The Ultimate Beginner’s Guide to Cryptocurrency Wallets
And if you read the title of this article, you may have an idea where to get started. Finding the proper cryptocurrency wallet to protect your assets from hackers and scammers is your first line of defense in safeguarding your crypto.
Considering the technicalities associated with crypto, it’s natural for people to be confused by cryptocurrency wallets. The following questions are quite common, and they can be challenging to put into layman’s terms:
- What are they exactly?
- How do they work?
- What do they look like?
- Are they physical or digital?
- What are the best cryptocurrency wallets on the market?
Luckily, we’re here to answer your questions and clear up the confusion. By the end of this article, we hope you’ll have adequate knowledge about the basics of cryptocurrency wallets, their types, how to choose between products, and how to use them properly.
- What is a cryptocurrency wallet?
- Why do I need a cryptocurrency wallet?
- A brief history of crypto wallets
- Types of cryptocurrency wallets
- How to choose a cryptocurrency wallet
- Cryptocurrency wallet etiquette
- Wrapping up
- Frequently Asked Questions (FAQs)
What is a cryptocurrency wallet?
It’s what you use to store your crypto coins.
However, as we all know, cryptocurrency is far from simple. When you think of a wallet, you probably picture a leather accessory in your back pocket or purse. But those are used for fiat money, coins and debit/credit cards, not cryptocurrencies.
Cryptocurrency wallets accomplish the same thing as leather wallets, except they hold crypto–AKA digital coins on the blockchain. Unfortunately, it gets more complicated than this.
If we’re getting deeper, a cryptocurrency wallet stores both your private keys and public address (also called public key).
A public address is a location on the blockchain where cryptocurrency is stored. From this location, tokens can be spent, transferred, withdrawn, and so on.
You can think of a public address as an email address. If someone knows your email address, they have the option to send mail to your inbox. Same thing with your public address—anyone can send cryptocurrencies to your wallet if they know your public key.
A public address usually looks like a bunch of random numbers and letters. For example, an Ethereum public address looks like this: 0xb794f5ea0ba39494ce839613fffba74279579268. A Bitcoin public address is different: 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2.
Private keys are the password to your wallet. Generally speaking, it’s a combination of characters or words granting access to your wallet on the blockchain. If we’re bringing back the email address analogy: everyone knows your email address, but you cannot access your inbox or send emails without knowing your password.
Why do I need a cryptocurrency wallet?
Since cryptocurrencies aren’t the same as the cash you stuff into your leather wallet, it needs a place to ‘stay’ like any other valuable asset.
A cryptocurrency wallet fulfills this need by giving users a place to securely store their crypto without worrying about people stealing your hard-earned money. It’s also how web3 users interact with each other–want to send Bitcoin to your relatives in Europe? No worries, just send it to their public address.
A brief history of crypto wallets
Cryptocurrency wallets emerged with the growth of crypto in the late 2000s and early 2010s.
The first wallet was created and released in February 2009 by Satoshi Nakamoto, the pseudonymous creator of Bitcoin. As Bitcoin became more prominent, there grew a need to store Bitcoin for safekeeping. However, the Bitcoin-QT wallet (the first cryptocurrency wallet) was far from perfect.
To deploy the Bitcoin-QT wallet, you had to download the entire Bitcoin blockchain. Isn’t that mind blogging? The blockchain was substantially smaller back then, yet it still took tremendous processing power to download.
Ethereum co-founder Vitalik Buterin stated:
“Because it is a full node, the client must download the entire (currently 6 gigabytes) blockchain to operate, which can take up to a few days the first time you start the client and several minutes to an hour every time you start the client afterward, if you do not keep it running constantly.”
Thankfully, we don’t have to download gigs of data to store our crypto anymore. Wallets have become much more advanced over time, and their features have improved considerably.
If we’re being honest with you, some wallets are as easy to set up as a mobile game.
Types of cryptocurrency wallets
Now that you understand the basics of cryptocurrency wallets and their history, it’s time to look at the various options you have to store your crypto.
Yep, even though a wallet is a combination of a public address and a private key, there are different ways in which they can be stored and accessed. Each ‘type’ comes with its own benefits and consequences.
1. Hardware wallets
True to its name, a hardware wallet, also called a cold or offline wallet, is a physically-held device that stores wallet addresses and keys off the Internet.
