You are ready to buy your first bitcoin? Or you want to start mining but don’t know where to store your cryptos? Not sure which crypto wallet to choose? Read the following article! It is crucial that you understand the differences between all existing types of wallets. This will maybe get you out of trouble someday!
What is a crypto wallet?
If you read my article about Bitcoin and blockchain here, the next logical step is to setup a wallet. But let’s go step by step if you want to know which crypto wallet to choose.
A wallet is a place (virtual or physical) where you can store your cryptos. Simple. When you buy some Bitcoins, this means they will be necessarily stored on a wallet somewhere.
So when you want to transfer one bitcoin to someone, the bitcoin will transit from your wallet to the other person’s wallet. Simple too. One more thing: you can use only one type of cryptocurrency with one wallet.
Similarly, if you have a euro bank account, you can only store euros on it. You may have a US Dollar account too with your bank. But you understand that both accounts are separated, even though they are within the same bank. One bank account = one bank account number = one currency. For crypto it is no different. One wallet = one wallet number = one cryptocurrency.
Finally, when you are mining, all mined cryptos are directly sent to a wallet.
The wallet address: your public key
Your regular bank account has a unique account number. It is an IBAN. It is simply a unique identifier of your account in the rest of the world. In the crypto ecosystem, each wallet has a unique number. Kind of an IBAN. But its is called an address, also referred to the term “public key”. It looks like this:
Thus, when you want to get a payment in crypto, you need to provide your wallet address. And when you want to pay someone, you need her wallet address.
Transparency with anonymity
In the blockchain and Bitcoin world, public keys (wallet addresses) are… public! This means that anyone knowing your wallet address can check online all transactions that have ever been transferred to or from it and the balance of the wallet. This is one of the main advantages if the blockchain: transparency. But do not worry! This is all anonymous (that is another advantage of the blockchain). So, one can check online your wallet details, but they cannot know who is the owner of the wallet. Same with the addresses to which and from which money transits. Unless you know to whom belongs a wallet address, there is no way to figure it out.
The private key
The private key is basically a secret password. The secret password that allows you to send YOUR funds to any wallet in the world. You can share the public key with anyone but you must never share your private key with anyone. Why? Because thanks to it, someone can access your wallet and empty it. So think of it like a unique security key and keep if safe! Depending on the wallet you will be using, your private key will have different forms: a long string of random characters, a QR code or a series of random words (seed). As long as you keep your private key safe, you will always be able to access and retrieve the content of a wallet, regardless of the type of wallet you are using.
This is also the reason why someone with your private key can empty your wallet from anywhere in the world. Again, keep it safe!
The two main types of wallets
Think of your regular fiat money (fiat is money that has a physical form, like coins and bank notes). Euro for example. You receive your salary. The money can be “stored” on your bank account, online. Or in your pocket / in a safe, that is to say “offline”.
For cryptocurrencies, this is the same. You have online wallets and you have offline wallets.
When a wallet is somehow connected to the Internet (like your online bank account), then it is called a hot wallet.
When a wallet is not connected to the Internet in any manner (like storing your cash in your safe), then this is a cold wallet
Why different types of wallets?
Cold and hot wallets have different usage. Hot wallets are connected to the Internet. So you can very easily access the cryptos stored in a hot wallet. But this is a double-edged sword. If it is easy for you, it can also be easy for hackers, who operate on the Internet. On the other hand, cold wallets are more secured since, by definition, they are not connected to the Internet. The downside is that they require a bit more manipulation when you want to send some funds from it. It makes them less convenient and less straightforward to use than hot wallets.
We can make again a parallel with your bank account. It is more convenient to pay on Amazon with your card knowing that the money will be debited directly from your bank account than if you want to pay on Amazon with cash in your safe. You would first have to bring your cash to the bank.
Which crypto wallet to choose: different wallet interfaces
There are plenty wallets available. But now, you understand the difference between the two categories of wallets, hot and cold. Not sure which crypto wallet to choose? Let’s review what is available.
Some can only store one cryptocurrency (single asset wallet), some can store several (multi-asset wallet). Some are safer than others. Nicer looking than others. Or more user-friendly than others. Anyone with some coding knowledge can create a wallet software, which is why so many various wallets are available on the market. They are usually free. And often, cryptos (Bitcoin, Iota, Qtum, etc.) have their own official wallet, that you may or may not use.
The choice will be yours to decide the one you prefer!
