Crypto Wallets Explained for Beginners and Experts
In 21st century the meaning of the word “wallet” has changed tangibly. Nowadays wallets are associated mainly with cryptocurrencies - exchanges, storage and safe keeping. Let’s leave the old-fashioned wallets which can contain hundreds of dollars and concentrate on crypto wallets in which you can store thousands or millions of coins.
In this article we will help you out to understand:
- What is a crypto wallet?
- How wallets work and how to use them?
- What type of wallets exist?
- Some valuable tips and advises about their usage.
What is a cryptocurrency wallet?
Wallets are platforms, devices or apps that you can sign up for, buy as physical devices or install as application on your phone or PC. To help you understand the meaning and purpose, first we need to explain the need of them. They help you maintain and control the flow of your goods through the network of blockchains. It is very important to understand that they don’t contain the coins them self, they possess the address of your values in the blockchain.
How do they work?
By definition, digital wallets are programmed software which stores private and public keys. Private keys are visible only for you and they must be kept in a secret. Public keys are like a bank account number. For example, if you send one Litecoin, you are sending value in the form of transaction, this way you are changing the ownership of your coin to the receiver. If the receiver wants to spend that coin, his private keys must match the public address where you have sent the Litecoin. Hard to understand right? Let’s try another approach, we will compare it with something way simpler. Imagine you have an email, that email has a password, if you want to send emails, you must know the password, right? So, the email is the public address, the place that you send or receive emails, everybody can have your email address, but nobody can send or receive any emails without your password, that password is the private key. If you lose your password, you won’t be able to access your email and send or receive emails. Pretty much that’s the way wallets work, explained on a common language. It is very important to understand that if you lose your private key, you are losing control over your coins, on top of that it cannot be recovered, so be cautious.
The truth is that there are different types of wallets, split in different groups depending on their usage, location and connection with internet. In the next paragraph we will examine it all and will explain the differences between it.
What types of wallets exist?
There are many types of wallets split in different groups depending on their usage, internet access, level of security or their origin. Most of the exchanges and cryptocurrencies offer official coin wallet or multi-coin one when you start mining or start trading on the exchange market. We will divide them now in several sub sections to make it more easier for you.
Cold and Hot wallets
Originally, those terms are related with the access to internet. “Cold storage” is an expression for hardware wallets or paper wallets, because they are not connected to the network, also called offline wallets. As you can guess, “hot wallets” are exactly the opposite, those which are constantly or part-time connected to internet like desktop, mobile or web(cloud) wallets.
Hardware and paper wallets
As we previously mentioned they don’t have any internet access which makes them the most secured option of all. Hardware wallets are specially dedicated hardware, invented to safely preserve your crypto funds. Usually, they are similar to USB as devise size. They can be connected to internet to make transactions and get new data, afterwards they go offline again for maximum security. Of course, there are different models, some of them with more complicated safety tools and encryptions to achieve higher security level. Their price varies between 60-250$ depends on the market and the model of it. Most popular and reliable brands are Trezor and Ledger. And now, as you can assume, paper wallets are private and public keys written on a real paper, nowadays usually is it QR code printed on paper. By using a paper wallet, you completely avoid the digital data storage of your currency. Those type of wallets are perfectly safe but there is always a chance of losing it or someone to steal it from you, so be careful if you are looking to create one.
Desktop, mobile and web wallets
It is obvious that they operate online, and they are tightly related with your PC security (fire-walls, antivirus software etc). As you may know to hack the blockchain is practically impossible, but to hack your personal computer and your private key which is stored there, it’s more than possible. Later on, we will give you some more advances how to prevent any attacks on your computer but before that we will explain the differences between these 3 types of wallets.
- Desktop wallets are most common because usually most of them are free or at low cost. The keys to your wallet are stored on your PC, to reduce the chance of any security breaches, its best to regularly update your software protection such as firewalls and antivirus clients. It is best also to have a paper or hardware wallet as a backup of the information in case of spontaneous malfunctions of your computer like re-installment of your operational system. Have a look at the most popular brands- Bitcoin CoreWallet, Electrum, Exodus, Green Address, ArcBit and more.
- Mobile wallets are also very popular because of their simple and practical usage, the ability to have access to your fund anywhere, anytime. They are great option considering the beforementioned but again you should be careful of any suspicious web sited and apps in the web. We recommend you to store only small quantities on mobile wallets to prevent any serious losses in case of security contraventions.
- Web or so-called Cloud wallets, they are online platforms which possess your private and public keys in exchange you receive account name and password to enter and control your funds through a website online platform. Here, the chance of hack attacks is higher because those platforms store enormous amount of coins, so it’s more-likely to hack the whole platform instead of your wallet only. The truth is that some of the wallet's providers, collect certain fees which will be used in case of any losses out of security violations but not all of them. Web wallets are very useful, practical and accessible from any point of the world with internet connection. Same as all other hot wallets, we recommend having a backup hardware or paper wallet.
