Cryptocurrency wallets 101, A Cryptosuss guide to wallets for digital assets
By: Crypto Suss
Tags: Crypto, Bitcoin, Blockchain, Cryptocurrency, Bitcoin Wallet

Okay, so you have just purchased some cryptocurrency on an exchange and now you want to secure it in your own wallet.

If you’re not already familiar with Bitcoin and crypto assets, check out our introductory guide to Bitcoin first.

So, what is a cryptocurrency wallet? There are many options for securing your crypto assets and we will break them down into a number of categories. But first, what exactly is a wallet? A cryptocurrency wallet is a software programme that is used to store, send and receive one or many cryptocurrencies. Many coins will have their own official wallets that you can download and use while other wallets are used to store records of multiple cryptocurrencies all in one place.

So how does a cryptocurrency wallet work?

Unlike traditional wallets you use for your cash and cards, a cryptocurrency wallet do not actually “store” any of your currency. Your wallet actually stores your public and private keys, which link back to transactions stored on a blockchain. When you make a transaction with a cryptocurrency on a blockchain you are essentially signing off ownership of the coins to your wallets address, and new ownership is being assigned to someone else’s. All these transactions are recorded on the blockchain and are publicly viewable. In this way, cryptocurrency wallets are not really anonymous, but more so pseudonymous, as while your identity will not be attached to a particular transaction, your public key will be.

What are the types of cryptocurrency wallets?

For the most part, cryptocurrency wallets can be broken down into three main categories; software wallets, hardware wallets and paper wallets.

1. Software Wallets

Software wallets are like those we have mentioned above. They can be desktop wallets on your computer, mobile wallets on your smartphone, or even custodial wallets on an exchange.

Desktop Wallets are wallets you download and store on your PC or laptop. You control the public and private keys and the wallet is accessible only on the device where the wallet resides. Some desktop wallets will be specific to one cryptocurrency while others like Exodus or Jaxx will hold multiple currencies in the one wallet.

Mobile Wallets run on your smartphone and can be downloaded from the App store on IOS or from Google play on Android. Naturally these will be more accessible and easier to carry around on a daily basis than a PC or laptop. Most stores that accept cryptocurrency payments will use QR code scanning on your smart phone wallet to carry out transactions. Both Exodus and Jaxx are also supported on IOS and Android devices.

Custodial wallets or ‘online’ wallets are run on the cloud and are accessible from anywhere using any device. While these are probably the most convenient way to store funds, your private keys are controlled by the custodian where your funds are being held. Most online cryptocurrency exchanges are examples of custodians who keep your funds and control your private keys. Keeping funds on an exchange puts trust in this third party. You should always use two factor authentication (2FA) when setting up online exchanges.

2. Hardware Wallets

A hardware cryptocurrency wallet is literally a hardware device that is built to hold and keep secure your cryptocurrency funds. When connected to a computer, these devices can go online to make transactions and gather data. Once disconnected, they can store your funds offline for security and ease of transportation.

Hardware wallets tend to be more secure than software wallets as you are storing your funds offline and away from potential hackers. While you may want to keep funds on a software wallet for ease of use and to move it around more frequently, hardware wallets are great for storing large amounts of crypto that you don’t need to move that often. The Ledger Nano S and the Trezor are two of the most popular hardware wallets. Both have multi-asset support and are relatively straightforward to get set up and running.

The Ledger Nano S Hardware Wallet

3. Paper Wallets

Paper wallets are the most secure and hacker proof form of wallet that you can use. A paper wallet acts as a cold form of storage as it is not connected to the internet. Paper wallets can also be quite useful for crypto beginners. They act as a way of storing your crypto that is somewhat similar to the fiat and cash that most people are used to handling. Even some of the largest exchanges like Coinbase keep large portions of their reserves offline in hardware and paper wallets.

A paper wallet literally involves printing out your public and private keys on a piece of paper and then storing it in a secure location. With a paper wallet, you have the luxury of not worrying about hackers getting into your software or hardware wallet. Paper wallets are not without their own set of risks though, subject to damage from water and the elements is always possible so keeping it safe and secure and keeping an extra copy in another secure location can be savvy.

Taking security one step further, you could create a mnemonic key for your bitcoin wallet. A mnemonic key is a list of words which store all of the information needed to recover a bitcoin wallet. Creating this 12 word phrase and memorising it means that you could store the entire value of all your bitcoin in your head. The best way to create this phrase is to allow a software programme generate a random 12 word string that will be much more secure than a human generated random string.

In conclusion

As the great Andreas Antonopoulos says, unless you control your private keys, you do not fully control your cryptocurrency assets. However, as he also often reminds us; with great power comes great responsibility. It is always important to secure your crypto assets in a safe and secure manner. It is your own responsibility to ensure the security of your private keys by whichever of the above methods mentioned. Employing a proper risk management strategy is paramount. Spreading your assets across multiple forms of storage, rather than keeping them all in one place is probably wise.