When somebody says that they own bitcoin, or any other cryptocurrency for that matter, what they really mean is that they control access to the public and private keys which are required to use the currency held at their public address.
As we explained in our bitcoin wallet guide, “there are many different approaches to managing your private keys, each with different levels of security and convenience.” That being said, the core mechanism of interacting with the blockchain through signing transactions with your private key(s) remains the same, regardless of which type of wallet you decide to use.
This type of wallet interface is accessed directly within your web browser. When choosing a web wallet, it’s important to consider where your information is stored, in what form, and how you can gain access to your cryptocurrencies.
For example, when you create a wallet with Blockchain.com, you are given a unique 12 word seed phrase:
“This master seed is the nucleus of your specific wallet, and is used to derive every individual bitcoin address that you’ll use to send and request bitcoin.” – Source: Blockchain.com
If you ever decide to change wallet providers, you can use this seed phrase to export your wallet.
In the case of Blockchain.com, an encrypted backup of your wallet is stored on their servers. By contrast, My Ether Wallet is an interface that provides user-friendly access to the Ethereum blockchain. They do not store any information on their servers, and all actions are taken on the client side.
People often confuse exchange wallets (also known as custodial wallets) with web wallets. When you send your cryptocurrency to an exchange, your tokens are controlled by the exchange provider and their software. If the exchange gets hacked, or they decide to run away with your money, there is little that you can do to stop them. It is therefore extremely important to only keep small amounts of crypto on exchanges, and withdraw any coins that you have to privately held wallets as soon as you are no longer actively trading them.
Exchange wallets (and online web wallet interfaces) are major targets for hackers due to the vast amounts of cryptocurrency that are accessed through these sites. This leads some people to avoid using web-based services all together and opting for the use of decentralized exchanges such as Shapeshift.io.
Security precaution: if you are using web wallets and exchanges, always remember to double check the URL to ensure that you are on the correct website before entering any information. Save this URL as a bookmark, and navigate to the exchange or wallet provider through your bookmarks bar rather than using search engines. There are lots of phishing scams out there, designed to steal your bitcoins.
- Web wallets process and complete transactions very quickly, as there is no lag between the app and the server.
- They are ideal for holding small amounts of cryptocurrency for everyday purposes and moving between exchanges.
- Some web wallets are able to handle multiple currencies.
- The TOR network and VPNs can be used for added privacy.
- Users are often targets for phishing scams, DDOS attacks, malware infection and have an increased likelihood of being keylogged by hackers.
- Information about your backups and private keys is often stored on a third party server. Whilst this information may well be protected with the highest levels of security, it still presents a large target for valuable data theft.
- Using online wallets requires any prudent investor to stay absolutely up to date with their antivirus and other security measures.
By downloading wallet software onto your computer or mobile device, you can maintain control over your cryptocurrencies without needing to enter private keys into a website. You can also sign transactions offline, providing a much higher degree of security:
“They are only accessible from the single computer in which they are downloaded. Desktop wallets offer one of the highest levels of security however if your computer is hacked or gets a virus there is the possibility that you may lose all your funds.” – Source
Software wallets can be broadly categorized as either desktop or mobile wallets. Desktop wallets provide high levels of functionality and control over your coins, whereas mobile wallets employ a simple, user-friendly interface.
A key distinction can be made between two different types of software wallets: core wallets (full nodes) and SPV wallets.
Core wallets download the entire blockchain, and stay up to date with every new block that has been added. By using a core wallet, you can be certain that your bitcoin balance is correct. To discover your balance, you basically scan the history of confirmed transactions on the blockchain, and subtract the amount of bitcoin sent from your wallet from the amount received.
At the time of writing, the bitcoin blockchain was roughly 183 gigabytes and growing. This is a very large file. If every bitcoin user was required to download the entire blockchain, bitcoin would never become popular.
This is where SPV (simplified payment verification) wallets come in handy. With an SPV wallet, you are able to check that the transactions related directly to your public keys are legitimate without needing to worry about every other transaction in the blockchain.
