If you’re interested in using cryptocurrencies like bitcoin or Ether, you’re going to need a wallet.
This guide will teach you everything you need to know and how to get started fast, even if you’re a complete cryptocurrency beginner.
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What's in this guide?
The most popular wallets are often a good choice and tend to be popular for a reason. Desktop, iOS and Android wallets can simply be downloaded to the device of your choice, ready to use.
Choose your hardware wallet
In addition to your PC or phone wallet, it’s also worth considering a hardware wallet. This is because it’s the only properly secure way to store cryptocurrencies.
Soft wallets are downloadable software programs for your PC or phone, while hardware wallets are physical vaults that store cryptocurrency on a specially designed hard drive contained in the device. Soft wallets are typically “hot” while hardware wallets are “cold.”
- Hot: A wallet is hot when it’s connected to the Internet. Nothing on the Internet is 100% secure, so funds kept in a hot wallet are always at a slight risk of theft or loss from software bugs.
- Cold: A wallet is cold when it’s safely offline and can’t be deliberately or accidentally compromised over the Internet.
All the popular hardware wallets are designed to be as secure as possible and can be backed up in different ways. Choose a hardware wallet that can hold the coins you want, has an interface you like and has a price tag that suits your needs.
What is a wallet? And how does it work?
Cryptocurrency wallets (or wallets for short) are pieces of software that give you access to any cryptocurrency (such as bitcoin or Ether) that you own. A wallet has a public key and a private key.
- Public key – This is the wallet address. With this, people can send money to the wallet. It’s much like a bank account number in that it can only be used to send money to an account.
- Private key – This is how one accesses the wallet. With this, people can control the funds tied to that wallet’s address. It’s more like your PIN number in that you should keep it 100% secret and secure.
Your coins are not stored in your wallet.
The name is a bit of a misnomer. In fact, your coins are not stored in the wallet at all. As a digital currency, they don’t really physically exist anywhere.
Instead, the wallet can connect with and analyse the blockchain, which allows you to send and receive money with other users of that blockchain, check out your coin balance and relate to it in other ways.
Some wallets have other features, such as checking live exchange rates to your fiat currency of choice.
Multi-currency wallets can interact with multiple blockchains, while others might only be able to interact with one.
Originally developed by Satoshi Nakamoto, the inventor(s) of bitcoin, the blockchain is the technology underlying most cryptocurrencies on the market today. The blockchain is commonly referred to as a “decentralised ledger.”
- Decentralised – It’s not held in any one place. The entire blockchain is stored on computers all over the world and can be accessed from anywhere. You could download the entire bitcoin blockchain right now if you wanted and see every single bitcoin transaction that’s ever happened.
- Ledger – It’s a ledger which records all transactions that take place on it.
It’s called a blockchain because transactions are processed in “blocks” which are “chained” together one after another to create a complete and unbroken transaction history.
In bitcoin, the blockchain is only used to store the transfers of bitcoin. But other platforms like Ethereum are using the blockchain to store many other different types of data, such as contracts, agreements and automated programs, all of which are transmitted and stored on the blockchain in a similar way.
The end result is an impeccably recorded transaction network that can’t be tampered with or destroyed and doesn’t give any one individual or organisation any kind of power over it.
The blockchain contains all the transactions that have been made since it began. By following the chain all the way to present day, a wallet can figure out how many coins you have.
For example, Alice sends Bob 0.001 BTC. Once verified and added to the blockchain, it’s been recorded that the amount of bitcoin on Alice’s wallet address has decreased by 0.001, and that the amount of bitcoin at Bob’s wallet address has increased by 0.001 BTC.
All wallets have a record of this transaction. All transactions on the blockchain are public so all users on the blockchain can confirm that the bitcoin changed hands, and all wallets have a record of this transaction.
You can see for yourself. The amounts sent and received, and the public wallet addresses are all public information.
The five different types of crypto wallets
Wallets are basically just a way to store two keys: the public address and the extremely important private key. Various companies have developed not only software but different types of real-world wallets to hold these keys, providing different levels of security and ease-of-use.