Core wallets and multi-coin wallets
We decided to add one additional paragraph to explain the otherness between Core wallets and Multi-coin wallets. Core wallets are usually a desktop “full node” wallets, which means that they contain the whole blockchain stored on your computer. Usually they are free to use or at low cost. There are “light node” wallets also, which only co-respond and synchronize with the “full nodes” in the blockchain but they don’t contain or store anything on your devise hard-drive. Core wallets are the official wallets for each cryptocurrency, usable only for that particular coin. You should prepare at least 500GB hard drive to store the full blockchain on it, if a “full node”. Multi-coin wallets on the other side, support more than one currency and they could be free to use or paid. Some of them are coming with a mobile application to easily access it from a distance. Most of those wallets are built into exchanges like Coinomi. Which is one of the biggest exchanges for cryptocurrencies, offering storage and exchange of more than 30 different coins but they offer only mobile client for now, desktop client is coming soon. Coinomi ensures the security of your coins with an extra encryption of your keys. Jaxx is another wallet build on exchange, this one offers desktop and mobile version, synced of course. Unfortunately, it covers smaller number of coins and they don’t do additional encryption of your keys. The interface is super user-friendly. We cannot miss to mention, the Exodus, it is a wallet with build in exchange. It is easy to use and with additional encryption as Coinami. They cover only 8 cryptocurrencies: BTC, LTC, DOGE, ETH, DASH, GNT, REP, DCR. Those were the 3 most famous and popular multi-coin wallets and their specifications.
Let`s get to the fun part now, we want now to share our wisdom and knowledge with you and provide you some lifehacks related with crypto wallets.
Advices, tips and lifehacks
As you already know, the private key is holding the access to your funds and if you lose it or it is stolen, there’s no way to retrieve them. Since hacking the blockchain is unlikely, all hacker will target your personal device, either desktop computer or mobile phone to get access to your information stored there and steal your private key. There are several ways to prevent that or at least to increase your security and reduce the chance of any breaches.
Our first advice is to create at least 2 wallets and never keep all your savings in one place. The first wallet is for daily use - exchanges, transactions and purchases and the second one preferably cold storage wallet (paper or hardware) as a back up to store the rest of your savings off the network.
As we mentioned above multi-coin wallets are quite useful and practical, but they hide certain insecurity. Those type of wallets we will recommend for daily usage but not for safekeeping. Yes, we do agree, they usually are well protected and maintained but logically they possess and control the funds of their users. More ambitious hackers are willing to attack them, in the last 5 years we can point several similar attacks with significant losses. In the majority of these cases the users ware not compensated for their losses.
In case you don’t want to have 2 wallets and you prefer to stick with only 1 we have another idea how to keep your coins safe.
Dedicate 1 desktop computer and install desktop wallet. You should install firewalls and antivirus software, update them regularly to keep high level of security. Also, just don’t use it for browsing or anything else to reduce more the chance of being hacked.
There are some system tools that you can use to protect your account from burglaries, depending on the wallet, they usually support SFA (single factor authenticator) or 2FA (Two factor authenticator). How do they work, you may wonder? The SFA provides single password or pin-code to access your account. The 2FA authenticator is more complicated, we will explain it step by step. First you need to install an app on your phone, that app will generate different codes every 30 seconds. When you are logging into your account, you will for fill your username and password and right after a new field will appear “verification code”. And then you need to add the code sent to your phone in order to successfully log in. Quite clever right?
You may ask, what about the mobile wallets? The truth is they are not reliable at all, because they are exposed to too many threats, coming from your web browser, hidden apps and back-round processes altogether with social media scams. If you can reduce those activities and limit your potential exposure to online threats, it will be best.
We want to add quickly a few simple tips more:
- Always have a backup of your information stored on a separate device.
- Always use complicated passwords.
- Never use public Wi-fi networks
- Re-search every subject before you take actions.
- Are wallets anonymous? – The answer is similar to the one for cryptocurrencies. Since the blockchain ledgers are open source with public nature, we can more-likely state that they are not anonymous but “pseudonymous”. In theory we can back-engineer the public data and find your address.
- Are there any wallet fees? – Many wallets don’t charge, others do. Carefully read the terms and conditions before you sign up. You should be aware also, there are small transactions fees which vary on the type of the coin.
- Can I use one wallet for all of my coins? – Yes, you can. Just pick a multi-coin wallet like the abovementioned. – Coinomi, Jaxx or Exodus
- What is “full node” wallet – Usually core-wallets are full node wallets, that means that they will download and contain the whole blockchain on your computer, prepare more free space.
- Which is the best wallet? – In particularity, there’s no best wallet, it is quite subjective. It really depends on your needs, preferences and usage.