Ledger Nano Wallet

Cryptocurrency Wallet Introduction – Everything You Need to Know

What is a Cryptocurrency Wallet?

A wallet is a general term that applies to anywhere you store your cryptocurrency.  At a basic level, a cryptocurrency wallet stores your public and private keys.  A public key is code connected to some amount of currency.  A private key is the secure digital code only known by you and your wallet.  You use the two in combination to access your currency and also to send and receive coins.  In order to use any kind of cryptocurrency, including Bitcoin, you will need a wallet.

There is a misconception that wallets “hold” your money similar to the physical wallet in your pocket or purse.  This is not the case.  Currencies are not actually stored in any single place.  They don’t even physically exist at all.  Instead, they live as records distributed across the blockchain.

Types of Cryptocurrency Wallet

There are a small number of cryptocurrency wallet types, each with their own pros and cons.  Accessibility and security are the main points of variation. Regardless of what wallet you use, if you lose your private key, you lose your money.  Just like losing a wallet filled with cash, your private keys are what give you access to your cryptocurrency. Some wallets only work with specific currencies so evaluate a few different wallets before making a decision.  Examples are listed alphabetically with an * denoting my suggestion for that category.

Exchange Wallet

The Coinbase interface on a smart phone.

The Coinbase interface on a smart phone.

This is the wallet you will most likely start with.  Anyone new to cryptocurrencies will most likely be introduced through popular currencies like Bitcoin or Ethereum.  Coinbase, or a similar exchange, is probably where they will make their first purchase.  If you have currency on an exchange, you are using the exchange as your wallet until you move that currency off to another option.

Pros: Easy to access; used mostly for active trading; just need to think of username & password instead of private keys.

Cons: Of any place to store your coins, exchanges are the most vulnerable to hacking.  Until you withdraw your cryptos, the exchanges also control your private keys.  This might have other implications because they will make decisions for you when required to do so (see Ethereum Classic for an example).

Examples: Bittrex, Coinbase*, Kraken, and Poloniex

Online Wallet

Jaxx Wallet IconsAn online wallet is a wallet that lives on the web and hosts the data on a server. They are accessible anywhere you can access the internet and from any device that can access the internet.  They are very similar to Exchange Wallets in that they live online and are easily accessible.  While less of a target than an exchange, having your private key online makes an online wallet vulnerable to hacking. Online wallets are usually, though not always, specific to a certain currency.

Pros: Easily accessible, generally easy to use.

Cons: Private keys are stored online, making them more vulnerable to hacking and theft.

Examples: Blockchain.info, Copay, Green Address, Jaxx*

Mobile Wallet

Jaxx Mobile App

The JAXX mobile application, a popular cryptocurrency wallet that you can access online, on your mobile or on your desktop.

A mobile wallet is run via an app on your smart phone.  This might be a standalone application or an extension of software accessible online or on your desktop.  Some cryptocurrencies, such as Bitcoin, are built to be used as a functioning currency, and a mobile wallet is critical for this purpose.  If you have no plans on spending cryptos as currency, then you likely won’t need a mobile wallet.

Pros: Real world functionality; Simple and easy to use; some argue most secure type of online (hot) wallet due to mobile encryption

Cons: Not as many bells and whistles; often specific to one currency

Examples: Blockchain.info, Copay, Green AddressJaxx*, Mycelium,

Desktop Wallet

A desktop wallet is software that is downloaded to and installed on your computer or laptop.  It is specific to that single computer. Highly secure, the primary risk with a desktop wallet is that all of your eggs are in one basket.  If your computer is damaged, gets a virus or is hacked, it is possible to lose everything.  They are often specific to a single currency and connect directly to that currency’s client.

Pros: Very secure; focus on one currency often means better functionality with that coin

Cons: Limited Accessibilty

Examples: ArmoryCopay, Electrum Exodus, Jaxx*

Paper Wallet

A foldable paper wallet

A fancy example of a paper wallet. Notice the public and private keys.

