Wallets are essential tools for accessing, sending and receiving cryptocurrencies.
- A wallet is a physical medium, device, program or service used by cryptocurrency holders to store (multiple) public and/or private keys
- Wallets are used to track ownership and to receive and spend cryptocurrencies
- The cryptocurrency itself is not “contained” inside a wallet - the wallet interacts with a blockchain
- Wallets are used to store the private and public keys needed for all types of transactions. There are different types of wallets for different user needs that offer varying degrees of security
In this lesson, you will learn the basics of wallets for cryptocurrencies.
What is a wallet?
A wallet is necessary to access cryptocurrencies such as Bitcoin, Ethereum, Litecoin and other altcoins. A wallet does not store the actual amount of cryptocurrencies a user owns, but holds private keys and therefore allows users to access their holdings more conveniently. It is not a physical wallet.
Wallets are used to store the private and public keys needed for all types of transactions. Different types of wallets for different user needs offer varying degrees of security.
Instead, a wallet is more like a storage vault for your addresses, including your public and private keys. Furthermore, this vault is needed to gain access to your public address on the blockchain which actually contains your cryptocurrency holdings, like Bitcoin.
To be precise: a single wallet can hold multiple private keys. You can create as many wallets as you want. In fact, most people who own cryptocurrencies use several wallets in order to ensure maximum security in storing their cryptocurrencies.
How does a wallet work?
Don’t imagine the inner workings of a cryptocurrency wallet like the leather wallet in your back pocket. Instead, imagine a safety deposit box or a vault. To access your assets and to withdraw them, you need a dedicated key or, in other words, a password.
Losing the keys to your wallet is a critical problem because it means you are no longer able to access your own storage box. If your keys are stolen, someone else will have access.
Now imagine this safety deposit is theoretically accessible by anyone who knows its location (public address) and corresponding key (private key). Knowing the location is no problem at all because the funds are safely locked away in the blockchain.
Losing the keys to your wallet is something you should avoid at all cost. If you lose your keys, you are no longer able to access your own storage box. If your keys are stolen, someone else will have access to your funds. For this reason be very careful and take the necessary safety measures when you handle your wallet and your keys.
How do I get a wallet?
There are many different options out there for storing cryptocurrencies and users are free to choose the one that best suits their needs.
Hot Wallet (Exchange / Broker)
The most basic and easiest option you have is to store your cryptocurrencies on the platform or exchange through which you bought them.
Bitpanda stores user funds as safely as possible in secure offline wallets using state-of-the-art technology. In addition, accounts can be secured using Two-Factor Authentication. Users see their active devices and sessions, can log out and close active sessions using another device. Plus, Bitpanda also provides SSL encryption and DDOS protection. It is generally recommended to keep only a small amount of your funds on an exchange and store the vast majority of your funds in a cold storage wallet.
- Most basic way to get started
- No need to transfer assets if you wish to sell them
- Fast and cost-efficient
- High security standards on trustworthy sites like bitpanda.com
- Not every exchange offers state-of-the-art wallet security like Bitpanda
- An exchange, by nature, is a single point of failure
- Convenience may tempt users to become careless about storage safety
- You don’t have immediate access to your funds
Software Wallet (Desktop / Mobile / Online)
A software wallet offers high usability and good security while storing your funds on your computer desktop or mobile device. You have immediate access to your crypto and complete control over your private keys. This solution creates a single wallet file, where private keys are stored. For added security, this file is also encrypted, which means that a customised passphrase can be used to access it.
You can choose between two types of software wallets: either you get a separate one for each cryptocurrency you own or you use software wallets that can store multiple cryptocurrencies.
- Easy to set up and use
- Good security
- You control your private keys
- Can be hacked if you lose your computer or mobile device
- Your funds are “hot” when your computer or mobile device is connected to the internet
- Public WiFi is unsafe to use when accessing your funds
Hardware wallets combine user convenience with a high level of security. They are probably the best way to store cryptocurrencies for most people. Your private keys are stored on a cryptographically-secured hardware device. Because keys are stored directly on the device and can’t be read in plaintext, it is almost impossible for attackers to obtain them, even if your computer is infected by a virus.
To ensure that hardware wallets have not been compromised in any way before you buy them, you should never purchase used hardware wallets and always buy them directly from trusted manufacturers.
- Easy to use
- Very high level of security
- Device can be safely stored away
- Convenient solutions to restore funds if hardware is lost or damaged
- Costs money
- Used hardware wallets may contain malware
- May seem inconvenient to use
- Device may get lost or stolen, then there is no way to recover your funds
Paper / Physical Wallet
The concept behind this solution is very straight-forward. There are websites that let you generate a public address and a corresponding private key within minutes.
You can easily create a paper wallet within minutes. Open source services are available online but create the keys locally on your machine, which means that they are not sent over the internet.
- Very high level of security (depending on how you create the paper wallet)
- Cheap, convenient and fast
- If the sheet of paper with your private key is lost or stolen, there is no way to recover it
- Could be compromised from the beginning if your computer has malware on it
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- Andreas M. Antonopoulos - The Internet of Money
- Alan T. Norman - Blockchain Technology Explained
- Abraham K. White - Blockchain: Discover the Technology behind Smart Contracts, Wallets, Mining and Cryptocurrency