What is a Cryptocurrency Wallet and why do I need one?
A Cryptocurrency Wallet aims to mirror the ‘Security’ and ‘Functionality of a real world wallet/account. Its purpose is to keep your funds safe, accessible and portable.
Think of a Cryptocurrency Wallet like you might an Online Banking Account. You typically need passwords, answers to secret questions or information about you personally to access your account. A Cryptocurrency wallet is much the same.
Once you have gained access to the account you can carry out certain functions such as checking your balance, sending some money or arranging to receive some money etc.
A point to note is that the currency you own never actually sits inside the Wallet itself. Instead the Wallet simply records your ownership of that currency on the associated Blockchain.
Since its creation Cryptcurrency has been plagued with stories of hacking and impersonation. With the technology still in its relative infancy it is still all too easy to fall foul of hackers and or fraudsters.
Common sense and Wallets are your primary means of defense against such dangers.
A Wallet contains a Private Key and Public Key. Think of the Public Key as being the long number on the front of your Credit/Debit card (Visible to others). Then think of the Private Key as being the same as your PIN when using a Credit/Debit Card (Never shared!). It is more sophisticated than this, but this analogy works well for now.
As the name suggests keeping your Private Key private is paramount. Never share this with anyone.
Wallet software varies in its degree of security layers. However, most will require a Password to access. I would suggest that you make this Password as complex as possible and at least 8 characters length, ideally more.
Types of Wallet
As Cryptocurrency has risen in popularity and the volume of coins available so have the number of wallets and the type.
Below I have listed the most popular types of Wallet available;
- Desktop/Extension — A Desktop Wallet is currently one of the more secure and convenient means of Wallet available.
The Wallet exists only on the computer that you have downloaded the Wallet onto. The Private Key forms part of the Wallet software itself.
Goggles’ Chrome is one of the most popular browsers that helps support Wallets of this type. It is called an ‘Extension’.
It’s considered secure due to its integration with the browser you are using instead of being held on a website which is online 24hrs per day. In addition it is convenient since you will only typically make use of your Cryptocurrency when online/in front of your desktop.
- Hardware — These are essentially USB Sticks with additional layers of Security. They are currently considered one of the most secure methods of securing your coins since the Private Keys used to spend/transfer the currency is held offline, meaning that they would prove extremely difficult to hack.
These are probably the most expensive method of protection. However, if you have invested heavily in Cryptocurrency then it is probably worth your investment.
- Mobile — Again, these are very similar to Online Banking App’s. Cryptocurrency Wallets now exist that aim to mimic similar layers of security to access your Wallet and coins. Some security features now include fingerprint readers, Passwords, Two factor Authentification etc.
Mobile is increasingly becoming one of the most secure means of Wallet/ Cryptocurrency security and without question the most convenient.
However, due to the phone essentially being online for the majority of its time, it still is yet to trump the Hardware/offline level of security.
- Physical — Old School Pen and Paper! For those who aren’t very trusting of any tech based tools and Wallets there is always the possibility of writing down your Private Key Information!
Later in the Guide I will share what a Private/Public Key looks like.
Do I really need a Wallet?
In my opinion YES!
You have the option to leave your coins on the exchange from where you purchased them. However, most of the stories concerning hacking stem from Exchanges.
The majority of large, popular and reliable exchanges in the Cryptocurrency space are Centralised. This means that they theoretically hold the coins (Private Keys) you own unless you transfer them to your own wallet.
If this exchange is hacked then you could be one of the unlucky victims whose coins are stolen.
Unlike a bank being robbed and your funds being reimbursed this is not the case with Cryptocurrency exchanges unless they are feeling “generous”. There is no law or layer of insurance in place protecting your funds.
If you choose to keep your coins on an exchange after purchasing them then you do so at your own risk.
Which Wallet should I use?
As things currently stand in the Cryptocurrency space, 1516 Coins and Tokens exist.
Note: For the purposes of this Guide, Tokens will be classified as Coins, the reality if quite different.
A question you may not yet have asked yourself or considered is — “Can any Wallet hold any coin/token?”
Unfortunately not. But it’s heading in that direction…
As things currently stand Wallets are designed to hold only certain coins/tokens. This means that if you hold more than one coin/token then you may need to hold more than one Wallet.
This can prove to be a little problematic in terms of management especially where you are holding 5+ coins/tokens and each requires its own Wallet.
However, Wallet technology is fast improving and the developers behind them are working on multi-currency/coin agnostic Wallets.
I would imagine in 12 to 18 months from now each person will only require one Wallet to hold all and any of their currencies, two at most.
So, in answer to “Which Wallet should I use?”. Unfortunately there is no one single answer. It depends on the currency coin/token you have purchased.
Choosing a Wallet that works for you
In short — before choosing to buy your Cryptocurrency, first set up the Wallet that will both be ‘Compatible’ with the coins purchased and that also meets your ‘Security Criteria’.
Setting up the Wallet beforehand will mean that you are able to immediately transfer the coins/tokens from the exchange to your wallet after purchase.
Compatibility — what I mean more specifically by this is you first need to find a Wallet that will permit the storage of the coin you own.
For example: Metamask is a very popular Desktop Wallet. It is a Google Chrome Extension (Browser Add On).
Metamask is Ethereum based. This means that it will allow you to hold Ethereum Coins and all Ethereum compatible Coins and Tokens (known as ERC20 compatible). So, if you plan to buy some Ethereum then Metamask would be a good starting point to hold the funds.
In terms of compatibility I would always encourage you to do your research on what Wallet support is available before buying your Coin/Token of choice.
I would recommend using Google Search and Social media platforms to collect information and reviews on the Wallets available. Be selective in what you chose to believe and aim to identify information/reviews from the most reliable sources.
Below, I have linked to some of the most popular and reputable of Wallets in the space to act as a starting point.
In addition to compatibility I would also urge you to consider what level of Security you feel is most appropriate for you.
Consider and weigh up the pro’s and con’s associated with each Wallet and its means of holding the coins/tokens — Desktop, Mobile, Hardware, Paper. Which works best for you?
In addition and as part of your own research look for information/reviews on the Wallets security. Has it been hacked? Is it vulnerable in some way? If so, how and is this likely to be a one of?
A minor but important aspect to note is that of Transaction Fees (Tx Fees).
Cryptocurrencies are aiming to provide instant and low cost/free transfers. This is not quite yet the case. The market is still experiencing growth and scalability issues. This means that costs to move currency from A to B can result in fees incurred.
When moving coins/tokens to or from a Wallet you will be presented with the associated costs directly or indirectly (if fees are flat).
It is important to be aware of this as the costs for transfers are typically correlated with the amount you are sending. The costs are usually negligible (less than $0.1) when compared with the cost of transferring at banks and money transfer services (typically $10+).
The amounts you pay in Tx Fees are also usually correlated with the speed of the transaction. The more you pay for the transfer the faster the Blockchain processes the payment.
Popular Wallets in use
The list/table is not exhaustive and certainly does not list all that are available as mentioned earlier. However, these are some of the most popular, secure and reputable that are available.
Please always do your own research.
Do your own research, “DYOR”.
This is a term frequently used in this space and one I follow religiously.
I have put this guide together simply to help others in the space find their feet and avoid the mistakes I made when I first started out. I have made suggestions throughout that I would encourage anyone to follow but only in addition to their own research first.
Good Luck and stay safe — ‘Average Crypto Joe’.
What does a Public key and Private key look like?
Please note that these keys have been edited for anonymity and security.
Example of Private Key
Example of Public Key
Note that the Private key is longer than the Public key for security purposes.