Having an informed knowledge of cryptocurrency wallets is essential for anyone looking to invest in cryptocurrency – no matter what level you’re at.
So here’s the deal:
By the end of this guide you’ll know about the different types of cryptocurrency wallets, the safest ones, where to find them and why you need a wallet for cryptocurrency.
Don’t forget: Hackers are real people with a lust for crypto newbies. You and only you are the master of your own cryptocurrency – so make sure you don’t fall prey to simple but avoidable security mistakes.
What is a cryptocurrency wallet?
It’s just like your everyday bank account but is used to receive, store and send your cryptocurrency. If you want to trade or hold cryptocurrencies as an asset, you need to have a wallet.
Why is it so important?
Crypto or digital currencies are currently not yet registered under the law of any country. So to protect yourself, having a secure crypto wallet is absolutely vital.
Hackers and scam artists follow the money…
And cryptocurrency is one of the biggest ways to make money right now. But many people are ignorant of how to secure their crypto properly and hackers are taking advantage of this.
Remember, if sophisticated hackers are able to infiltrate government websites, it won’t be hard for them to infiltrate your crypto account if you have a “newbie” mindset.
Add to this the fact that the technology infrastructure is still early-stage, it makes cryptocurrency even more susceptible to these threats. You’ve probably heard about crypto exchanges being hacked, the largest being the Mt. Gox Exchange with $473 million worth of Bitcoin stolen in 2014. In these cases, a lot of people lose their money and it will never come back again. Your risk is much higher if you store your assets on an exchange.
Phishing techniques are also increasingly common with hackers targeting the community and creating fraudulent links to try and steal your crypto. You know what they say about offers that are too good to be true right? For example:
Click here to get 2x more tokens when you buy in the next 24 hours.
I’d be tempted to click this – that’s how hackers using these sort of links draw you in with the intention of downloading malicious software onto your computer.
Let’s be serious:
A secure wallet is the MOST IMPORTANT asset to keep your crypto safe and minimise your exposure to these threats. They are the best way to store cryptocurrency.
How do cryptocurrency wallets work
They help keep your cryptocurrency safe through the use of a digital, and most importantly, private key.
Cryptocurrency is not physically “stored” in a wallet. A private digital code – that should only be known to you – shows ownership of a public key (a public digital code which records a specific amount of currency).
Your wallet stores both your private and public digital keys, allows you to send and receive coins, and acts as a personal record of transactions made. Simple enough right?
Private keys perform the following key processes:
Authentication: To verify that the holder sent a specific message. It’s your digital passport so to speak.
Encryption: To decrypt or encrypt a message to process a transaction. It’s the key to unlock everything.
All transactions are signed for with your private key and confirm your crypto investment.
But remember that your wallet doesn’t actually store your crypto, it’s just attributed to your private key – meaning that your private key is the MOST IMPORTANT thing. If someone else has your private key, they have access to your crypto and can steal it. This is why protection of your private key is so important.
Private keys take the form of hexadecimal codes such as:
Yes this is intimidating and fortunately you won’t be expected to memorise it. You have the option to write it down, print it on paper, type it on a document, convert to an image or even store it in a physical device – we’ll get to this later when we come to hardware wallets.
You will also be given a public key address which you can use to receive cryptocurrency. If someone wants to give you crypto, they can send funds to your public key. In addition, you can send funds to yourself using this key. For example, if you want to send funds from an exchange account to your wallet.
It’s okay to give people your public key, but NEVER your private key – It would be a nightmare situation if you got the two mixed up.
Pro Tip: You must always take steps to secure your private key backups. You need your private key to access your cryptocurrencies and authorise transactions from your wallet(s). If you lose your key, your cryptocurrency will be lost forever. Never share your private key with anyone apart from trusted friends and family.
Hot versus Cold Wallets
The terms “Hot” & “Cold” are used to differentiate between different storage types.
“Hot Wallet” – One that is connected to the internet. Desktop wallets are “hot” with Coinbase being an example. Since it is connected to the internet, the risk of being hacked is greater (those pesky hackers again.)
“Cold Wallet” – NOT connected to the internet (generally safer). A hardware wallet is an example. Hackers cannot steal digital assets that are not connected to the internet. On the flipside, if you lose your cold wallet, your crypto can also be lost. But it is still the safest storage to have.
Paper wallets are an offline storage method to hold your cryptocurrency. It involves printing out your public and private keys on a piece of paper which you should then store in a secure place – for example a security box in your home.
The keys are printed in the form of a code (the long, horrible looking hexadecimal code you saw earlier), a QR code (you will have checked into an airport with one of these) or both.
If you have a QR code, it can be scanned to make transactions rather than typing out the long-form code (most of us don’t have time for that.)
Paper wallets are extremely safe for cryptocurrency and give you complete control. You’re not relying on a piece of hardware and the risk of being hacked is non-existent. You just need to make sure you keep the piece of paper safe…
Which means YOU have sole responsibility.
If you lose the piece of paper – and you don’t have backups – your crypto is gone.
Despite this they are completely free and easy to set up.
Create a Bitcoin based paper wallet
Go to https://walletgenerator.net/. You can generate a wallet straight away. But what you should do is download the website from Github. This is safer as you can generate your codes offline. Once downloaded, turn your internet off. This is the safest way to prevent anyone from getting access to your private key.
Open up the zip file from the Github download, and double click on “index.html”. You can then create your private and public address.
Navigate to the Paper Wallet area. You will see a “BIP38 Encrypt” checkbox which allows you to put a password on the use of it. So if someone stole your paper wallet and tried to use your private key, they would also need your password. This adds a very welcome additional layer of security.
You can now select “Print” and print off your keys onto a piece of paper. There you have it.
Create an Ethereum based paper wallet
MyEtherWallet.com is the best way to secure your Ethereum. It also gives you the option to print out your private and public keys on paper. Check our our MyEtherWallet guide – you’ll find out how to set one up.
Pro Tip: DO NOT send Bitcoin to an Ethereum based wallet or vice versa. You will lose your money. This can happen if you mix up your private keys so make sure you’re well organised.
- Always make multiple copies, and store at least one of these offsite, for example at a family members home or in a safety deposit box at a bank. Although unlikely, natural disasters and fires do happen and you don’t want to lose your crypto because of it.
- It’s difficult to protect against theft if they know where to look. Hide your paper wallet in a location only you know about and don’t tell anyone where it is. Don’t leave the piece of paper lying around in a random location either – it might get thrown in the bin or just forgotten about.
Desktop wallets are downloaded and installed onto a laptop or computer, and are only accessible from the particular machine where they have been download.
Desktop wallets can offer a good level of security however:
If your computer is hacked or gets a virus you can lose all of your funds. So this type is recommended for SMALLER amounts of money and it is certainly not the most secure type of crypto wallet.
You are more at risk of phishing scams and you are vulnerable to such threats. For example, if you click on an unknown link and it results in malware being downloaded onto your computer?
You can potentially wave goodbye to the funds on your desktop wallet. And you can’t get them back.
There are 3 main types of desktop wallets being:Coinbase This is a great desktop wallet for beginners and is the gateway to cryptocurrency for most people; allowing you to buy major cryptos like Bitcoin, Ethereum and Litecoin. Check out our guide to opening a coinbase account for a more comprehensive walkthrough. Always enable two factor authentication (2FA), which gives you an extra level of security. It’s the best way to prevent your desktop wallet from being hacked as someone needs your computer AND phone to hack your account. Crypto specific This is a desktop wallet that is built for a specific cryptocurrency. For example if you have Bitcoin, you might decide to use the Electrum wallet. If you have NEO, you might want a Neon wallet. They are built specifically to secure a particular coin or token and can offer great security (more so than having your assets on Coinbase) and rewards if you store your crypto with them. Multi-crypto Finally we have desktop wallets that hold a number of different coins and tokens. An example of this is Exodus. The idea is that you have one platform to secure, exchange and manage your crypto, making it easier to manage rather than having a number of different wallets for various coins and tokens. Platforms like Exodus are constantly updating and adding new cryptocurrencies for ease of use. Bear in mind that Exodus doesn’t currently support all coins and tokens, such as Ripple (XRP), which is in beta testing on the platform.
Pro Tip: Always make sure you are downloading a desktop wallet directly from the source. Again, going back to the phishing links risk, you don’t want to download something that turns out to be a malware application. Check that you’re on the correct URL address and that the site is secure.
This leads us on nicely to hardware wallets next.
Hardware wallets are the most secure method to safeguard your crypto as they allow you to store crypto offline.
It is a physical device that you can connect to your computer or other device via USB port.
The clever thing is that the private key is within the device – so you need the device to access your crypto. Someone cannot steal your key without having the device.
You also dictate the pin code required to access its. Someone might steal it from you, but they still need your pin code to do anything with it.
Hardware wallets cannot be hacked (at the time this article was written.) That’s not to say they will never be hacked. But they are most certainly the safest method to store your crypto.
The only downside?
They can cost anywhere from $50 to $350, depending on availability and model.
Overview of hardware wallet types
There are two main hardware products from two different companies, so your decision here boils down to one question – Ledger or Trezor? Here’s a brief overview below.
1. TREZOR: This supports all major cryptocurrencies such as Bitcoin, Ethereum, Litecoin, XRP and ERC 20 tokens. You need to install an app called “TREZOR bridge” to allow the hardware wallet to talk to your computer / device; with different software versions for Windows, Mac OS and Linux. Here’s a guide on how to set it up.
