A simple guide to cryptocurrency wallets
Use this simple guide to understand what a cryptocurrency wallet is, how it works, how to find the most popular cryptocurrency wallets, and the most secure ones available on the market today. We will help you choose the most suitable wallet to serve your needs.
What is a cryptocurrency wallet?
A cryptocurrency wallet is a client that stores the private and public keys of a single coin or multiple coins and/or tokens. The coin wallet is the means by which a user manages these keys and interacts with different blockchains, in order to send and receive cryptocurrency transactions, and check their balance(s). Unlike the concept of a “pocket” wallet, a cryptocurrency wallet doesn’t actually store the currency. Instead, it only includes records of transactions and balances that are stored on the blockchain(s). Actually, a cryptocurrency does not get stored in any digital location, or exists in any physical form, only on the blockchain public ledger.
When you send bitcoin, or any other cryptocurrency, to someone, you are actually using the coins’ private keys stored in your wallet to sign off ownership of the coins to the receiver. For the receiver to be able to spend the received coins, the private keys stored in their wallets have to match the public address to which the coins have been sent. If the private and public keys match, the receiver’s wallet balance will increase, and yours will decline accordingly. The idea is that there is no actual exchange of coins between the wallets. The transaction is marked by a transaction record on the public ledger that confirms the change of balance between cryptocurrency wallets.
Types of cryptocurrency wallets
There are multiple types of cryptocurrency wallets that offer users various means for storing and accessing their coins and/or tokens. Wallets can be divided into the following categories:
Software wallets can be further broken down into desktop, web based (online), and mobile wallets:
By far, desktop wallets are the most secure forms of cryptocurrency wallets. However, using a desktop wallet is not a simple task and requires considerable experience, otherwise all stored funds can be lost. A desktop wallet requires downloading the coin’s whole blockchain, before it can be used to send and receive transactions. Bitcoin’s blockchain is currently estimated to be around 185 Gigabytes, so one would need a few days to be able to fully download it and be able to use the Bitcoin Core desktop wallet client, which is inconvenient to many.
A desktop wallet is downloaded and installed on a PC or laptop, and a special file is used to store private key information. For example, the original Bitcoin Core client stores private key information on a file named “wallet.dat” which is located by default in the Bitcoin data directory, and can be encrypted with a password or a mnemonic phrase. Usually, a local bitcoin wallet file is intended to be used on a single computer, as attempting to clone a wallet file to use it on multiple computers can lead to “weird behavior”.
Online wallets run on the cloud and can be accessed via any computer from anywhere. Even though online wallets are much simpler to use than desktop wallets, they are less secure. Some online wallets store your coins’ private keys, which renders them more prone to theft and hacking attacks. Online bitcoin wallets like those offered by Blockchain.com do not store your coins’ private keys so they are highly recommended over any other other online wallet.
Mobile wallets are increasing common and you can find a bitcoin wallet for Android or a bitcoin wallet for iPhone, as well as altcoin wallet apps for both systems. They are very convenient as they can be accessed via your phone anywhere and a bitcoin wallet app can be used to pay at retail stores. Mobile wallets such as the Coinbase wallet are much smaller in size than desktop wallets, yet they are less secure, as the coins’ private keys are usually controlled by the mobile wallet provider.
Hardware wallets are more secure than online wallets, because the private keys are stored on the hardware device offline. Most hardware wallets are compatible with multiple online interfaces and support different cryptocurrencies. Sending a transaction is simple – you just plug in the bitcoin hardware wallet to any computer connected to the internet, enter a pin, send the desired coins, and confirm the payment.
A paper wallet is as secure as a desktop wallet, and is relatively easy to use. A paper wallet is simply a printout of your coins’ private and public keys. Furthermore, the term paper wallet refers to a software client that can generate the coins’ public and private keys, which are then written down or printed out. To receive funds to your paper wallet, all you have to do is send funds to the public address written on your paper. To spend funds from your paper wallet, you first have to transfer funds to a software wallet which is done via entering the private keys shown on the paper wallet into the software client.
Is your cryptocurrency wallet secure?
The security of different cryptocurrency wallets varies greatly. The security level depends on the type of wallet, i.e. desktop, online, mobile, hardware, or paper. A cryptocurrency wallet relying on a web server to store your private keys is much riskier than a wallet that stores your private keys offline. Online wallets render users prone to loss of funds via hackers compromising the web server used to store the coins’ private keys, or via exit scams planned by providers of the wallet services. On the other hand, offline wallets cannot be compromised as they don’t rely on a web server, or a third party for storage of private keys.
Even though online wallets are known to be vulnerable to hacking attacks, following certain security measures, with your blockchain wallet login, can maximize their security and minimize the risk of a loss of funds. Always remember that regardless of the type of wallet you use, losing your private keys leads to a permanent loss of funds. Also, it should be emphasized that cryptocurrency transactions are irreversible, so if you send your coins to a scammer, you can never reclaim your funds. You can maximize your wallet’s security via the following measures:
1. Back up your wallet
Software wallets, including desktop, online, and mobile wallets, can be backed up to prevent loss of funds. Backup can be accomplished in different ways:
The desktop wallet’s wallet.dat file can be encrypted with a password. After encrypting the file, copy it to another device such as a CD, a USB drive, another computer, or a cloud drive.
Online wallets and hardware wallets can be backed up via a mnemonic phrase which usually consists of 12 to 24 randomly selected words. A desktop wallet can also be backed up via a mnemonic phrase which is used to generate a root key, from which all the coins’ private keys can be regenerated.
Multi-factor authentication can be used to boost the security of online wallets. Most online wallets offer users the option to use two-factor authentication, e.g. Google Authenticator, for an extra layer of security. This prevents loss of funds even if a hacker uses a keylogger to phish the wallet’s password.
2. Keep your wallet’s software updated
Whether you’re using a desktop wallet or a mobile wallet, you should always know how to get a bitcoin wallet software client up-to-date to guarantee that you have the latest security enhancements.
3. Use long, complex, and meaningless passwords to minimize the risk of your password being cracked.
Services like Passwordgenerator.net can generate passwords for you. Don’t share your passwords with anyone, even your online wallet service provider. Administrators of online wallets will never ask you for your password.
4. Use multiple authentication requirements for your withdrawals from online and mobile wallets.
To allow withdrawal of funds, enable multiple authentication steps, e.g. entering your password, two-factor authentication, and SMS code via your mobile phone.