“SPV provides the 2 critical ingredients: a) It ensures your transactions are in a block, and b) it provides confirmations (proof of work) that additional blocks are being added to the chain.” – Source
Security precaution: when configured correctly, software wallets can be extremely secure. However, that is another topic altogether, which we will discuss in a future article. General security precautions include using quality antivirus software and keeping it up to date, regularly updating your wallet software, making sure that you downloaded it from a reputable source and encrypting your wallet with a strong password.
When you create a new wallet, you will be given a 12 word seed phrase. Write this down. Keep it in a safe place. Store multiple copies of it. If you ever lose your mobile phone or computer, or forget your password, you can use this phrase to transfer your wallet to a new device.
- Very easy to use once installed.
- When installed correctly on a machine that has never connected to the internet, this can be a great way to securely store your coins long term.
- Private keys are not stored on a third-party server.
- Your computer is open to malware, ransomware, keyloggers and viruses. Cryptocurrency wallets are a prime target for hackers.
- If you forget to backup your wallet and your computer dies, you’re out of luck.
- The security of your wallet depends largely on the security of your antivirus, VPN and other protection measures implemented on your computer.
- If you send your computer to a repair agency, they might try to steal your bitcoins.
“Before hardware wallets, paper wallets were the defacto standard for cold storage of cryptocurrencies.” – Source
Paper wallets are the simplest possible form of cryptocurrency storage. A paper wallet is a document that contains your public key, private key and QR codes for sending and receiving cryptocurrency.
If you’re not planning on using your cryptocurrency any time soon, and have a secure safe or other storage place for your paper wallet, this can be a good way to invest in bitcoin.
Once you have securely created a paper wallet and stored it in a safe place, your coins are as safe as the storage place. However, it is hard to know if the website that you used was bugged, or if your wallet information has been intercepted at any stage during the process of generating your wallet.
Safety precautions: there are a number of ways to ensure that you are securely creating your wallet away from prying eyes. To begin with, you can download the wallet generator from GitHub if it’s available. This way, you can generate private keys offline. Check that your printer is not connected to bluetooth or Wi-Fi networks, and make sure that your computer is offline during the printing process. Print multiple copies and consider laminating them to protect your wallets from the elements. When storing your wallets, remember to keep them in separate secure locations.
When the time comes to spend or otherwise use your wallet, it is a good idea to ‘sweep’ all of the cryptocurrency to a new address rather than leaving some of your balance at the original address.
Physical bitcoins are another form of a paper wallet. These precious tokens contain a pre-loaded amount of bitcoin. The private key is generally concealed behind a tamper-evident seal. During recent years, physical bitcoins have become somewhat of a collectors item.
- Private keys are not stored on a computer or third-party server.
- Difficult for hackers to intercept.
- More effort and technical understanding required to move currencies around.
- If the printed wallets are not stored properly, the ink might fade or the paper may deteriorate.
A hardware wallet is a special type of bitcoin wallet that stores private keys in a secure hardware device. For long term storage of large amounts of cryptocurrency, hardware wallets are almost indispensable.
Hardware wallets store private keys in an encrypted manner, and have the ability to sign transactions without transferring these keys to other devices. This makes them very secure and relatively simple to use.
Ledger and Trezor are the most well-known hardware wallets. However, there are other brands and types available. Newer versions of these wallets come with a digital screen for added functionality, which reduces the need to connect your wallet to a computer as often.
“Some require batteries, some don’t. Some have screens which mean you don’t need an insecure computer to back up your private keys, some don’t. Some handle hard forks better than others (Trezor had a short-lived issue during the BCH fork, Ledger Nano had no issues)” – Source
Hardware wallets have the ability to store a wide range of different cryptocurrency keys, which makes them suitable for both astute investors and non tech-savvy people alike. When deciding which hardware wallet to use, do your research and remember that although your coins may not be worth what you consider to be a significant amount at the moment, there is every chance that they could become a fortune in the years to come. It is therefore imperative to think of a hardware wallet as an investment rather than an expense.