Hardware wallets usually look like USB devices with an interface screen at the front and buttons on the side to operate the device.
One thing you have to get straight: they are designed to store data offline. Hence, most of the time, a hardware wallet will be disconnected from the Internet and stored away like a handheld GameBoy from 1991.
How do hardware wallets work?
When you unbox a hardware wallet, you’ll need to set up both a PIN and a seed recovery phrase containing a randomly-generated sequence of 12-24 words.
The PIN helps you unlock the wallet. Think of it as a smartphone PIN—you need it to access your device, and you’re the only one that should remember your PIN. If your friend knows your smartphone password, they could quickly get into your device and do whatever they please. The same thing applies to cryptocurrency wallets.
The seed recovery phrase acts as a backup for your private key. If you ever damage, lose, or accidentally reset your hardware wallet, you will need the recovery phrase to regain your cryptocurrencies. Remember, your crypto is stored on the blockchain, not inside your cryptocurrency wallet.
Once you’ve set up your PIN and written down your seed recovery phrase on a piece of paper, you’ll be prompted to download and install an app on your computer. From here, connect your cryptocurrency wallet to your computer via a USB cord, log in to your account through the connected wallet, and explore how to send and receive crypto.
When your hardware wallet is disconnected from your computer, it goes “offline” and thus cannot be hacked.
This is what makes hardware wallets god-tier in the world of crypto; With a click of a button, you could have all your funds stolen if your wallet is connected to the web.
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2. Desktop wallets
While hardware wallets have been heralded as the pinnacle of crypto safekeeping, they might not be for everyone. For example, maybe you don’t want to remember a PIN and recovery phrase, and perhaps you want something a little more straightforward.
It’s your lucky day—there are other options for you, and desktop wallets could be the one.
A desktop wallet is a desktop application… who would’ve thought. Think of it as software installed on your computer, like Microsoft Word or Zoom. They function as any other app would: sign in to your desktop, crack open the app, and access your crypto. Yes, it’s that easy.
What makes desktop wallets more secure than their counterparts, aside from hardware wallets of course, is that we can only access them through a single computer terminal. It’s not on the web, nor is it on the cloud.
Like hardware wallets, there’s a variety of desktop wallets on the market. Some serve a specific function, whereas others support multiple cryptocurrencies from a range of blockchains. Although, there’s one thing desktop wallets share in common: they’re cheap (or free) and user-friendly.
However, ensure you secure your desktop ecosystem before using a desktop wallet. A compromised computer could lead to future troubles.
How do desktop wallets work?
Desktop wallets work like any other desktop software: install the app, create an account, and set up all security protocols. You’ll be getting a private key, so write it down on paper and store it somewhere you’ll remember. After the onboarding process is dealt with, you can begin sending and receiving tokens.
3. Paper wallets
While other methods are considered secure and reliable, paper wallets have the distinction of simultaneously being one of the safest yet most dangerous ways to store your private keys.
Paper wallets are perhaps the most “basic'” way to store your private keys, as it’s one of the first methods ever created to protect your assets. As the name implies, you can decide to either print or write down your private keys on a piece of paper, then store it somewhere secure and unbeknownst to others.
While this means your information is inherently offline and thus, secure from any sort of cyberattack or hack, it requires a tremendous amount of caution from the owner. Case in point—in 2020, an Irish drug dealer lost millions of dollars in Bitcoin after the paper with his private key was accidentally tossed in the trash.
And because this method doesn’t come with a seed recovery phrase like a desktop or hardware wallet, you will lose your cryptocurrencies forever if the paper is lost or misplaced. Needless to say, if you’re clumsy, distracted, or have a terrible memory, avoid paper wallets at all costs.
How do paper wallets work?
To create a paper wallet, you must access a cryptocurrency wallet generator. If you want to be extra careful, download the webpage as an HTML and disconnect from the Internet. Then, follow the cues on the website to generate a random public address and private key.
Once this is done, print the address and private key and store find a hiding spot or another location for safeguarding.
4. Mobile wallets
You can think of a mobile wallet as the younger sibling of a desktop wallet, except it’s installed and used on mobile devices (duh).
Mobile wallets are apps that you can download from the iOS store or any Android equivalent, and it empowers users with randomly generated private keys and public addresses.
