Even if some people still don’t see Bitcoin and cryptocurrencies as money, there’s little to no doubt that digital currencies are just as good as cash and even better. But that’s a story for another day because today we’re focusing on how to store cryptocurrencies — a common question among those getting started with digital assets.
Cryptocurrencies are entirely digital, meaning there’s no way you can actually touch them. Yet, you have to store them somehow. So… What is the best way to store cryptocurrency? Are cryptocurrency wallets safe? How do cryptocurrency wallets work? Find the answers to these and other essential questions below.
Cryptocurrency Wallets 101
What is a cryptocurrency wallet?
Looking for a cryptocurrency wallet definition? Here’s the thing: while we normally talk about the storage of bitcoin and other cryptocurrencies, this is technically wrong since digital currencies are virtual and do not exist in any physical shape or form.
But again, they have to be stored somewhere and that’s the job of crypto wallets. A cryptocurrency wallet is a software used to store private keys and public keys, allowing the user to easily manage their cryptocurrency assets. With a blockchain wallet, holders not only can store assets but also send, receive and monitor their cryptocurrency balances.
How do cryptocurrency wallets work?
Cryptocurrency wallets might look similar to mobile banking apps, but the system behind the screen is essentially different. Cryptocurrencies are underpinned by blockchain technology. The blockchain is a distributed public ledger that keeps an immutable record of transactions.
A cryptocurrency wallet is a set of private and public keys that verifies the ownership of a digital asset, giving them the ability to send and receive digital assets that otherwise would permanently reside on a blockchain ledger.
Bitcoin wallets are considered proof of ownership of BTC that exist on the Bitcoin blockchain. You can spend your bitcoin through the use of private keys while the public key is used for receiving digital assets.
Confused? Here’s an easy way to think about it. Your public key is much like your bank account. You give it to people or businesses to send you money while the private key is like the PIN of your debit card or bank account password. It’s only known by you.
Types of cryptocurrency wallets
There are two main kinds of crypto wallets: hot and cold wallets. This distinction refers entirely to Internet connectivity. Hot wallets are those always connected to the Internet, while cold wallets are kept offline.
For some users, online wallets might seem more susceptible to hacks and thefts, but they’re also so much comfortable and easy to access.
Here is a rundown on the different types of wallets.
A desktop wallet, just as the name suggests, resides on a desktop. A desktop wallet is downloaded on a computer or laptop and can only be accessed on that machine where it is installed.
These wallets offer a good level of security but they can also be broken into. Things can go wrong if your computer is hacked or infected with a virus. There is a possibility that you may lose your funds unless you take measures to mitigate such risks.
They are seen as more secure than mobile and online wallets as they typically don’t rely on third parties for data storage.
One of the key advantages is that your keys are stored on your hard drive. These crypto wallets are mostly ideal for traders since they can easily manage their funds without switching devices.
Mobile wallets are apps that you install on your mobile devices and their main advantage is that you can access your funds on the go. Send, receive, store, and even spend with just a few taps.
Mobile wallets tend to offer a remarkably good user experience, perfect for those just getting started with cryptocurrencies.
As its name suggests, a hardware wallet is a physical device, sometimes in the shape of a USB drive, that securely stores your private and public keys. It is generally considered to be the safest method to store your digital assets since there are no verifiable incidences of being hacked.
Hardware wallets are reportedly resistant to computer viruses and cannot be used to transfer your funds in plain text.
Using a hardware wallet isn’t complicated. All you need to do is plug the device onto a computer with internet access, select the amount and currency you want to send and be on your way. But here’s the deal: if you lose the wallet, accidentally step on it, or your dog eats it, it’s over.
Paper wallets are really easy to use and can give you peace of mind because they are highly secure.
A paper wallet can mean two different things. It can either refer to the printed version of your private and public keys, or to a software that can generate private and public keys which you then print out.
You receive cryptocurrencies by sending funds to the public address you printed out. You can transfer funds out of a paper wallet by either scanning a QR code on the paper wallet or manually entering your private keys.
One of the selling points of a paper wallet is that you are not storing your keys digitally, making it impossible for hackers or computer malware to exploit your funds. However, you still need to take precautions to ensure that your funds are safe.
Make sure that no one is watching you when you create your set of keys. Most importantly, store your private keys in a place where your paper will not be exposed to elements such as water, fire, or chemicals that may otherwise destroy it. Seriously, sh*t happens.
A piece of good advice is to laminate the paper wallet and keep it in a safe deposit. You could also play Sherlock, break down the keys into different chunks and store them in different locations.
Online wallets run on the cloud and you can access them from any device, anywhere in the world. They are easy and convenient to use; however, they are risky since the private and public keys are controlled by a third party, which makes susceptible to thefts and hacking.
Are cryptocurrency wallets safe?
There is no universal answer to this question. All wallets are secure up to a certain extent and the level of security depends on several factors such as the wallet type and the service provider.
Hot wallets are bit riskier because they expose you to hackers while offline wallets cannot be attacked. Of course, the risk levels of using online wallets can be considerably reduced with some safety measures:
- Backup your wallet
- Regularly update your software
- Make use of extra layers of security such as 2FA
How to choose the best cryptocurrency wallet?
There are plenty of factors that could influence your decision, such as the amount of cryptocurrency you own, the way you use that cryptocurrency, your country of residence, etc.
A person who has a large stash of digital currencies and wants to hold them for a long time may opt for a hardware or paper wallet.
On the contrary, someone who wants to use cryptocurrencies to pay for goods and services would be better off with a mobile wallet such as Crypterium.
At the end of the day, the wallet you choose should be a balance between convenience and security.