How to Choose a Cryptocurrency Wallet
Which of today's newest digital technologies will cast the longest shadow over banking and investments?
The story of cryptocurrency seems to have leapt out of a science fiction movie. With technology shaping the real world, cryptocurrencies could one day represent your financial status.
Whether you’re planning to invest, trade or simply hold onto cryptocurrency, you’ll need a cryptocurrency wallet.
- What is Cryptocurrency?
- How Does Cryptocurrency Work?
- What is a Cryptocurrency Wallet?
- Public and Private Keys
- Types of Cryptocurrency Wallets
- How to Choose a Cryptocurrency Wallet
- How to Protect Your Wallet
- Bonus Checklist for Cryptocurrency Wallets – Mobile and Desktop
What is Cryptocurrency?
Cryptocurrency is encrypted and decentralised digital money that takes the form of tokens or coins. You can use this virtual money to buy goods or avail services, and can also invest in them. Bitcoin was the first cryptocurrency that was released as open-source software in 2009. Since then, a number of other cryptocurrencies have been created; some of them are Ethereum, Litecoin, Cardano, and Polkadot.
How Does Cryptocurrency Work?
Unlike the other tangible currencies, there is no central authority that manages and maintains the value of a cryptocurrency. The transactions are verified and recorded in a ‘block’ and then linked together in a ‘chain’. This open, distributed ledger is called a blockchain. Every new transaction is updated on the software, keeping all records accurate.
But, how do you manage your holdings? Where do you store them? How do you make a transaction, or access, send or receive cryptocurrency?
This is where you would need a cryptocurrency wallet.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet functions like a traditional wallet that holds your paper currency. But, here it holds proof of your digital cash.
A cryptocurrency wallet is a software program that gives you access to all cryptocurrencies in your possession and allows you to manage your holdings, store, receive and send coins. Some wallets can hold only one type of coin, while others support coins from multiple cryptocurrencies. A few have additional features like exchange rates and other information.
Public and Private Keys
To access a cryptocurrency wallet, the user needs one public and private key. A private key is a string of numbers and digits randomly generated that works as a password or digital signature to access your wallet.
A public key is like an address or a bank account number that is visible to anyone who wants to send crypto assets to you.
A private key is like the key to your locker; anyone who gets it can open your wallet and take your cryptocurrency. It is crucial to keep it as safe as possible. When you receive any type of virtual currency from someone, they assign the ownership of the coins to your wallet address.
Types of Cryptocurrency Wallets
The five types of cryptocurrency wallets are - desktop, mobile, online, hardware and paper wallets.
Desktop wallets are apps or software programs that can be easily downloaded and installed on a computer or a laptop. Available for most operating systems, desktop wallets are relatively safe as they can only be accessed through your computer.
Once installed, the app will generate a mnemonic phrase that will store all the information required for your wallet recovery. The same information is required to access your wallet; so you need to keep it secret.
- Easy to install and easily available on the net. Many of the cryptocurrencies have a desktop wallet created.
- As they are accessible only from the computer, desktop wallets offer a high level of security.
- Desktop wallets offer additional tools and features.
- Since your computer or laptop is connected to the Internet, there are chances of virus and malware attacks.
- And worse, if your computer is hacked, you may lose your virtual money. Install reliable anti-virus software to keep your digital assets safe.
Mobile wallets can be installed from an app on a smartphone, tablet and other similar hand-held gadgets. Available for both iOS and Android operating systems, mobile wallets come with additional features such as a QR code scanner. Mobile wallets are extremely convenient as people can access, send, receive and check their crypto balances, anytime, anywhere.
All major cryptocurrencies have mobile wallets.
- Easy to use.
- Convenient and can be used on the go.
- Due to space and capacity constraint, mobile wallets have only basic functionality.
- Just like the cyber-attacks on a desktop, mobile crypto wallets are also vulnerable to cyber threats, viruses and malware.
- Have weaker cryptographic security features.
- Anyone who gets access to your phone or tablet with a crypto wallet on it, will be able to take your money away.
