In a previous post, I discussed how to buy cryptocurrency, but I only casually mentioned what you do with it once you’ve purchased it.
When you have anything of value, you must find a place to store it. That might be a vault, or a safe deposit box at the bank, or your purse, or the wallet that you keep in your back pocket when you’re out and about.
It’s no different when you purchase cryptocurrency, at least in theory, and for storing your Bitcoin, Litecoin or whatever-coin, you’ll first need to acquire a cryptocurrency wallet in which to store it. A cryptocurrency wallet is quite a bit different from the piece of leather that you may carry around with you, and in this post, I’ll discuss the different types of wallets so you can choose the best cryptocurrency wallet for your needs.
Cryptocurrency Wallet Overview
While in the real world, a wallet for your dollars or euros might be a physical storage device, that’s not quite the case for storing cryptocurrency. A cryptocurrency wallet may or may not be a physical device; it might be little more than a piece of paper.
With cryptocurrency, you don’t actually possess the coins or tokens themselves. They exist on the blockchain, the online database that represents the currency itself. What the wallet stores are your public key, which is the address that you use to receive a particular coin or token, and your private key which is the string of characters that give you access to the blockchain and allow you to alter it when you send or receive cryptocurrency.
The public key is a string of characters that you may freely give out to anyone at any time. If someone wants to send some Ethereum to you, you can get your public key from your wallet and provide it to that individual. In order to do anything with that Ethereum once it has been sent to you, you’ll need the private key that corresponds to your public one.
So a cryptocurrency wallet is really just a method of storing both your public key and your private key in a way that you will have access to them when you need them and ideally, storing them in a secure way that prevents you from having them stolen from you.
There are four basic types of cryptocurrency wallets:
- Online wallet
- Software (desktop or mobile) wallet
- Hardware wallet
- Paper wallet
Each of these has advantages and disadvantages. All wallets will be capable of generating a public and private key for you; they’re long strings of numbers and the chances of having one duplicated are astronomical.
Online cryptocurrency wallet – An online wallet is one that you access using a Web browser. Green Address and MyEtherWallet are examples of online wallets. Another example is the storage wallets provided to you at any cryptocurrency exchange. When you’re using the exchange, they’re storing your currency for you in an online wallet.
You’ll access an online cryptocurrency wallet as you would any other Website.
MyEtherWallet will generate a private key for you and allow you to access the site using that in addition to your password so that you can access the site safely. You can also download an encrypted version of that key, and you can store that on a flash drive for security reasons. MyEtherWallet will also allow you to use a hardware wallet to connect to the site. In this case, the private key is stored on the hardware device, which offers a safer way of using it.
There are a few downsides of using an online cryptocurrency wallet. If the Website is down, you don’t have access to it. It’s also possible that you may be vulnerable to hackers, and if your computer has had keylogging malware installed on it, someone might be able to steal your passwords as well as your cryptocurrency.
Nevertheless, an online wallet is free, easy to use and easily accessible from computers, tablets, and mobile phones.
Desktop cryptocurrency wallet – A desktop cryptocurrency wallet is a program that you run on your desktop PC or laptop. There are also mobile wallets that work much the same way. You download the software from a site such as Exodus or Electrum, install the software, and follow the instructions to backup your data and create access passwords.
Different types of cryptocurrency require different types of wallets. Electrum is Bitcoin-specific, while Exodus can handle multiple cryptocurrencies. Unfortunately, there is not yet any kind of universal cryptocurrency wallet, so if you plan on having a diverse portfolio, you may need to have more than one kind of wallet.
Desktop wallets are easy to use, free, and convenient, but your passwords could be compromised if your computer has a virus or keylogging software. Some wallets also need to download the entire blockchain for them to work properly, and this can sometimes take many hours.
Hardware cryptocurrency wallet – If you’re serious about cryptocurrency security, you might want to get a hardware wallet. A hardware wallet is a physical device, similar in appearance to a flash drive, that stores your private keys in such a way that the key is always on the device and is never exposed to the public.
That way, even if your computer is infected, your data is still safe. Hardware wallets are password protected, and they give you a list of “seed words” that you write down on a piece of paper that you then store in a safe place. If your hardware wallet is lost or stolen, you can replace it with a new one and recover all of your data and cryptocurrency by simply entering the seed words, which then recreates your private key.
The Ledger Nano S has a small display and two buttons on it that you can use to enter a PIN to access the device. If you enter the PIN incorrectly three times, the device erases itself as a security measure.
All hardware cryptocurrency wallets work in conjunction with software provided by the manufacturer, though you can also use both the Ledger Nano S and the Trezor with the online MyEtherWallet.
There are people with literally millions of dollars worth of Bitcoin who trust their portfolio to hardware wallets. They are definitely the most secure way to store your keys while still providing ease of access for making trades at cryptocurrency exchanges.
Paper cryptocurrency wallet – In some ways, a paper cryptocurrency wallet is the most secure kind of all, though it’s also the hardest to use. A paper wallet is literally nothing more than your private and public keys written or printed on a piece of paper.
They’re safe because they’re not online and cannot be connected to the Internet in any way. You can store one in a vault and no one can get it. There are online paper wallet generators such as Bit Address that will generate a paper wallet that you can then scan or print out.
These wallets have both QR codes and printed alphanumeric strings, so you can use either one. You can have the wallet laminated to protect it, and you can make multiple copies if you like. You can lock them away when you don’t need them and your funds will be safe, as everything is completely offline.
A paper wallet is easy to use if you have a device, such as a smartphone or tablet, that can read a QR code. On the other hand, smartphones and tablets are not overly secure, and using them to transact on exchanges is not recommended.
If you’re using the alphanumeric string on a paper wallet, you have to be very careful to type in the string correctly, or you’ll lose your cryptocurrency!
Cryptocurrency Wallet Summary
Everyone has different tastes and needs and there is no perfect cryptocurrency wallet that works for all people, for all coins or tokens, or for all conditions. I use a Ledger Nano S hardware wallet, but I also use two different desktop wallets, as I have some crypto coins that aren’t compatible with the hardware wallet.
Hardware wallets offer the best tradeoffs between security and ease of use, and if you’re going to be working with cryptocurrency on a regular basis, they’re worth the $100 or so that it takes to buy one.
Paper wallets, online wallets and desktop wallets have their uses, as well, and there’s no “wrong” kind of cryptocurrency wallet. If you’re going to be buying and selling cryptocurrency, you’re going to need at least one wallet, though. There’s no getting around that.