Crypto Wallets Guide

Crypto Wallets Guide

Posted on : 03 Jan, 2022    |    Last Update - 3 years ago   

Blockchain technology has made digital currency transactions increasingly useful, practical and accessible. However, as the number of crypto users has gone up, so has the rate of cyber theft related to cryptocurrencies. That’s why having a highly secure crypto wallet is more important than ever, whether it’s digital or physical.

What is a crypto wallet?

Cryptocurrency wallets, or simply crypto wallets, are places where traders store the secure digital codes needed to interact with a blockchain. They don’t actively store your cryptocurrencies, despite what their name may lead you to believe.

Crypto wallets need to locate the crypto associated with your address in the blockchain, which is why they must interact with it. In fact, crypto wallets are less wallets than they are ledgers: They function as an owner’s identity and account on a blockchain network and provide access to transaction history.

How do crypto wallets work?

When someone sends bitcoin, ether, dogecoin or any other type of digital currency to your crypto wallet, you aren’t actually transferring any coins. What they’re doing is signing off ownership thereof to your wallet’s address, that is to say, they are confirming that the crypto on the blockchain no longer belongs to their address, but to yours. Two digital codes are necessary to do this: a public key and a private key.

A public key is a string of letters and numbers that are automatically generated by the crypto wallet provider. For example, a public key could look like this: B1fpARq39i7L822ywJ55xgV614.

A private key is another string of numbers and letters, but one that only the owner of the wallet should know.

Think of a crypto wallet as an email account. To receive an email, you need to give people your email address. This would be your public key in the case of crypto wallets, and you need to share it with others to be a part of any blockchain transaction. However, you would never give someone the password to access your email account. For crypto wallets, that password is the equivalent to your private key, which under no circumstances should be shared with another person.

By using these two keys, crypto wallet users can participate in transactions without compromising the integrity of the currency being traded or of the transaction itself. The public key assigned to your digital wallet must match your private key to authenticate any funds sent or received by it. Once both keys are verified, the balance in your crypto wallet will increase or decrease accordingly.

Types of crypto wallet

Crypto wallets can be broadly classified into two groups: hot wallets and cold wallets. The main difference between them is that the hot wallets are always connected to the internet while cold wallets are kept offline.

Hot Wallets

Hot wallets are digital tools whose connection to the internet cannot be severed. They are pieces of software that may be accessed from your phone or desktop computer to monitor your currencies and trade them. Some hot wallets may also be accessed from your browser, meaning you can use them on a wide variety of devices.

The greatest advantage of hot wallets is their convenience. Your public and private keys are stored and encrypted on your wallet’s respective app or website, so unless they're limited to a specific device, you can access them anywhere with an online connection. This ease of access makes them ideal for those who trade more often and who are thinking of spending bitcoins.

Because hot wallets are always accessible online, they also face a greater risk of cyberattacks. Hackers can exploit hidden vulnerabilities in the software that supports your wallet or use malware to break into the system. This is particularly dangerous for wallets hosted by crypto exchanges, which are bigger targets overall for crypto thieves.

Pros

  • Highly convenient, can be accessed from anywhere with an internet connection
  • Easier to recover access in the event you lose the private key than cold wallets

Cons

  • Less secure than cold wallets, vulnerable to a wider variety of attacks
  • For custodial wallets, your keys are kept on the exchange's servers

Cold Wallets

Cold wallets store your digital keys offline on a piece of hardware or sheet of paper. Hardware wallets usually come in the form of a USB drive which lets you buy, sell and trade crypto while it’s connected to a computer. With “paper” wallets, your keys may be accessible via print-out QR codes, written on a piece of paper, or engraved on some other material, such as metal.

Cold storage wallets are deliberately designed to be hard to hack. Unless the wallet owner falls for some sort of phishing attack, hackers have no way of obtaining the owner’s keys remotely. For something like a hardware wallet, a thief would first have to obtain the USB drive used to access your crypto and then somehow crack its password.

This high level of security may lend itself to mistakes on the part of wallet owners. If you lose your USB drive or sheet of paper and don’t have your private key backed up somewhere, you’ve effectively lost access to your crypto. Compared to hot wallets, which make it possible to regain access through a seed phrase, recovering access on a cold wallet is impossible in most cases due to the two-key security system.

Pros

  • More secure than hot storage wallets due to offline storage
  • Many hardware wallets are supported by hot storage wallets

Cons

  • Transactions take longer on average
  • Nearly impossible to recover currencies without a backup of your digital keys

What to look for in a crypto wallet

When looking for a crypto wallet, it’s very important to first ask yourself:

  • How often do I trade? Will you be trading cryptocurrency daily or just occasionally? Hot wallets are better for active traders due to their speed and practicality. However, active traders may also benefit from a cold wallet by using it as a kind of savings account, keeping the bulk of their currencies there.
  • What do I want to trade? Are you looking to buy and store Bitcoin or are you interested in different types of cryptocurrency, like altcoins and stablecoins? The crypto wallet you pick should support the currencies you wish to trade and will ideally accommodate any other coins you may want to trade in the future.
  • How much am I willing to spend? Are you planning on accumulating large amounts of crypto at some point in the future? Hardware wallets are ideal for this sort of activity, but unlike hot wallets (which are mostly free), they require an upfront payment to own the wallet itself. Some hot wallets have higher crypto trading fees but offer faster transactions or greater functionality.
  • What functionality do I need in a wallet? Do you plan on doing anything specific with crypto beyond simply trading it? For example, traders who want to passively make money with their crypto should look for wallets that allow for crypto lending, staking, and deposits.

