Recent polls by CNN indicate a shift in the global attitudes toward cryptocurrencies. They show that, at present, more than half the people in the world know what cryptocurrencies are and that more than 30% of millennials will buy cryptocurrency in 2018. Even so, the older generation doesn’t place much confidence in this new form of money, nor are they adequately informed about it. According to CNN, 62% of people ages 30-45 know little to nothing. That increases to 66% in ages 45-65, rising as high to 73% in individuals 65+. All this results in skepticism and fear.
Due to rapid developments in the crypto-blockchain sphere, even those who are informed are often uneasy, not with the lack of options, but with the sea of choices. If you google “crypto wallet,” the browser will serve up numerous options. How do you choose the right one? How do you avoid being scammed or trapped by crypto tricksters?
The first step in making informed decisions is understanding what wallets are, how many types exist, and the different needs they serve. In this article, we will explain the basics.
What is a crypto wallet?
A “wallet” is where cryptocurrency is stored. It is not a place, like a physical wallet where you keep paper money; in fact, there is no cryptocurrency in a crypto wallet.
A crypto wallet is essentially two codes: a “private key” and a “public key.” In other words, it’s software that holds public-key and private-key cryptography. A cryptography key is a chain of symbols used by special crypto software for data decoding. These allow the wallet’s owner to access the blockchain and make transactions.
Why do I need a public key and a private key?
The public key is the address of your wallet. For example, if your friend wants to send you some crypto, he/she needs to have your public key.
The private key is the code you use to lock and unlock your wallet. It works like the confirmation code on a credit card; to approve the transaction, your friend has to input his/her private key. Your friend has to use his/her private key to send crypto to you.
To accept the cryptocurrency after the crypto has been transferred to your wallet, you need to use your private key, which corresponds to your public key.
You need your private key to carry out other transactions such as transfers, withdrawals, etc.
Wait a minute… where is my money?
As already mentioned, your crypto wallet has no crypto in it. Your money is in the blockchain. Crypto never leaves the blockchain; it is always stored there.
When your friend transfers crypto from his/her wallet to yours, a record of that transaction is added to the blockchain where it stays forever. For more information on how this works, please read our previous articles.
How do I choose a wallet?
Let’s have a closer look at the different types of wallets, as well as their advantages and disadvantages:
No, this is not a wallet made out of paper! What this means is that people write down their public and private keys on paper so that they can have a hardcopy record.
You can only store cryptocurrency in paper wallets. To send cryptocurrency (if you want to buy something, for example), you need a different type of wallet.
The big advantage of paper wallets is safety. It’s hard for someone to steal a piece of paper from your home or safety deposit box. There is only one disadvantage – they are inconvenient to use, and the chance of making a mistake while copying the long keys is high. That has changed in recent times however; special software generates QR codes of the keys so they can be scanned without errors.
Also called “cloud wallets,” hot wallets are the simplest type of crypto wallet. They “live” online and are provided by various wallet services.
They are called “hot” because you can use them online anytime. To open a hot wallet, all you need to do is visit the service provider’s website and register. Your wallet will live on the wallet provider’s “cloud storage,” and you do not have to install any applications on your PC or phone. Anytime you want to access your crypto, you simply visit the wallet provider’s website, log in, and make a transaction.
Hot wallets are easy to use but entirely dependent on the wallet provider; in other words, if the site shuts down or is hacked, you will likely lose your crypto.
Crypto exchanges and trading platforms offer hot wallets for the currencies they list because this allows for fast transactions in large numbers; in other words, it speeds up the trading. History shows, however, that it’s not safe to keep all your crypto in hot wallets if we take Mt. Gox as an example. Also, hot wallets are very attractive to hackers.
Some hot wallet providers also offer exchange services; they allow you to convert one currency into another (e.g., buy Ethereum with Bitcoin). Although this is very convenient, wallet services that do not offer exchange transactions are likely to have a higher degree of security. Nevertheless, in both cases, your wallet is wholly dependent on the integrity and security of the wallet service.
Another important consideration in choosing a hot wallet is whether or not you can see the keys. Some providers let you see the keys and keep records of them elsewhere; others do not. In the first case, you could change wallet providers if you wanted to, but in the second case, you would likely lose your crypto.
To summarize: The advantage of hot wallets is that they are easy to use and online, therefore accessible anywhere 24/7. The major disadvantages are the lack of security and that the user depends on the trustworthiness of the service provider.
In contrast to hot wallets, which live on remote servers, warm wallets are software, which has to be installed on your phone or computer. As such, they require an internet connection.
A warm mobile wallet holds your public and private keys and processes transactions. In general, they are not bad for storing currency and making payments.
Warm wallets can be divided into two subcategories: “thick wallets” and “thin wallets.” Thick wallets keep a copy of the entire blockchain history on the user’s hardware, while thin ones use remote internet storage for this purpose. This means that a thick wallet cannot fit on a phone – the only place you can install it is on a PC since the blockchain is 200+ Gb at the moment.
Initially, all warm wallets were thick, but now they share the market with cloud and thin wallets. Nevertheless, thick wallets are still popular because they are safer than cloud and thin wallets. The user doesn’t depend on a third party to keep a log of the entire blockchain but has access to it on his/her PC.
Although warm wallets are safer than hot wallets, they are not protected enough because all the information is stored on a single device.
The following are some warm wallet smartphone providers: Copay, which is actually a universal wallet provider, Breadwallett, Mycelium, Bitcoin wallet, Airbitz, Greenbitz, and others. Breadwallet, Airbitz, and Copay are also available for Mac.
Cold wallets are devices, which can be plugged into a computer or phone. They look like flash drives. Although you could use an ordinary flash drive as a cold wallet, it’s preferable to use a device made specifically for this purpose since it has a Secure Element (SE) chip, which stores sensitive data and runs secure apps such as those designed for payments.
Cold wallets are also safer because all the data is stored on a device that is not constantly connected to the internet. But, as you might have guessed, they are not free and cost more than a flash drive. And yes, this will be another device that you need to store safely or carry around with you. At least, cold wallets do not need to be charged.
After reviewing the advantages and disadvantages of the various types of wallets, you may consider storing your crypto in more than one place; for example, you may store large sums in a cold wallet, and use a hot or warm wallet for day-to-day transactions. In choosing your crypto wallets, do your research to find the best and safest options to meet your needs.
In closing, we include the following excellent diagram that shows a visual comparison of the different types of wallets: