A cryptocurrency wallet is your interaction with the blockchain. It allows you to store, manage and interact with your cryptocurrency balance. In order for you to receive funds, for example Ripple (XRP), you’ll need a wallet to receive the transaction. It’s a requirement if you want to store any cryptocurrency.
If you’re interested in keeping your crypto portfolio safe, cryptomonster have an article on some of the best practices to follow.
A cryptocurrency wallet always come with a public key, also known as a wallet address, which you can share with third-parties to receive a transaction of funds. A wallet address is a unique identifying address on the blockchain. For Ripple (XRP), an example is: rf1BiGeXwwQoi8Z2ueFYTEXSwuJYfV2Jpn.
A cryptocurrency wallet also comes with a private key, which is a secret address that controls (behind the scenes) your wallet. With the private key, your wallet can only be controlled by you – so it’s imperative that you keep your private key extremely safe. Do not share your private key online, with anyone, unless you know what your doing!
What type of wallets are there?
There are different types of wallets for each cryptocurrency.
Online wallets are typically cryptocurrency wallets that you access via a web browser. Often, these are regarded as ‘Hot wallets’, and aren’t advised to store a large bulk of your cryptocurrency. They are a convenient way to interact with the blockchain, but they come with potential security risks.
- Quick to get up and running, i.e. you can quickly login and get going
- Great for small amounts under a threshold, you set your risk tolerance
- They mostly support the most popular cryptocurrencies, allowing management of multiple different assets such as Bitcoin, Ripple or Ethereum
- You never really truly own your private keys, and those keys are managed (and the security of them) by a third party
- As it’s an online wallet, you are open to malware, keyloggers or virus’ that could intercept and gain access to your wallet
- Third party businesses can suffer from attacks, DDoS and outdated security features, and could go bust or bankrupt at any time
Mobile wallets are online cryptocurrency wallets that you access via your mobile phone. After installing an application, such as on iOS or Android, you can get up and running fairly quickly. Much like an online wallet, they do pose potential security risks, and it’s advised that you don’t store the majority of your funds on this wallet. (Unless you know what your doing).
- Very easy to get up and running, great for newcomers and for speed
- Additional features such as wallet backup, QR code scanning and fingerprint/pin code locking
- Some mobile wallets can support multiple currencies, such as Jaxx.io, making them very versatile and easy to use
- Phones can be insecure devices, with software being out of date or suffering from vulnerabilities if you don’t update
- They are open to malware, keyloggers or virus’ that could intercept and gain access to your wallet – there are some sophisticated forms of attack to steal your funds
- If you lose your phone and haven’t backed up your private keys, you’ve essentially lost your access to your wallet
Desktop wallets are regarded as slightly more secure, as they can feature some of the features from online wallets and mobile wallets. As Long as your online security is robust, and you keep your cryptocurrency desktop extremely clear of any potential forms of attack – you’ll be relatively safe.
To be truly secure, though, you need to be completely offline, such as a old laptop that has been formatted and has no active internet connection.
- Very easy to use and to get up and running
- Should the desktop wallet be truly offline, it’s essentially a ‘cold storage wallet’, and can be considered extremely safe
- Private keys are yours, and aren’t stored on any online server
- If you do not backup your wallets and your laptop dies, you have no access and you will lose your funds
- The security of your wallet is entirely up to you, and you are required to act with responsibility accordingly
- Should you go online then a desktop wallet is prone to virus’, malware or keyloggers
A hardware wallet is a purpose built piece of hardware, normally interactive over USB, having all the advantages of a desktop and mobile wallet whilst be truly ‘cold storage’. The private keys are stored on the device and cannot be accessed via the internet.
- Truly offline, convenient solution for ‘cold storage’
- Strong security features, such as a transaction confirmations, pin code locking
- Not susceptible to traditional keyloggers, malware or other forms of attack that a desktop PC might be
- The barrier to entry is moderate, and they aren’t as easy to get up and running (But with persistence and constant improvements, they can be)
- Like not worth it if your hardware wallet costs more than your holdings
Before hardware wallets were developed paper wallets were the go-to for ‘cold storage’ wallets.
- Very secure, hacker-proof wallet address’
- Not susceptible to any form of attack such as malware, keyloggers or virus’
- Private keys are not stored on an online server
- Substantially more effort to move funds around
- Technically focused so can be difficult to setup correctly, and confirm you’ve got access to your funds
Each wallet type has disadvantages and advantages, and they ultimately need to marry up to what you need from a wallet. As a general rule, cold storage is going to be the safest solution as you can’t be hacked. If you plan on storing a substantial amount that it’s going to give you the most peace of mind.
Hot wallets, such as Mobile or Desktop are great for getting up and running, but it’s imperative that you back them up correctly should your phone die, be lost or stolen.
Ultimately, you are in control of your own wallet & security, so you should always consider all strengths and weaknesses way before choosing a wallet.