What You Need to Know About Cryptocurrency Wallets (Update)
So you’re thinking about getting involved in crypto. Maybe pick up some Bitcoin, Ether, or XRP.
Buying is easy. But what about storing it?
Safety and security are paramount when owning digital assets like crypto. Because there are no banks in crypto, you are your own bank. That means choosing the right storage method or a mix of storage methods is crucial.
There are a few terms to understand and some options to consider. But overall, your wallet choices will be driven by what you want to buy and how you plan to use it.
So we will give you a solid overview of crypto wallets by exploring the following:
- * Cryptocurrency Wallets, Public and Private Keys
- * Choose your crypto wallet with a few questions
- * Hot versus cold storage
- * Hardware wallets
- * Desktop wallets
- * Mobile wallets
- * Paper wallets
- * Browser wallets
The first step is understanding what a wallet is. And that means you should know the difference between private and public keys.
Cryptocurrency Wallets, Public and Private Keys
Here’s the number one thing to remember about a crypto wallet, it’s a way to store numbers called keys or addresses. This applies to all types of crypto wallets.
There are technically two numbers. One is your public address or key. The other is your private address or key. And depending on the type of wallet, it may also have your overall crypto balance.
The public address is often described as your bank account number, and the private address is your PIN number. Sometimes the public address is compared to your email address, while the private key is your sign in details.
You can receive crypto assets through your public address. And while your public address doesn’t have your name on it, anyone can see the balance and the transactions associated with a public address. These records are publicly available on the blockchain of the specific coin or token.
The blockchain ledger keeps track of the complete history of every coin on its specific blockchain network. So Bitcoin is recorded on the Bitcoin blockchain, Ether on the Ethereum blockchain, and so on.
Now, your private key or address, on the other hand, gives you direct control over the coins or tokens you own. This key is your claim to the asset wherever it is stored on the blockchain. Only you have access to your private key or address.
A wallet helps owners of digital assets like Bitcoin accept Bitcoin, transfer Bitcoin to someone else, or store it. So whether you are a crypto trader, hodler, crypto enthusiast, or new to digital assets, a wallet is a must-have.
Before we get into the different types of crypto wallets, there are a few things to consider.
Choose your crypto wallet with a few questions
There are numerous kinds of crypto wallets, brands, and formats. Depending on what you are planning to do with the wallet, you should ask a few questions.
If you plan to buy, sell, or trade several different cryptocurrencies, you may want a wallet that works for multiple platforms. So if you trade Bitcoin, Ether, and XRP, you might want a universal cryptocurrency wallet that can manage all of these in one place.
When you look into a specific wallet, you should check out its reputation. It would also be good to know if they’ve had any issues.
You might also consider how easy the interface is to use. As a beginner, you might want something simpler to use than a more seasoned crypto trader or user.
Do you use IOS, Windows, Android, or Linux? If you use a desktop or mobile wallet, make sure the wallet works with the operating systems you are most likely to use.
Does the wallet have two-factor authentication? (2FA) This is an added security measure to protect your private keys from being stolen. Unlike losses at your bank or broker, there is no CDIC or CIPF insurance for losses or theft of crypto assets. As your own crypto bank, you have sole responsibility for the security of your private keys and holdings. 2FA on your wallet helps you accomplish this.
And depending on how you use the wallet, you might want different wallets for different purposes. Some wallets are ideal for long term hodling or storage like hardware or paper wallets. Others are easier to access for short term trading like mobile, desktop, and browser wallets.
And you might want to consider a backup strategy.
Hot versus cold storage
When you look into crypto wallets, you will hear the terms hot storage and cold storage.
Hot storage refers to any crypto wallet or storage solution that is directly connected to the internet. It can be a browser, a website, even your phone. As a result, hot storage has additional security considerations.
Hot storage provides easy access for short term trading, transfers, and spending. It’s best for smaller volumes of crypto to maintain security and reduce the risk of loss.
Cold storage is any wallet or storage solution maintained off any kind of internet or network connection. This method eliminates network risk and is, therefore, more secure. Cold storage is considered ideal for larger crypto holdings where changes are less frequent.
Wallets come in a variety of formats. They typically come in hardware, desktop, mobile, paper, and browser formats. Each one has advantages and disadvantages.
These are considered to be the most secure form of storage. Hardware wallets keep your private keys off a network and theoretically inaccessible to hackers. These wallets typically look like USB devices and can be connected to a computer or mobile device.
Hardware wallets are an example of cold storage.
In case you lose your hardware wallet, these wallets typically include a backup seed key. You can use the seed key to restore your cryptocurrencies on another hardware wallet.
Not all coins and tokens may be supported by all hardware wallets.
While hardware wallets are ideal for large crypto holdings from a security perspective, they have one big risk. If you lose your wallet and the seed key and don’t have a backup, you could permanently lose access to your holdings.
Wallet software programs designed to work with major operating systems are called desktop wallets. These wallets are downloaded and installed directly on your computer. Desktop wallets are a form of hot storage.
Desktop wallets vary in terms of functionality. Some work with only one dedicated currency. Others are designed to work with many different currencies and tokens.
While convenient, desktop wallets have significant security risk potential. So a clean computer with anti-malware/anti-virus software, a secure network, and a firewall should be a must.
Because of their ease of use and near-universal access to smartphones, mobile wallets have become very popular. Mobile wallets are typically designed to work on either IOS or Android. Like desktop wallets, mobile wallets are a form of hot storage.
Mobile wallets are very convenient to use and fast, but they also have some security risks. Making modifications to your phone, malware, SIM swapping and phishing are ongoing mobile risks.
Strong security practices are a must. These include not using unsecured WiFi networks or downloading suspicious apps.
Paper wallets are considered to be cold storage. They have advantages and drawbacks.
A paper wallet can be as basic as a record of your public and private keys on a piece of paper. It can be as sophisticated as these two keys with corresponding QR codes. Because it isn’t connected to the network, it can’t be hacked.
As a backup of an existing hardware wallet, a paper wallet can be an excellent backup. But as a standalone crypto wallet solution, paper wallets have a variety of downsides.
Paper wallets are typically downloaded from a web-based provider. They may then be printed on a networked printer. Both of which can present a security threat, so precautions should be taken.
But if the ink gets smeared
Or a crease makes parts of the key or QR illegible.
Or you lose the paper.
You may lose access to your keys.
So a paper wallet solution can represent a secure backup, but not necessarily a good standalone wallet solution.
Browser or online wallets add convenience and portability. But they also mean that you have a less secure environment. This security matter increases when you use unknown public WiFi networks or someone else’s computer. You have no control over the security environment in these instances, and your keys are at risk.
For small amounts of crypto and ease of use, these wallets can be adequate solutions. For larger holdings, the risks of this solution is probably unacceptable.
Crypto traders, hodlers, enthusiasts, and beginners should consider a combination of crypto wallet solutions.
One solution for ease of access and small holdings. This might be a hot wallet like a mobile or desktop solution.
Another wallet solution for larger, longer-term holdings that require more security. This would be a hardware wallet with a paper wallet backup.
Remember that no matter what wallet options you choose, cybersecurity is a must when you’re involved in crypto.
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