. For instance, if you forget or misplace your recovery seed key and/or PIN code, then you can’t access your coins.
So you need to always remember your PIN code.
You should also write your backup seed key on a piece of paper and keep it safe. I recommend you to make 2-3 copies of this key and keep all of them in different places.
The Best Bitcoin Hardware Wallets
But the cons are easily avoidable if you’re smart about how you handle your wallet.
Overall, having an offline storage space for your cryptocurrencies is a really smart thing to do.
Conclusion:
Securing your cryptocurrency is paramount, and selecting the right wallet is a crucial step in that process. By understanding the various types of wallets available, including software wallets, hardware wallets, paper wallets, and brain wallets, you can make an informed choice based on your security requirements and convenience preferences. Remember to conduct thorough research, follow best practices, and remain vigilant to safeguard your digital assets effectively.