Security precautions: despite the fact that hardware wallets are immune to hacks, there are a few potential vulnerabilities that need to be considered when deciding whether to purchase a hardware wallet. Although we have some of the brightest minds working on developing these wallets, they are still very new technology that hasn’t been subjected to the test of time yet. There is a possibility that any number of failures could result in the wallet breaking down and potentially losing access to your private keys. At this stage, hardware/software failure isn’t much of a concern. However, when there is lots of value on the line, it is important to make sure that you are buying the best possible device. By contrast, if you control your private keys, then you have 100% autonomy over your crypto, and there is no counterparty risk.
Make sure to generate new seed/recovery phrase and accurately follow the setup instructions when you purchase a new hardware wallet (NEVER buy one second hand). Before opening the package, check for evidence of tampering and return it if you believe that someone may have already opened the seal.
- If used correctly, offers much stronger security than the other wallet types.
- Great for storing large amounts of crypto long term, especially if it has a screen.
- Takes a bit of learning for beginners to understand how to use them properly.
- Risk of being tampered with.
- Potential of not being compatible with future forks.
Other types of cryptocurrency wallets?
All of the wallets listed above interact with the underlying blockchain in the same way. However, they store your information in different ways from one another.
There are a few other distinctions that can be made when it comes to wallet types:
- Multi-signature wallets – are jointly held between multiple parties.
- To sign and execute a transaction, more than one private key is required.
- For example, there might be 5 key holders and 3 signatures are necessary for a transaction to be successfully signed and broadcasted to the network.
- This type of wallet is useful for managing custodial funds, family estates and public trusts. It could also be used to prevent a single employee in a company from running away with digital assets.
- ERC20 compliant wallets – are ethereum wallets that can also interact with ERC20 tokens such as Omise Go and MicroMoney AI.
- As a programmable blockchain, Ethereum provides a core layer that people can use to launch their own cryptocurrencies with. These tokens are made using a standard called ERC20.
- ERC20 compliant wallets only need to interact with the Ethereum blockchain in order to handle dozens of different currencies.
- Wallets with exchange integration – some wallets such as KeepKey are integrated directly into the ShapeShift exchange platform.
- This allows users to exchange one cryptocurrency for another without sending any money to a traditional centralized exchange.
- There are a number of benefits that come with using this type of wallet. Not only do you avoid the counterparty risk of depositing funds into an exchange, but there is also no need to worry about deposit fees, withdrawal fees and minimum withdrawal amounts.
- Hot vs. cold wallets – this refers to whether a wallet is connected to a device with internet access.
- Cold storage wallets are not connected to the internet, and therefore present a viable way to keep your cryptocurrency away from hackers.
- People with large amounts of cryptocurrency will often keep the majority of their funds in cold storage.
- There are a number of ways to make the most of cold storage – such as printing paper wallets and keeping them in safety vaults, installing your wallet software on a computer that has never been connected to the internet and using hardware wallets.
- Hot wallets are suitable for making smaller transactions on a regular basis. They are akin to a current account or a debit card.
- Think of a hot wallet like your back pocket – if you wouldn’t carry $10,000 in your back pocket, then it’s probably not a good idea to keep it in your hot wallet.
- Only keep what you can afford to lose in a hot wallet.
Which wallet is right for me?
This is a decision that only you can make. Hopefully, the information contained within this guide helps you to decide which wallet is best for your needs. If you’re still unsure about which wallet (or combination of wallets) to go for, consider the following questions:
- How much cryptocurrency do you control?
- How many different types of cryptocurrency do you have?
- How often do you plan on making transactions?
- What is the purpose of these transactions?
- How much experience do you have transacting with blockchains?
- How technically competent are you when it comes to troubleshooting, installing software and avoiding phishing scams?
- How long are you planning to hold your digital assets for?
There is more to securely storing your crypto than simply downloading a wallet and safely storing your keys. In our idiot proof guide to keeping your crypto safe and secure, we take a look at how to ensure that your computer is clean and avoid common scams like phishing and ransomware.