What Is A Cryptocurrency Wallet?

When it comes to storing cryptocurrency, the concept of a wallet can be a bit daunting for the uninitiated. There are software wallets (online/mobile/desktop), hardware wallets, and paper wallets. The “best” type of wallet will be different for everyone – it all depends on an individual’s particular needs.

Wallets don’t exactly store your cryptocurrency directly. It’s more accurate to think of a wallet as storing your private keys. Public-key cryptography is what allows cryptocurrency to function in the first place, and uses specific algorithms to generate pairs of keys. Your public key is the address to which anyone can send cryptocurrency. The corresponding private key is what allows you to spend funds from that address. Without a private key, a public address becomes a bottomless pit that you can only check the balance of; money can still be sent there, but it’s lost without the private key.

The different types of wallets simply represent the various ways a person can secure their private key. The two main types of wallets, hot and cold, refer to a wallet’s level of internet connectivity. Hardware wallets and paper wallets aren’t actively connected to the internet and are considered cold storage. A hot wallet is an internet connected wallet, which is easy to spend from but is also vulnerable to cyber-attacks. Cold storage protects from cyber-crime, but it’s still the owner’s responsibility to physically secure their property.

Online Wallets/Exchanges

The easiest type of wallet to use is also considered the least secure (because you don’t control your private keys). These wallets are online software wallets, like the type hosted at an exchange. Examples of these are Coinbase and Gemini. If you’re entirely new to holding virtual currency, this option allows you to buy, sell, and store value all in one place, without having to deal with public and private keys. This leaves your virtual money vulnerable if the exchange is hacked or compromised in any way since it controls your keys. Make sure whatever password you use at your exchange account is a very strong and very secret one because once logged into the exchange, your account is fully accessible.

While storing crypto at an exchange is generally considered safe, not being fully in control of the private key is worrisome to most crypto-enthusiasts. Cryptocurrencies and libertarian ideals don’t have to go hand-in-hand, they just often do. As such, it’s regularly touted that the security of your finances should be your own responsibility, which may intimidate some who are less computer savvy. If tech isn’t something you feel confident interacting with at an above-average level, an online wallet takes all the command-line wizardry out of the equation but also the control.

Desktop Wallets

Another popular type of wallet is a desktop wallet. Similar to an online software wallet, a desktop wallet is simply hosted on your computer instead of a company’s servers. A desktop wallet is only as secure as your computer. A piece of software can be bug-free and secure, but if a hacker has installed a keylogger on your machine, all the security in the world won’t stop you from sharing your passwords and private keys with Johnny Black-hat. As long as you follow reasonable security practices, these wallets are regarded as safer than exchange wallets. A desktop wallet is often baked into a blockchain client, just like the Ethereum Wallet in the Mist browser. Mist allows you to interact with the blockchain (as it has a full copy of the blockchain and runs as a node on the Ethereum network), as well as store your Ether (ETH).

Having a desktop wallet means you are in full control of your private keys and as such, the responsibility of securing your finances falls on you. That means being smart about how you choose your passwords and where you store them while following standard best practices for network/computer security.

One could even use a service like MyEtherWallet (MEW) to generate a wallet without having to run a full node. MEW doesn’t hold your cryptocurrency on its server but simply helps a user create their own set of public and private keys, which the user then stores on a personal computer. Since MEW runs a full node, a user can broadcast their transactions to the Ethereum network through the service instead of running a node themselves, saving the significant time it takes to sync with the blockchain.

Mobile Wallets

A mobile wallet is just like a desktop wallet, except it’s available as an app on your phone. Some people like the convenience of having access to their cryptocurrency in their pocket. Jaxx Wallet is a popular example of a mobile wallet app, available for both iPhone and Android devices.

Some mobile wallets, like Mycelium (for Android), have added support for Near Field Communications (NFC) payments. Instead of scanning a QR code, a person can use NFC’s “tap and pay” ability to send cryptocurrency to any merchant who accepts that form of payment. In the future, as more merchants begin to accept virtual currency, this type of wallet will likely grow in popularity.

Hardware Wallets

Now we’re getting into cold storage. Hardware wallets generally look like USB sticks. They’re made of either smart cards or entire (miniature) computers. A hardware wallet is capable of generating a proper address all by itself, which is why it needs to have some decent computing power onboard (due to the algorithms that must be run to calculate a functional crypto-address). Examples are the Ledger Nano S and Trezor. These hardware wallets are the equivalent of using an old laptop without an internet connection to run the algorithms that generate public-private key pairs. A hardware wallet is incredibly secure since no one can install key-logging malware on it or even see what you’re doing without physically being next to you.

These high-tech devices connect to your computer via a USB port or a self-generated QR code. They’re designed in such a way that they can only do exactly what you want them to do. When private keys are generated on the device and they never leave the device, there’s no way for those keys to be compromised unless the device is lost, stolen, or damaged.

Paper Wallets

A paper wallet is exactly what it sounds like: a literal piece of paper. If you were to visit a bitcoin ATM and feed it some of your fiat cash, it would print out a receipt with QR codes on it (one of which represents your private key). This is your paper wallet. A paper wallet is intended to be hack-proof like a hardware wallet, but achieves it through a low-tech approach: by not having any circuitry at all.

Unlike hardware wallets, paper wallets aren’t the most reliable method of cold storage. Even a destroyed hardware wallet stands a chance of being recovered via (expensive) digital forensic methods. A paper wallet can technically be anything that stores your public and private keys, which are simply 40-character-long hashes. You could write those characters on anything, and as long as you don’t lose them, you’ll always be able to access your account. There are even solid metal “paper wallets” that allow you to store your public and private keys on engraved stainless steel, like with cryptosteel.

Sending a transaction from a paper wallet requires either scanning the QR code (if you have one) or manually entering the addresses by hand, which is considered very risky. A misspelling could send your currency to an invalid address where it becomes stuck for eternity, effectively burned and removed from the network, never to be seen again. The most secure form of a wallet would be if a person made a paper wallet, memorized their private key, and then destroyed the wallet. Most don’t find this practical, as it’s not worth the risk of forgetting a 40-character-long string of random numbers and letters.

Conclusion

When it comes to securing your cryptocurrency, there are clearly many options. The most important takeaway is that every user’s needs are different, and it’s on you (the user) to do your own research. Make sure that not only is the wallet you’re investigating legitimate but that it also suits your buying and selling needs.

A good solution for anyone looking to hold a significant amount of cryptocurrency (significant meaning any amount you’re not comfortable losing) is to use a combination of hot and cold storage. Cold storage is like your savings account (or like keeping your money in a safe at home) and hot storage is more like your normal wallet (the one full of fiat, credit cards, and too many supermarket rewards cards).

Hot comes with convenience but also a higher chance of security issues. Cold is more secure but less accessible. Your ideal wallet will depends on your specific needs.