A paper wallet is literally that.  You create a physical print out of a QR code for your public and private key.  You can still spend and receive digital currency using this method.  By doing this, you totally avoid storing any data about your currency.  I have read of many people storing large amounts of Bitcoin this way.  They print a physical copy of their wallet, laminate the copy and then store it in a safe or safe deposit box.  Retrieving money from a paper wallet simply involves scanning the QR code to transfer the money to a different kind of wallet where it once again accessible.

Pros: Not hackable as data isn’t online;

Cons: Like cash, if you lose it or it is destroyed, so is your currency; NOT safe unless strict precautions are taken (see this article: https://en.bitcoin.it/wiki/Paper_wallet)

Examples: Article on creating a paper wallet via Coindesk

Hardware Wallet

A leger nano

The welcome screen on the Leger Nano hardware wallet.

A hardware wallet is designed specifically to securely hold cryptocurrency.  They often look like USB devices or tiny tablets.  They work by storing your cryptocurrency offline for security and mobility.  When you want to make a transaction, you go online, enter a security authorization such as a pin, and send or receive your currency.  When you are done you take it back offline.  These also have backup features so your currency isn’t gone if your wallet is lost or compromised.

Pros: Secure; Private; Multiple currencies

Cons: Expensive; Device required to make transactions

Examples: KeepKey, Ledger Nano*, Trezor

Is a Cryptocurrency Wallet Secure?

A wallet with a lock around it representing a secure cryptocurrency wallet.All wallets are generally secure.  The amount of security, however, is different depending on what kind of cryptocurrency wallet you decide to use.  Generally speaking, online wallets (aka “Hot wallets”) are less secure than offline wallets (aka “Cold Storage”).  Keeping your wallet in any type of online format exposes you to faults and vulnerabilities that can be taken advantage of by hackers.  Exchanges are the biggest target for this behavior because that is where the money is.

Just like the account information for your bank, you want to use “best practices” when it comes to the security of your wallet.  Do not keep more currency than you really need to on a wallet that you use often.  Encrypt your wallet.  Use two-factor authentication or Google Authentication for extra safety.  Back up your information in a secure place.

No matter what wallet you decide to use, remember this critical idea.  LOSING YOUR PRIVATE KEYS MEANS YOU LOSE YOUR MONEY.  It is critical you do not lose the private keys tied to your currency.  If you do, it is just like losing cash on the beach.

Is a Cryptocurrency Wallet Anonymous?

profile with a question markCryptocurrencies are “pseudonymous.”  The nature of these platforms is that all transactions are stored publicly and permanently on the blockchain.  However, wallets and currencies are not bound to a user’s identity. Because we leave a trail as we move about the internet, it is possible to attach our public identity with our cryptocurrency addresses.  However, this is very unlikely to happen to the average user.

Which Cryptocurrency Wallet Should I Use?

This all depends on what you plan on doing with your cryptocurrency.  Are you dipping your toe in the water or are you a highly advanced user?  Do you plan to buy cryptos as an investment to hold or do you plan on using your cryptos for daily purchases?  Would you like to focus on a single currency such as Bitcoin or do you plan on getting involved in several altcoins?

If you are new to cryptocurrencies, your best bet is to go with the “official” wallet for your currency, which can be found at their website.  Alternatively, you can sign up for an exchange like Coinbase if you plan on trading, or go with a universal wallet like Jaxx.  If you are not new to the world of cryptos, then you’ll need to evaluate your security and accessibility needs.

 

 

Posted by Travis Ball

This is some information about Travis Ball. He is a lifelong traveler, technology enthusiast, photographer, blogger and high school math teacher. Not enough detail? Find out more about Travis here.

2 comments

Hey Travis, love the article it was through and easy to follow. I have no less than 10 Alt Coins but don’t want to setup a wallet for each one. Can you recommend a wallet that I can put them all in?

Hey Mike,

It really depends on the specific alt coins you are seeking. Unfortunately, there is not a single wallet set up to hold all coins. Without knowing which alt coins you have a stake in, it is also highly unlikely there is a single wallet for the 10 specific alt coins you have. Your best bet is to do a little research and find a few wallets that covers the majority of your coins. I realize that wasn’t the answer you were hoping for but hope that helps none the less.

– Travis

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