According to a poll of more than 1,000 American adults, over 56% know what a cryptocurrency is. However, more than 78% don’t know where to buy it, and even fewer know how to store it securely. So, to help we decided to shed some light on this question.
What is a cryptowallet?
To store cryptocurrency, you need a cryptocurrency wallet. Put basically, a cryptowallet is a program that stores your private and public cryptographic keys, which you need to access the blockchain on your behalf and make transactions with your cryptocurrency.
The public key is like an address for your wallet, whereas the private key is used to unlock it. Whenever someone wants to send you money, they reassign it from their own address to yours (which means they need to know your public key). To do so, the sender needs access to his own private key. In turn, to unlock and spend new funds, you must enter the private key that corresponds to your public key.
Here’s an important thing to remember: Owning some cryptocurrency and storing it in your cryptowallet doesn’t mean you’ve got the coins in your pocket. The wallet is just two keys, and the coins are all in the blockchain, and they never leave it. When a transaction occurs, the only thing that actually happens is a block describing the transaction is added to the blockchain. If you want to understand how cryptocurrencies work, here’s a post we suggest that you read.
Let’s get back to wallets. There are several types of cryptocurrency wallets, and each have their pros and cons.
Types of cryptocurrency wallets
1. Paper wallets
In its simplest form, your cryptocurrency account is just your private and public key, and the simplest way to store those is to write them down on a piece of paper. That would be called a paper wallet, and people do actually use this kind of wallet in real life.
But paper wallets can only store cryptocurrency; to pay for something, you’ll have to create another type of wallet, and transfer funds from the paper wallet to the new one. Entering those long keys manually can be tricky, and so QR codes were introduced. To generate the keys and then turn them into QR codes, people use special software.
Pro: Security (unless the piece of paper gets damaged or stolen)
Cons: Inconvenience, limited access
2. Hot wallets
The easiest type to use is called a hot wallet. A hot wallet is a wallet provided to you buy some online service, and it’s called hot because you can reach your assets from wherever you want and using whatever device you want — you just need an Internet connection. To get a hot wallet, you simply need to register on the service’s website or install some software, and then it will provide the interface to manage your crypto funds.
Hot wallets are really convenient, but to use one, you have to trust the service provider with all of the money in your account. For example, cryptocurrency exchanges provide their customers with hot wallets for each cryptocurrency that is traded on the exchange, and recent history shows that keeping a lot of coins in these wallets is not wise — exchanges are very valuable targets for hackers. Some dedicated hot wallet services do not work as exchanges and focus more on security; however, they are still based on trust.
Some hot wallet service providers give you your keys so you can store them, some others don’t. In the latter case, if something happens to the provider, the chances of you losing your money are high. With the former, you can always switch to using another wallet. Hot wallets are good for storing small amounts of cryptocurrency that you plan to spend.
Pros: Convenience, accessibility
Cons: Lower security; requires a third party
3. Software and mobile wallets: either full-node, or light
Whereas hot wallets are cloud-based, so-called software/mobile wallets are based locally but connected to the Internet. A software or mobile wallet is a utility installed on your computer or smartphone (or any other device) that handles your public and private keys as well as transactions. Local wallets are generally okay, both for storing cryptocurrency and for using it to pay for something.
Like hot wallets, they come in two main types. Here, your choices are full-node or light. Full-node wallets store the entire blockchain in the device’s memory, and light wallets rely on a third party for storage. Practically speaking, full-node wallets won’t work on a smartphone. For example, the Bitcoin blockchain currently occupies about 200GB, a bit more than a smartphone can handle. Using full local wallets is the original way to store cryptocurrency, but they are now mostly giving way to light and hot wallets. However, full-node wallets, which don’t rely on third parties, are generally more secure than light wallets.
Pros: Greater security than with hot wallets
Cons: Still not very secure; device-bound
4. Cold wallets
If there’s something hot, there must also be something cold, and indeed, so-called cold wallets also exist. They are actual, physical pieces of hardware. Usually a cold wallet looks like a flash drive and needs to be connected to a computer or a smartphone to work.
Actually, a plain old USB stick can be used as a cold wallet, but specialized hardware wallets that are based on a Secure Element chip to manage the crypto and keep your keys secure are preferable. They are more secure than software wallets because they keep your keys inside an offline device. Cold wallets are very good for storing your crypto securely, and they can be used for transactions. The only problem with specialized hardware wallets is that they are not free (they also naturally add to the total number of electronic devices you already have). Good news: you don’t have to charge this one.
Pros: Greatest security of any type of cryptocurrency wallet
Cons: Cost; the need for yet another device