You can store, send, or receive crypto at the touch of a button since your keys are always kept on your mobile device. However, although mobile wallets are widely regarded as having the best user experience for cryptocurrency wallets, they carry more risk than hardware and paper wallets.
Transactions are facilitated within seconds, though you’re putting your crypto at risk whenever you connect your cryptocurrency wallet to the web.
How do mobile wallets work?
Pay a visit to your device’s app store and scroll through the available selection of mobile crypto wallets. Once installed, sign up, and write down your keys.
5. Web wallets
Web wallets are cryptocurrency wallets that differentiate themselves in one aspect: they’re always connected to the Internet. In many ways, they’re like opening an email account and logging in to check your inbox.
Web wallets are also known as “hot” wallets for a good reason—your private keys are stored online, making them prone to malicious activity.
There are two types of web wallets: custodial and non-custodial, though the latter are considered a better choice. The difference? With custodial wallets, your private key is held by a third party. Non-custodial wallets put full responsibility on the user as they hold their keys.
How do web wallets work?
These wallets are easy to set up. All you have to do is visit their website, sign up, and begin using your wallet. Of course, your private key should be backed up offline if possible, just like with any other cryptocurrency wallet.
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How to choose a cryptocurrency wallet
We gave you the rundown of all the cryptocurrency wallets you will encounter on your crypto journey. Now we’re at the fun part: choosing the right one for you.
Like anything else, you need to choose a cryptocurrency wallet based on several factors unique to you.
One thing is for sure, though: if you’re serious about crypto, we recommend you use several wallets, one of them being a hardware wallet and the other, a hot wallet. The pros suggest this, and it wouldn’t be right if we didn’t promote it as well.
The reason? A hardware wallet is mainly used to store your long-term investments, whereas a hot wallet is for quick transactions on the web. Therefore, you should keep most of your funds in a hardware wallet.
As previously explored, some cryptocurrency wallets are free, whereas others go for hundreds apiece.
Although this hasn’t been confirmed, we’ve noticed that the price will increase as security improves. That’s why hardware wallets like Ledger and Trezor are expensive, whereas MetaMask is free.
So if you have a couple hundred to work with, we recommend you invest in a hardware wallet, and if not, cheaper options like desktop and mobile wallets don’t sacrifice security for the price.
Experience and intended use
An advanced hard wallet might be rather complicated for those just starting out. In this case, a free online wallet is a newbie-friendly option, though make sure you don’t put in any money that you cannot afford to lose.
Your average techie might relish the idea of a hardware wallet. Scatterbrains might be wary of putting the key to their funds on a piece of paper. Some people work better with apps. There is no one size fits all for cryptocurrency wallets and it is best to choose according to the option you feel most comfortable with.
Cryptocurrency wallet etiquette
Alright! You’ve invested in a cryptocurrency wallet, and you’re good to go. Here are some best practices to keep in mind:
Keep your private key safe
Please back up your private key! You must do this every single time you open a new cryptocurrency wallet.
To “back up” your private key, write it down on paper along with your seed recovery phrase. Unfortunately, there hasn’t ever been a shortage of people who’ve lost their private keys and end up throwing out millions in retirement funds over a simple mistake. It happens more than you think.
Keep your hardware wallet safe
If you are using a hardware wallet, keep it somewhere safe, especially if you move around a lot. Depending on how much money is stored in the cryptocurrency wallet, some people go as far as storing it in safety deposit vaults.
Do your own due diligence
Before you choose any wallet provider, do your own due diligence. Read up on reviews, watch a couple of tutorial videos on YouTube, take a look at what you value in cryptocurrencies, and compare products.
A good idea is to Google “[insert crypto wallet provider] hack” and check if the wallet is truly impenetrable. There have been instances where popular cryptocurrency wallets were broken into by hackers, either for malicious reasons or to expose design flaws.
Follow all security protocols
If you are using a hardware wallet, follow all precautions as instructed by the manufacturer. If you are using a hot wallet, make sure anti-virus and anti-malware software are installed and good to go on your device.
Remember, be cautious of phishing scams and make sure your device is secured at all times.
Cryptocurrency wallets are one of the most important investments you should make when entering the cryptocurrency market. They not only give you a place to store your crypto coins, but they also provide a layer security against cyber threats.