This is a complete and ultimate guide about cryptocurrency wallets. Learn about the different types, how they work and what storage option is the best for your needs.
What is a cryptocurrency wallet?
A cryptocurrency wallet acts as as storage for your blockchain keys. You need these to stay in control over your digital assets. Typically there is a public key, which defines where on the blockchain your tokens are located. In addition there is a private key which you can compare to a password. It is needed to sign a transaction from one public address to another.
To cut things short, someone who owns the public key can only check the balance on this specific address. He will need the private key though to move the funds to a different address.
You are your own bank!
In crypto space, you and only you are responsible to keep your assets safe. You might share your public key with people who want to send money to your wallet. Also you need it if you want to withdraw tokens from a cryptocurrency exchange to your personal wallet. Beware that everyone who knows your public address can also check your balance.
However make sure to never ever expose your private key to anybody. If someone happens to know both your public and your private key, he is essentially in full control.
What types of cryptocurrency wallets are there?
The blockchain industry has come up with a huge variety of cryptocurrency wallets. And you can justify the existence of each of them. There is no one-fits-all wallet. They differ in cost, user-friendliness and convenience. Depending on the use case you may choose one which would be completely inappropriate for another scenario.
But now let’s get into it.
Cryptocurrency exchange wallet
Usually you buy digital currencies on a cryptocurrency exchange like Binance, Huobi or Bitfinex. After you’ve purchased the coins, they immediately appear in your account and of course it is highly convenient to just leave them there. And if you are day trading, you simply have no other option.
For everyone who plans to hold his tokens for more than a few days, consider the downsides (always remember Mt. Gox). First of all, you have no real control over your assets. Compare it to a bank, the money you see on your account is essentially only a promise. The same is true for the crypto exchanges. Imagine what happens when one of these platforms gets hacked or even goes bankrupt. You might be in serious trouble to see your tokens again.
Additionally there is the risk that the exchange is not passing on benefits like airdrops, inflation or hard fork currencies like BitCoin Cash.
Online wallet (also called Web Wallet)
An Online wallet is basically a website which lets you create your keys and interact with your assets while being connected to the internet. This is also called a hot wallet. Their biggest advantage is probably the convenience to access your wallet from any online computer there is. Many of them offer a great user experience and are very easy to use. Look at https://www.myetherwallet.com for one of the most prominent examples.
As good as it all sounds, there are also disadvantages. First and foremost, most Web Wallets are created and maintained by third parties. And they may not always have good intentions. So you can either check the source code of the project yourself or you have to trust other people to review it for you. Additionally, being a hot wallet, there is always the possibility for an Online Wallet being hacked. And always keep in mind that your operating system or your internet connection may be compromised. For example there have been cases of bad browser extensions which have exploited the users’ funds in the past. So it might be a good idea to use a separate browser whenever you interact with your online wallets.
Here are some of the most popular and most trusted Web Wallets:
– https://www.bitgo.com/info/ for Bitcoin
– myetherwallet.com (MEW) for Ether and every ERC20-token
– https://wallet.btc.com/#/setup/register for Bitcoin and Bitcoin Cash
Desktop Wallets are traditional computer programs and can be downloaded from the official project website in many cases. They are often available for all major platforms, Windows, Linux and MacOS. Since they are often developed and maintained by the project team itself I consider them to be more safe than Web Wallets in many cases. Normally the offer a great user experience and some of them, like the Cardano Daedalus wallet, let you even create a paper wallet completely offline.
On the downside, if you hold dozens of different coins, you’ll have as many wallet programs on your computer. It takes space on your hard drive and personally I don’t like to have programs on my PC which I only use maybe once a year. Moreover, because you have that Desktop Wallet on your online PC, there is always the chance of being hacked and loosing access to your keys.
My advice, if you have to choose between Web Wallets and Desktop Wallets, always go with the one which is recommended on the official project website. That gives you at least the assurance that someone, who knows what he does, has looked at them and thinks they are secure.
Officially recommended Desktop Wallets for some of the most important cryptocurrencies can be found here:
– https://bitcoin.org/en/choose-your-wallet for Bitcoin
– https://github.com/ethereum/mist/releases/tag/v0.11.1 for Ether and ERC20-tokens
– https://www.bitcoincash.org for Bitcoin Cash
– https://www.stellar.org/lumens/wallets/ for Stellar Lumen
Mobile Wallets are the smartphone counterparts to their desktop brothers. Of course having your crypto wallet with you, wherever you go, is their biggest advantage. For example many of these let you just scan an address with the camera of your phone and transfer your coins instantly. Most of them are very easy to use and available for both iOS and Android.
The disadvantage are mainly the same as for Web Wallets and Desktop wallets. On a device connected to the internet there is always the possibility of being hacked. So do your best trying to keep your device free from malware. Also it should be clear to protect your mobile with a passcode, TouchID or FaceID in case you loose it.
These programs are often issued by the official project teams. On their websites normally you find links to the apps you can then download from the AppStore.