TREZOR also offers Universal Second Factor (U2F) authentication. This is similar to Two Factor Authentication (2FA) but more secure as it does not transmit sensitive information over the internet during the setup process.
2. Ledger Nano S: This also supports all major cryptocurrencies such as Bitcoin, Ethereum, Litecoin, XRP and ERC 20 tokens. You need to install a Google Chrome application called “Ledger Manager” on your computer to run it with your wallet.
There is also Ledger Nano Blue. This device is larger than the Ledger Nano S and has bluetooth connectivity. It’s also more expensive at around 289 euros.
There are slight differences between the two products being:
- Minor differences in the coins and tokens supported: As mentioned above, both support the major cryptos like Bitcoin, Ethereum, Litecoin, XRP and ERC 20 tokens but they might differ slightly on some of the more obscure and less popular tokens out there.
- Different interfaces: For example, Trezor has a pincode with the numbers displayed on the screen and you select 4 digits. On Ledger, you select an 8 digit code using the left and right buttons on the keypad.
- Difference in firmware updates: As they’re operated by separate companies, it’s at their discretion as to what updates are required depending on user requests and making sure that security is constantly being improved.
Please do bear in mind that these devices are very popular and can regularly go out of stock. So if you want one, you should order it in advance to avoid disappointment (and you could end up paying a higher price for it elsewhere other than the official website.)
Mobile wallets are downloaded onto your phone from the App Store and run via the mobile application. Many desktop wallets – like Coinbase and Electrum – have mobile applications which you can use on your phone.
This is a hot wallet and recommended only for smaller amounts of crypto.
There are a couple particular risks you should consider:
If you wipe your phone or it breaks – and it’s not backed up – you’re at risk of losing all of your crypto stored on the App. This is why you should only store small amounts on your mobile wallet. Remember that time you lost your phone on a night out or dropped it in a toilet?
That could be a very expensive mistake if you don’t take the proper safety precautions.
Secondly, there have been security concerns over mobile wallets. Research by a security firm called High-Tech Bridge suggested that 90% of mobile apps are susceptible to common vulnerabilities and weaknesses. Again, this is something to bear in mind as there have been various cases where people’s funds have been compromised through hacks and stolen phones.
Universal crypto wallets
We touched on multi-crypto wallets earlier in the Desktop section. But in the future will there be better solutions to cryptocurrency security and ease of use?
Right now you can’t have everything in one place if you invest in multiple coins and tokens.
This is why initiatives like Ethos have sprung up with the intention to create a universal wallet so you don’t need to keep track of private keys and multiple wallet types. The idea is that it’s an “all in one” platform.
It’s still being implemented, but regardless it will be interesting to see if it’s possible to create a universal wallet that is both regulatory compliant and secure for users.
Cryptocurrency requires a great amount of trust in the technology underpinning the security of our assets. And anyone who can solve the problem of storing multiple cryptos whilst being completely secure could make a big name for themselves in the future.
On the other hand, hackers are also becoming more sophisticated. The need for security to be constantly improving will never go away as we move into the era of a digital economy.
Unlike other industries, holding crypto is not particularly easy or convenient right now. Case in point is the sheer number of different wallet types and suppliers available. Consolidation could be a welcome development and make crypto more accessible and less scary to the world at large.
Backups are essential to make sure that your private keys can be recovered if something bad happens to your wallet – say if your computer is lost or stolen or your hard disk fails. It’s important to have multiple backups which are both online and offline. Freak accidents do happen! Here are some basic tips:
- Store multiple backups in different locations such as paper, USB, external hard-drive, encrypted cloud and so on. External hard-drives are a great option and you can pick them up easily online.
- Make an encrypted file for wallet backups and passwords. Tools like VeraCrypt are great for this. It acts as a virtual hard-drive and you can choose double or triple encryption. Files you create can easily be put onto a USB stick or other device.
- Multiple wallets: It’s a good idea to store your crypto between a number of different forms of wallet. Create a paper wallet, a functional desktop wallet like Exodus and a hardware wallet if you have a large amount of funds. Do your own research and make sure you’re using a reputable and trusted supplier.
- Do not store your password and wallets on the same file. If a hacker accesses the file, they will have access to everything!
- Have a strong password: Kinda obvious, but you don’t want anyone guessing it.
- Two Factor Authentication (2FA): We’ve mentioned this a couple times, but it’s an extra layer of security. If you want to move funds from an exchange, you need both your password and a 2FA code (normally sent to your phone.) So if someone has your exchange password, you won’t be able to steal your funds easily if 2FA is in place.
Ultimately crypto is digital money. If you don’t have your private key then you don’t own the crypto. It’s your own responsibility so take it seriously – with secure wallets being the best way to store your cryptocurrency.