The Complete Beginners Guide To Cryptocurrency Wallets
In this guide, you will get to learn all there’s to know about a cryptocurrency wallet; what it is, how it works and also the best wallets in the market today.
What’s a Cryptocurrency Wallet?
A cryptocurrency wallet is basically a software program that has the unique ability to store private and public keys. It also enables its users to transact digital currencies by interacting with various blockchain networks. A digital wallet is a must-have if you intend to use cryptocurrencies such as Bitcoin or Ethereum as your preferred method of transacting business.
How Do They Work?
There’s quite a huge misunderstanding around how cryptocurrency wallets work even though there are millions of people all over the world who use them. Digital wallets don’t “carry” currency, unlike the traditional ‘pocket’ wallets. As a matter of fact, currencies are not stored in a single location. They are basically non-existent in physical form. Transaction records are the only thing that exists as proof of their existence. The records are stored on blockchain networks.
Cryptocurrency wallets are defined as software programs with the ability to store public and private keys. They are also able to interact with a range of blockchain networks and thus allow their users to conduct operations such as sending money and monitoring their balance. When a user of a digital wallet sends Bitcoins or other cryptocurrencies to another user, they are actually signing off the ownership of the digital coins to the address of the buyer’s wallet. The public key that the currency was assigned to must be similar to your private key if you want to unlock the funds and have the freedom to use them as you like. The balance in the sender’s wallet will decrease while yours increases if the keys are a confirmed match. The transaction doesn’t involve the exchange of any real coins. A record on the blockchain network is the only thing that signifies this kind of transaction as well as a slight or huge change in your crypto wallet balance.
Crypto Wallets Types
There exist many types of digital wallets that provide different ways of storing and accessing your digital coins. There are three major categories of digital wallets: hardware, software, and paper.
Software wallets are further broken down into mobile, desktop or online.
Desktop: They are installed on laptops or PCs. They can only be accessed from the single computer they are downloaded in. Even though these wallets offer more security than the rest, the possibility of being compromised may arise if your PC is hacked or is attacked by a virus.
Online: They can be accessed from any location by any device with an internet connection since they are based in the cloud. These wallets are more vulnerable to theft and hacking attacks since your private keys are stored online and are controlled by third parties. Their level of accessibility is more convenient.
Mobile: They run on apps in mobile devices. They are convenient because they can be used almost everywhere including retail stores. Due to the limited storage space in mobile devices, mobile wallets are simpler to use and also smaller in size than desktop wallets.
Hardware: They are different from the rest because they store private keys in flash drives and other hardware devices. The offline storage of private keys means that they are more secure. They are also compatible with various web interfaces and can also support different currencies. This depends on your choice. Transacting by using them is easy. All you need to do is plug in your flash drive into an internet-enabled computer, enter your pin, send digital currency and confirm in the end. Hardware wallets keep your money safe, and they also make it easy to transact.
Paper: Paper wallets are incredibly easy to use, and provide a high level of security. The obvious interpretation of paper wallet is a piece of paper or just a printout containing your private and public keys. However, it may also mean a piece of software whose purpose is to create a pair of keys that are later printed. The working of a paper wallet is quite straightforward. You can do the transfer of cryptocurrencies to your paper wallet by transferring funds from your digital wallet to the physical wallet address reading on the paper wallet. Alternatively, if you need to spend or withdraw your money, you will just need to move the funds to your software wallet from your paper wallet. You can achieve this by either scanning the QR code on your paper wallet or by manually entering your private keys.
Are Cryptocurrency Wallets Secure?
The degree of security varies. It all depends on the type of wallet you choose (that is, online, paper, desktop, mobile, hardware) and also the service provider. Compared to offline storage, web servers are riskier storage sites for your currency. Online wallets are more vulnerable to hacking, which may lead to huge losses for the concerned parties. Online wallets, on the other hand, are more secure since they aren’t connected to any network. The risk of hacking is therefore non-existent. They also don’t rely on any third-party for security purposes.
Diligent security measures have to be put in place for all wallets, despite online wallets having the biggest risk of being hacked. It’s important to keep in mind that losing your private keys almost certainly means that you will lose your money. This will happen regardless of the wallet that you’re using. Similarly, sending money to a con artist or your wallet being hacked will lead to losing your money. There’s also no way to reverse transactions once they have been made so be careful when working with digital wallets.
Backup Your Wallet: Your mobile or computer should only have small amounts of your digital currency, preferably specific amounts that you will need for daily usage. The bulk of your funds should be kept in devices that are highly secure. Should it happen that you lose your wallet,, offline or cold backup options such as Ledger Nano or USB or even paper may help you recover your wallet. They will also come in handy in the case of computer failure. Protection from eager hackers may not be possible as they are always waiting to pounce on every available opportunity. The risks involved in using online wallets are inherent, and it’s not possible to be protected from all of them.