Having asked yourself that, here are some general suggestions for what to look for in a crypto wallet:

  1. Supported currencies - The rule of thumb for supported currencies is “the more, the better.” Unless you're interested in solely trading Bitcoin, we suggest you opt for a wallet that supports at least a few of the more popular altcoins.
  2. Accessible interface - An accessible, intuitive user interface is always welcome, regardless of whether you’re a crypto veteran or newbie. Look for wallets that don’t make you jump through hoops just to start basic trading.
  3. 24/7 customer support - Although more useful for newer traders, having customer support available throughout the day is always a plus. This is especially true for wallets that undergo frequent updates and may suffer from bugs or visual glitches.
  4. Hardware wallet compatibility - Anyone who is seriously thinking about getting into crypto should consider getting a hardware wallet. Even people who don’t trade frequently should consider a hardware wallet to safeguard their most important assets. Investors with a hot wallet that’s compatible with at least one brand of hardware wallet have an advantage, since they can default to the model(s) supported by their wallet and transfer their crypto back and forth as needed.

Investing in crypto prudently

Cryptocurrencies are a new and exciting financial asset. The idea of a decentralized currency independent of the banking industry is enticing for many. The wild price swings can be a thrill, and some coins themselves are simply amusing.

Consider the story of Dogecoin. A portmanteau of Bitcoin and Doge, the latter of which is a meme based on the image of a Shiba Inu dog, Dogecoin was created as a joke by Billy Markus and Jackson Palmer on December 6, 2013. The currency was a hit on Reddit, a popular social network forums site, and quickly generated a market value of $8 million. DOGE hit an all-time high on May 8 of this year, reaching a market capitalization of more than $90 billion after Elon Musk and Reddit users involved in the GameStop short squeeze turned their attention to it.

While entertaining, the fact remains that cryptocurrencies are unpredictable assets and should be traded with caution. It’s important to consider the following dangers when asking yourself “should I invest in cryptocurrencies?:”

Crypto is volatile. A cursory glance at the historical price of Bitcoin is enough to see massive peaks and depressions throughout its lifespan. Just recently, Bitcoin fell 53% in May of 2021 after having surpassed a value of $64,000 for a single coin in April. The same goes for any other major cryptocurrency. These dramatic changes are not normal compared to the pace at which mainstream assets move.

Crypto isn’t backed by anything. For most coins, there is no natural resource they track the value off of. They're not backed by the government and don’t track the growth potential of enterprises the way stocks and bonds do. This increases crypto's volatility as a whole. Cryptocurrencies are also speculative assets, which are riskier due to large fluctuations in price. Many active traders invest in them with the hope of making a big profit after their value dramatically increases in the near future — hopefully before a crash.

Crypto is unregulated. Governments and institutions around the world are still grappling with how to regulate cryptocurrencies, asking: Do we need specific legislation to regulate crypto assets? Who should regulate crypto? Should it be regulated at all? While this lack of regulation responds to the nature of crypto and its ethos of freedom, a lack of adequate regulation means consumers are not protected against many crypto crimes and scams. Ultimately, crypto must be studied and handled carefully, as its future remains uncertain.

Personal finance experts and advisors recommend investing no more than 5% of your portfolio in risky assets like crypto. Beginners should also refrain from riskier crypto trading practices, such as lending and staking currencies to generate revenue.

Crypto Wallet Glossary

  • Blockchain: A blockchain is a type of ledger that records digital transactions and is duplicated across its entire network of systems. The shared nature of blockchain creates an immutable registry that protects users against fraud. Cryptocurrencies are traded on the blockchain.
  • BTC: The currency code used to represent Bitcoin. Bitcoin was created by Satoshi Nakamoto as the first decentralized cryptocurrency. Read our article on what is Bitcoin to find out more.
  • Foundation for Wallet Interoperability (FIO) Network: The FIO was established in the “pursuit of blockchain usability through the FIO Protocol.” The FIO protocol is meant to improve the scalability of the blockchain and develop a standard for interaction between various crypto-related entities.
  • Hierarchical Deterministic (HD) account: HD accounts may be restored on other devices by using a backup phrase of 12 random words that's created when you generate the wallet.
  • Light client: Also called light nodes, light clients implement SPV, a technology that does not require downloading an entire blockchain to verify transactions. Depending on the currency, a full blockchain could be anywhere from 5Gb to over 200Gb. Thus, light clients tend to be faster than regular clients and require ​​less computing power, disk space and bandwidth. Mobile wallets almost always use light clients.
  • mBTC: Short for millibitcoin, which is one-thousandth of a bitcoin (0.001 BTC or 1/1000 BTC)
  • Multi-signature: Multisig for short, wallets with this feature require more than one private key to sign and send a transaction.
  • Open-source: Software that is considered “open-source” has a source code that may be studied, modified or redistributed by anyone. The source code is what programmers use to adjust how a piece of software works.
  • Seed phrase: A string of 12 to 24 words generated by a crypto wallet. Users are recommended to write down this phrase in a safe location, since it stores all the information needed to recover a user’s access to their wallet and funds.

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