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Cryptocurrency Wallets

Cryptocurrency Wallets

About the Author: Andreas Thalassinos (BSc, MSc, MSTA, CFTe, MFTA), Head of Education at FXTM. Highly respected FX educator and Certified Technical Analyst and an authority in algorithmic trading.

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A cryptocurrency wallet is a medium that stores your private and public key, and allows you to receive and send digital coins. They also allow you to monitor your personal transactions and balance. Most wallets are basically software applications that are downloadable through apps, but hardware wallets exist as well.

The wide variety of wallets and features makes choosing the right one a difficult task.

Just like we use physical wallets in our everyday life for cash and credit cards, we have cryptocurrency wallets that store data and assist in transactions involving digital currencies. Unlike conventional wallets however, these crypto wallets store digital keys and not the actual coins. There are two types of keys, a private key which is kept secret and known only to the owner of the wallet, and a public key.

Similar to an ATM card’s PIN number, the private key is required to authorise the transfer of coin ownership. As long as it is kept secret, nobody else can send or spend money from your wallet.

Your public key is derived from your private key and is used to specify the address of your wallet. This is why the security of your private key is of the highest importance. If the private key is your PIN number, think of the public key as your credit card number.

A Few of the Best Types of Cryptocurrency Wallets

In the cryptocurrency world, these wallets are split into two categories - hot and cold. Hardware and paper wallets are cold, whereas the rest are hot. The core difference between the two is that hot wallets have a direct connection to the internet.

HOT WALLETS

  • Online Cryptocurrency Wallet

Online or web-based wallets, also known as e-wallets, are available through any device connected to the internet. This advantages of online are obvious, but they can be a little challenging for people who are not tech savvy.  Private and public keys are usually stored on a company’s servers, or third-party servers, which leaves the door open for some security weaknesses. Even though most of these wallet companies claim that security is their top priority, nothing can be 100% secure when you’re connected to the internet.

The Blockchain wallet is one of the most widely used online wallets. It is non-custodial, meaning that your private key does not reside on the company’s servers but with you and this means you have more control of your funds.

  • Cryptocurrency software Wallets

These Wallets are downloaded like any other application on your laptop or mobile.  Due to the fact that they are stored on your own computer, along with your keys, and not with any third parties, you need to be mindful of the security, reliability and accessibility of your computer and follow astute security practices. Phishing, malicious codes, theft and hard-drive disasters are just a few of the risks you need to be aware of. Backing up your computer should be common practice for safeguarding your keys, along with all other information on your computer.

Software wallets provide good flexibility, with an increasing number of retailers accepting payment in cryptocurrencies, you can now pay for goods or services on-the-go with this type of wallet.

Electrum is an example of a popular software wallet.

COLD WALLETS

  • Cryptocurrency hardware wallets

Hardware wallets usually look like USB drives. Their greatest benefit is the security they offer as they are not continuously connected to the internet. On the other hand, owners are advised to store them in a secure place because hardware wallets are vulnerable to theft. Physical wear and tear is another drawback to hardware wallets. Recovery features are usually available, but owners are advised to check with their manufacturer/retailer for the availability of this option.

The bottom line with hardware wallets is that they are not free. Higher security, and more control of your private key and consequently of your money, comes at a price.

Notable examples of hardware wallets include Trezor and Ledger Nano S.

  • Cryptocurrency Paper Wallets

Paper Wallets fall under the category of cold wallets because they are offline as well. Just like hardware wallets, security is one of the biggest advantages of paper wallets as they cannot be hacked. As the name suggests, paper wallets are pieces of paper where your private and public keys are written. Some may have corresponding QR codes written on them. They are very easy to use; simply print them on piece of paper and off you go.

The two main drawbacks to paper wallets are that they’re easy to lose if not stored properly, and if they’re printed on an ink-jet printer, the ink could fade. This is why laser printers are recommended by some paper wallet owners.

Some of the most popular include Bitaddress.org, Walletgenerator.net and Bitcoinpaperwallet.org.

ONLINE EXCHANGE WALLETS

Many online cryptocurrency exchanges offer wallets as well. In this case, your private key is stored in or on the exchange’s servers (referred to as the cloud). While they are convenient to access, they are a target for hackers and less secure than other wallets. In 2014 one of the world’s biggest cloud exchanges – Mt Gox, filed for bankruptcy as a result of losing 850, 000 bitcoins to hackers.

A more recent example of cloud based wallet vulnerability is Bitfinex. In 2017, customers complained about massive delays when trying to withdraw; the exchange was periodically offline on some days while the price of bitcoin was surging. The company explained that they were the target of distributed denial of service (DDoS) attack, in the form of “malicious micro deposits and withdrawals”.

Some experts advise people to avoid keeping large amounts of digital currencies on exchanges, precisely because of cases like Mt. Gox and Bitfinex.

Conclusion

Many articles have been written about cryptocurrency wallets, but the final question you have to ask yourself is: “what is the best cryptocurrency wallet for me?” Do your research, weigh up the pros and cons of each wallet, and decide what you would be most comfortable with.

Those that boast high security are more suitable for long-term commitments and a large amount of funds. Others boast ease-of-access and user-friendliness, which are more suitable for beginners and transactions involving smaller amounts. You can also decide to use more than one wallet. In this case, consider using a cold wallet for your long-term needs and a hot wallet for immediate transactions.

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

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