Note: In this article, I am not promoting any of the wallets or websites mentioned in this article nor encouraging you to use any of them. They are just there as illustration, to give you an idea of what exists. I am not and cannot be responsible for any misuse of this information, these wallets, their hack, the loss of your private keys or anything else.🙂
An online Exchange is basically a trading platform. Exchanges are multi-asset wallets. Even if you are not a trader, this is usually the very first wallet you will ever use. Most people, when they start investing with crypto, first send money to an online platform via a bank transfer or credit card.
These platforms allow you in a simple manner to Exchange your fiat money (euro, dollar) against cryptos. There are hundreds of crypto Exchanges around the world. Most of them, though, only allow you to trade (or exchange) crypto vs. crypto. Only few actually allow you to send fiat money there.
Anyway, the thing with Exchanges is that your private key is not in your possession. The Exchange controls it. Of course, you need a login + password to log into an Exchange (like you do to connect to your Facebook account) but still… Please, just keep in mind that Exchanges are not 100% safe. The big ones get hacked, one after another, like Binance recently was. Or Bitfinex. Or Bitstamp. And more…
Quick note about hacks. The blockchain network is safe. Every time you hear some Bitcoins were stolen, it is indeed from Exchanges, and not because of a flaw with the Bitcoin protocol.
Exchange wallets are very simple to use. But one advice. Only keep your cryptos stored on an Exchange if you actually need to exchange your cryptos, or if you trade cryptos (no choice then).
In Europe, Kraken (no affiliation whatsoever) is the first choice for exchanging fiat to crypto and crypto to fiat. Indeed, the exchange is free and it is secured.
Some wallets are accessible through websites. They can be single-asset wallets or multiple-asset wallets. With a web wallet, you just need to enter your private key to access your money. So they may be hacked if a malware is running on the website at the time you enter your private key. You could also be fooled by phishing, that is to say you may be thinking that you access your real wallet but you are on a hacker’s similar-looking website. Similarly to Exchange wallets, they are very straightforward to use. But beware!
Some well known web wallets are MyEtherWallet, Magnum Wallet, Kimera, etc.
Browser extension wallet
It is an extension running directly in your browser (Chrome, Safari, etc.). They are meant to be safer than webs wallets because your private key is stored (in general) directly in the browser. This remains a hot wallet anyway, so in any case, a hacker may get access to it as long as an Internet connection exists.
Some well-known browser wallets are MetaMask, Guarda, Waves Wallet, MyCrypto, etc.
Software wallets are programs / apps that you can install on a computer or a smartphone, like any other program / app. They are very convenient and safer than Exchanges or web wallets since an attacker would need to penetrate your computer / phone to hack the software. This is more difficult if your computer is up to date with all security updates / antivirus. And less interesting for hackers. Hackers would rather focus on trying to steal millions of dollars worth of cryptos on an Exchange rather than few dollars from your computer. But this can happen! So, keep your eyes open!
Some well-known software wallets are Exodus, Atomic Wallet, Guarda, etc.
A paper wallet is a method of storing bitcoin which is not very popular any longer. Your private key and your crypto wallet address printed on a piece of paper. The private key is often generated by a website and printed on a paper by the user. One of the reasons paper wallets are problematic is because they require using a printer. Many printers have a hard drive for internal storage. At the time of printing, the information from your paper wallet will be saved. Anybody who reads the file will be able to see the private key and steal the bitcoins on it. Shared printers such as in schools, offices or internet cafés or connected to any public network are particularly subject to attacks.
If you want to use a paper wallet, it is better to write down yourself your private key on a piece of paper.
But guess what? What can be the issue with this storage method?
0! It can burn! Or you can lose it! Or someone can find it (that’s a bit the same, right?) So if you use this method, make sure to keep that in mind! To try to minimise the risk of fire, some companies offer paper wallets made with high-temperature resistant metal. Cryptosteel is one of these companies.
Hardware wallets are the safest wallets to use. They allow the storage of the user’s private keys in a secure small hardware device (more or less the size of a USB stick). When you transfer your crypto out of the device, the data is not in plain text. Thus, a potential attacker, even if he can steal the data, will not be able to read it. Moreover, private keys never get in contact with software potentially vulnerable (like the software wallets I mentioned before).
Some well-known hardware wallets are Ledger, Trezor, KeepKey, etc.
Now you know everything about wallets, you are ready to start mining and passively receive your first cryptos! If so, join us here! You can also read a bit more about mining just here.
Photo credit: Quote Inspector