According to a survey of more than a thousand American adults, more than 56% know what cryptocurrency is. However, more than 78% have no idea where to buy it, and those who understand how to store it safely are even fewer. So we decided to break this question down.
What is a cryptocurrency wallet?
Cryptocurrency is stored in cryptocurrency wallets. Basically, a crypto wallet is a program that contains your public and private cryptographic keys. Keys allow you to work the blockchain on your own behalf and perform cryptocurrency transactions.
The public key is something like your wallet address, and the private key “unlocks” the cryptocurrency vault. If someone wants to send you money, he has to re-assign it from his address to yours (that means he needs to know your public key), using his private key. You, on the other hand, must enter the private key that corresponds to your public key in order to receive and spend the money you send.
It’s important to understand that currency in a cryptocurrency wallet is not the same as regular money in your pocket. Your wallet is essentially just two keys; it contains no money. The digital money itself is in the blockchain and never leaves it. When it is transferred from wallet to wallet, a single action occurs: only another block describing the transaction is added to the blockchain. To understand how cryptocurrency works, we suggest reading this post.
But let’s get back to wallets. They come in several types, and each has its own advantages and disadvantages.
Types of cryptocurrency wallets
1. paper wallets.
Since your cryptocurrency account is, roughly speaking, your private and public keys, the easiest way to keep them is to write them down on a piece of paper. That would be a paper wallet. Some people do use these wallets.
But you can only store cryptocurrency in a paper wallet. To pay for something, you’ll have to create another type of wallet and transfer funds from the paper wallet to the new wallet. It’s not easy to enter long keys manually, it’s easy to make a mistake, that’s why they were written in a QR code. Special programs are used to generate the keys and save them as QR-codes.
Advantages: safety (in case somebody does not steal it and the inscription does not become unreadable for some reason).
Minuses: inconvenience, limited possibilities.
2. Hot Wallets.
The easiest to use electronic wallets are hot wallets. They are served by various online services, and they are called hot wallets because you can use your money anywhere and from any device, all you need is an Internet connection. To get a hot wallet, all you have to do is register on the service’s website or install a special program – and you can manage your digital savings through the interface.
Hot wallets are very convenient, but when you use them, you entrust all the money in your account to an online service. For example, cryptocurrency exchanges offer customers hot wallets for every cryptocurrency they trade, but recent experience shows that keeping a lot of money in such wallets is not very wise: exchanges are like a red rag to a bull for hackers. Some specialized hot wallet services do not trade cryptocurrencies and pay more attention to security, but still work with them is based solely on trust.
Some hot wallet services allow you to see your keys and store them somewhere else, while others do not. In the second case, if something happens to the service, you will most likely have to say goodbye to your hard-earned money. And in the first case, you can always switch to another wallet. Hot wallets are good for keeping small amounts you plan to spend.
Pros: convenience, accessibility.
Cons: less security, dependence on a third party.
3. warm wallets: thick or light.
Unlike cloud-based hot wallets, so-called warm wallets (aka software or mobile) are on your device but connected to the Internet. A software or mobile wallet is a utility installed on your computer, smartphone, or any other device that stores public and private keys and processes transactions. Such local wallets are generally quite good for storing cryptocurrency as well as paying for goods and services.
Here, as with hot wallets, there are two options to choose from – thin or thick (also called “full node wallets”). Thick wallets store the entire blockchain in the device’s memory, while lightweight wallets use third-party resources to do so. In practice, this means that a fat wallet won’t “fit” on a smartphone. For example, the Bitcoin blockchain now takes up about 200 GB, which slightly exceeds the capacity of smartphones. Initially, cryptocurrency was stored just in thick local wallets, but now they have given way to thin and hot wallets. On the other hand, fat wallets are independent of third parties and therefore generally safer than thin or hot wallets.
Pros: safer than hot wallets.
Cons: still not secure enough and tied to a specific device.
4. cold wallets.
Since there’s a hot wallet, surely there’s a cold one? That’s right, cold wallets exist too. These are separate physical devices – usually a cold wallet is a flash drive that plugs into your computer or smartphone.
In general, even the most common USB flash drive can be used as a cold wallet, but it’s better to trust your crypto-keys and transactions to specialized devices with a Secure Element chip. Such wallets are safer than software wallets, because keys are stored in devices not connected to the Internet. Cold wallets are great for secure storage and use of cryptocurrency. Alas, no one gives away specialized hardware wallets for free. Well, you’ll have one more electronic device at home – your only consolation is that at least it doesn’t need to be charged.