Update Software: Having the latest software means that you have the latest security features. Make it a habit to constantly update your wallet software as well as your computer or mobile software.
Add More Security Layers: Many security layers will improve your level of security. You can start by ensuring that all transactions require passwords to be processed. You can also set complex passwords. Choose a wallet that has a proven reputation for security. For instance, those that require two-step verification and that ask for pins each time a wallet app is opened. Wallets that offer multi-sig transactions should also be under your consideration. These include Armory and Copay. Multi-Sig, also called multi-signature wallets, require permission from other users before any transaction can be made.
Multi-Currency vs. Single Use
Bitcoin has remained the most famous and popular cryptocurrency in the world. However, more digital currencies (known as altcoins) are continuously emerging, each with its own unique infrastructure and ecosystems. If you’re interested in using different currencies, there’s good news for you. You don’t need to open a wallet for each digital currency. All you need is to open a wallet that supports multiple currencies (a multi-currency wallet). From this wallet, you can operate several currencies.
Are There Any Transaction Fees?
Unfortunately, a clear answer to this question doesn’t exist. Generally, transaction fees in crypto wallets are a mere fraction of what traditional banks charge. Sometimes, network miners need to be paid a processing fee for specific types of transactions. Some transactions don’t have a fee. Setting your own fee is also possible. 18,080 satoshis, the equivalent of $0.12, would be the transaction fee of 226 bytes. This is just a guideline. Choosing to set a low fee means that you may have to wait for longer periods, even days before the transaction is confirmed. This means that your transaction has a lower priority when compared to others. Increasing the amount that you are willing to pay consequently means that your transaction will be processed faster. Transaction fees are not something that’s worth losing your sleep over. Once you decide the wallet you are going to use, you will either choose your own fees, pay minute fees or not pay any fees at all.
Are Crypto Wallets Anonymous?
One could argue that they are, but not exactly. Wallets are just pseudonyms. All records are stored permanently on the public accessible blockchain network, though the actual identity of the user is not actually tied to the wallet. Names and personal addresses are not available, but other data such as your wallet address can be traced via various ways which could lead to your identity. Developments are continuously being made to make privacy and anonymity easier to achieve although there are many disadvantages of full anonymity. Have a look at the DarkWallet project. It aims to increase privacy through coin mixing and stealth addressing.
Which Wallet is the Best?
The list is long, and it’s growing each day. However, you should consider what you intend to use a wallet for before you choose the right one for your needs.
Do you need the wallet for daily transactions or for purchasing and holding cryptocurrency to invest later?
Do you plan to use a single currency or several currencies?
From which location do you need access to your wallet?
Choose a wallet that will meet all your goals, or at least most of them.
Bread Wallet is a digital wallet used for Bitcoins that simplifies the sending and receiving of digital currencies. It makes it look like sending and receiving emails. The app is available on Google Play and App Store. Bread wallet doesn’t require a server for transactions to happen. This means that users are in full control and they can access their money anytime, anywhere. The Bread Wallet is committed to improving security, it has a lightweight design, as well as a clean interface. This makes it very easy to use for both experienced users and beginners.
- Open-source software
- Easy to use
- Hot wallet
- No desktop interface
- Lacks some features
If you’re an advanced user, then this is the wallet for you. It doesn’t matter where your smartphone is Android or an iPhone, Mycelium allows you to transact with Bitcoins and also grants you total control over your digital currencies. Your funds are not affected by third parties. It boasts of some of the best security features in the market which include encrypted PDF backups, integrated QR code scanner, cold storage and secure chats. This is one of the reasons why Mycelium has been named the best crypto wallet in the market.
- Advanced security
- Open-source software
- Hot wallet
- No desktop interface
Exodus is new to the market and only available on the desktop. It supports Bitcoin, Litecoin, Ether, Dash, and Dogecoins. It has an easy-to-use interface that’s also very intuitive. It allows its users to trade bitcoins for altcoins and vice versa using the same wallet.
- In-wallet trading
- Open-source software
- No web interface
- Hot wallet
Copay is one of the best wallets today. It has a user-friendly interface for mobile phones, online or desktop. This makes it pretty convenient to use. Security is also well enhanced as it brings to the table a multi-signature feature. Copay is for everyone from beginners to experienced players.
- Multi-sig transactions
- Multiple wallet storages
- Good security
- Limited user support
- Can be slow and unresponsive