Hardware Wallets store the user’s keys on dedicated hardware and normally support dozens of digital currencies. They are considered to be very safe because they store your private keys on a secure chip and offer a great user experience. Normally you have to connect the hardware wallet to your computer using USB. In most cases you also need to have a companion software on your computer, issued by the hardware wallet company. When you now make a transaction the idea is that your private key never leaves the device in plain text.
A lot of people ask what happens if your hardware wallet is stolen. Normally you don’t have to worry as long as the other person doesn’t know the PIN of your device. When you first set up your wallet, you are instructed to backup your data by storing a secret passphrase or seed in a safe place. It is this seed you can now use on a new hardware wallet to get access to your assets again.
Up to date, decent hardware wallets have a very good track record. No major incidence of tokens stolen from such a device is known to the public. But of course this doesn’t have to be like this forever. A device you connect to the internet is always under the risk of being hacked, in one way or another.
All in all, a hardware wallet is one of the safest and easiest ways to use ways to store and interact with digital assets. They are suitable for your day to day transactions as well as for long term hodling. This is something no other type of wallet can offer to you. Hence it is understandable they get more popular every day.
Some of the most trusted and popular hardware wallets are:
– Ledger Nano S
A Paper Wallet is just a piece of paper with your keys written on it. Together with hardware wallets, they are considered to be the most secure type of coin storage there are. They are used to hodl tokens for the long term, months, years or maybe forever.
There are two things you have to consider:
1) The most crucial step in creating a paper wallet is to create the keys. You have to make sure that your keys are not stored anywhere after the creation of the wallet. This includes the clipboard, the storage of your printer, the program you created the keys with and others. To make this process as safe as possible you usually create the keys on an offline computer and print with a device which is wire connected.
2) Once you have successfully created your paper wallet, you need a place to store it. This can be a locker at your local bank, under your pillow or maybe even a whole in your backyard. You may also think about ideas how to protect your wallet from water and fire.
To help you to create paper wallets for different cryptocurrencies in a secure way, we have created several How-to guides you’ll find below.
How to create a Bitcoin paper wallet
How to create a Monero paper wallet
How to create an Ethereum paper wallet
How to create a Ripple paper wallet
How to create a Bitcoin Cash paper wallet
How to create a Litecoin paper wallet
How to create an EOS paper wallet
How to create a Stellar Lumen paper wallet
How to create a Dash paper wallet
Which type of wallet do we recommend?
It depends on your use case and some external factors. Don’t worry, we’ll provide you with a few examples.
Example 1: If you are a day trader, always waiting for the next pump or dump, holding your coins for only minutes, maybe seconds, then there is no other option than to leave your coins on the exchange.
Example 2: Imagine you have invested in a very young but promising project, maybe even participated in an ICO (Initial Coin Offering). You will often find yourself in the situation, that the coin’s ecosystem hasn’t matured yet. Literally no wallet is mentioned on the official website. Of course you may try to generate your keys with some developer tools offered on the project’s GitHub page. But we don’t recommend that to the ordinary user. There are some third party wallets floating around but they are all a bit shady and none has earned significant reputation from the community yet. In this case we would leave our coins on the exchange too.
Example 3: Many new coins are born on the Ethereum platform and you have coins which are basically ERC20-token. Some of these projects later opt for creating their own blockchain. This process of trading the old ERC20-tokens for new native blockchain tokens on the coin’s main net is called token swap. If your exchange support this swap it might be the easiest way to just leave them there between the two snapshots.
Example 4: I am talking about the cryptocurrency Tezos here. Let me give you some background information. If you own at least 10,000 XTZ (several thousand US$), you qualify as a Tezos delegate. Delegates are responsible for creating new blocks on the chain. In the Tezos ecosystem this is called baking. Finally, when the block is created, the delegate gets some XTZ tokens as a reward.
So what should holders do, who don’t qualify as delegates? They simply delegate their XTZ to another person who qualifies for baking. The baking reward can then be shared between all of the participants.
The problem is, some exchanges don’t let you do that. Moreover there is no wallet which is recommended on the official Tezos website. There is only one wallet which has gained some reputation from the community, is considered to be safe and lets you delegate your tokens. It is called Tezbox and is a web wallet.
This is some of the rare cases we would consider a web wallet.
Example 5 If you want to store tokens for the long term, you don’t know how to create a decent paper wallet and the token is not supported on hardware wallets yet, we would go with a desktop wallet. But first you have to make sure, that the wallet is either recommended from the project’s team or has gained significant trust from the community.
Example 6 For your everyday money, the one you spend on coffee, drinks and food, nothing beats a mobile wallet. Just make sure you don’t store significant amounts there and have backed it up properly.
Example 7 Imagine you hold most of your coins for the long term, but spend some of it from time to time. We recommend to get a hardware wallet, because it combines the paper-wallet-like security with a convenient and easy to use way to make transactions from time to time.
Example 8 If you hold your coins only for the long term we recommend both hardware wallets and paper wallets. We consider them as equally safe.
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