Just like accessing your Google drive on the cloud, online cryptocurrency wallets are in a cloud and can be accessed via web browser from your mobile or computer. Online wallets get the best from both computer and mobile wallets.
- Online wallets offer faster transactions.
- Online wallets are integrated with cryptocurrency exchanges and allow transferring amounts between supported coins.
- Low-security level – as your private keys are stored in the cloud, hackers can get access
Unlike the other online types of wallets discussed here, the hardware wallet stands out in its being an offline option. Here, the mode of storage is a dedicated device, often a USB or an external hard disk. To send money, the device just has to be plugged onto a computer connected to the internet. To ensure security, you just have to take care to disconnect the wallet once the transaction is completed.
Hardware wallets too are constantly evolving and come in different types. They also come with a built in LED screen making it possible to do without attaching a computer. There are plenty of hardware wallets on offer and some have the ability to store multiple cryptocurrencies and several ERC-20 tokens.
This offline wallet alternative is ideal for those who need to store larger quantities of cryptocurrency for longer periods.
- The hardware approach means that users do not have to worry about any online threats like hacking.
- The offline storing of the keys means cyber threats are not a risk at all. All you need to ensure is that the device is stored safely and is not misplaced.
- With improving technology, hardware wallets now are getting to be more compatible with various web interfaces.
- The offline nature of these wallets means you have to spend money to purchase these. So be prepared to invest anywhere from $100 to $150 to acquire the device.
- Ready availability also could be a problem as they can be in short supply.
- The one other disadvantage of hardware wallets is the relatively lower levels of functionality as compared to online wallets.
An early model of a hardware wallet, paper wallets allows you to store your private and public keys on print or as a QR code.
To spend cryptocurrency, you first need to move funds from your paper wallet to your software wallet. The process is known as sweeping.
- Paper wallets are one of the cheapest wallets.
- Paper wallets are considered to be relatively hacker-proof as they are not stored on a computer or any other Internet-connected device.
- Paper wallets are not beginner-friendly.
- To operate this wallet, users need some sound technical knowledge.
- Paper is not a very durable material, so you have to take extra care to keep your wallet from fire, water and a shredder.
How to Choose a Cryptocurrency Wallet
Choosing the best cryptocurrency wallet depends on a number of factors. Would you need to access your wallet daily? How many currencies will you hold? Do you want security or convenience?
- If you need to hold on to large amounts of cryptocurrency for longer periods of time, go for a hardware wallet.
- If you want to make sure of the security of your funds then opt, again, for a hardware wallet.
- If you want to access your wallet from anywhere, anytime, online wallets are the best.
- If you need a user-friendly option, go for a mobile or desktop wallet.
- If you are planning to hold more than one cryptocurrency, then picking a wallet with multi-currency support is a must.
How to Protect Your Wallet
Like in real life, your pocket wallet must be secured; precautions must be taken to protect your cryptocurrency wallet.
Diversify: Just like your wallet with cash, keep only small amounts of currencies on your computer, mobile, or server for everyday uses. Keep the larger part of your funds in a safer environment.
Keep a backup: A backup of your wallet can protect you against computer failures and allows you to recover your wallet in the event of theft of your device.
Keep up with updates: You need to update your wallet software whenever the developers release a new version.
Secure your wallet: Create a strong password. Go for service providers who provide additional layers of security such as a two-factor authentication and pin code request every time a wallet application is opened.
Bonus Checklist for Cryptocurrency Wallets – Mobile and Desktop
To ensure utmost security while using cryptocurrency wallets, it is important to have a thorough checklist for usage and adhere to it.
- Be selective when investing in a wallet. Buy only from a reputed brand with a proven track record. Avoid unknown brands and those that have not been vetted widely.
- Make sure the software being installed is from reliable sources.
- Invest in a secure firewall. Also, pick your user names and passwords carefully, opting only for those that are strong and safe.
- Reputed antivirus software and malware are a must.
- Ensure that the address of an online wallet and of the address to which funds are being sent are checked and cross checked before making the payment.
- Absolutely avoid using the wallet from an unknown connection or public Wi-Fi.
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