The most common types of wallet out there, desktop wallets, are downloaded and installed on your computer. Easy to install and maintain, most are available for Windows, Linux and Mac, although there are some limited to a particular OS. Most, if not all cryptocurrencies offer a desktop wallet specifically designed for their coin.
Desktop wallets provide a very high level of security since they’re accessible only from the machine on which they’re installed. The biggest disadvantage is that they also rely on you to keep your computer secure and free of malware. So antivirus and anti-malware software, a strong firewall and a common sense approach to security are required to keep your coins safe and sound.
Most desktop wallets will provide you with a long string of words upon installation. These words map with your private key so it’s important to store them somewhere safe in case your computer dies or you need to format the operating system and re-install your desktop wallet.
Did you know? Pseudo-mnemonic Keys
A pseudo-mnemonic key, provided upon installation of most desktop wallets, looks something like this:
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In the off chance that you uninstall your desktop wallet, these words would be used to map out your private key and restore all your funds. So make sure to keep this key secret and safe.
Online wallets (most often owned by exchanges but sometimes owned by third-party organisations) run on the cloud and are the easiest to set up and use. Some only require an email address and a password, although the more secure ones, require other verification like scans of your passport or ID.
The biggest advantages to online wallets are that they cannot be lost and that they’re accessible from any computer with an Internet connection. Businesses keeping online wallets for users also often have servers that are far more secure than the average user’s computer.
However, being online is unfortunately also their biggest disadvantage. Because some businesses maintain the wallets of thousands of users, they are the biggest targets for hackers. After all, why would a hacker attack your wallet when it can attack thousands at once?
Additionally, some online wallets will take a percentage (or flat) fee for every transaction you carry out, which could quickly eat into your balance unless you’re careful.
Similar to desktop wallets, but running as an app on your smartphone, wallets enjoy most of the same advantages and disadvantages of regular, desktop wallets.
Smartphone wallets are often simpler and easier to use compared to their desktop counterparts, and include the ability to scan other wallet addresses for faster transactions.
You will need to be extra careful about losing your smartphone, though, because anyone who has access to your device might also have access to your funds.
Also very similar to desktop wallets, hardware wallets add another layer of security by keeping the private key on a USB stick or specially designed piece of hardware. Apart from added security, hardware wallets allow the user to plug the USB stick into any computer, log in, transact and unplug.
The biggest disadvantage here is that you need to keep the device safe. You should either back it up regularly or have a way to recover the contents in the event of failure. Purpose-built cryptocurrency hardware wallets typically have these built in.
Paper wallets take the concept of entirely offline keys used for hardware wallets to the next logical step: simply print out your public and private keys and use that printout as your wallet. That we are allowed to keep paper wallets is a testament to the power of the blockchain transaction.
As secure as they are, paper wallets are also the most complex wallets to use as they require you to generate your own keys and will also need either a key generator or a software wallet to work. It’s typically only used by the most advanced users who want the highest level of security possible.
To transfer money to a paper wallet, you use a software wallet (any of the above mentioned) to send money to the public key printed on the sheet of paper. Most often, this is printed as a QR code for easy scanning. To transfer money from the paper wallet to someone else, you would first need to transfer money to a software wallet (by manually entering the private key into the software), and then transfer money from the software wallet to the recipient as usual.
Sending and receiving coins with your wallet
Wallets are not only the gateway to checking your available balance, they also allow you to send and receive cryptocurrency. Wallets vary from one another in how they handle the sending and receiving of currency, but the general process remains the same.
How to send currency to other users
First, you will need a wallet address (the recipient’s public key). These addresses are given in one of three ways:
- A long alphanumeric string (numbers and letters)
- A QR code (for smartphone wallets)
- A URL-like web link (clickable, opens your wallet automatically)
Once the address is entered into the wallet, you will be asked to enter an amount of currency to send. Once you’ve entered the amount, click your wallet’s version of a send button.
The recipient will immediately be notified of the transaction.
How to receive currency
Receiving coins is even easier than sending them. However, wallets vary greatly in the way this is done: some will provide you with a fixed public address, some will give you a new address for every transaction and most will provide a combination of the two.
Whichever system your wallet uses, you will have to provide a public key in one of the formats listed in the previous section to the sender, along with how much money you’re asking for. Once sent, you should receive a notification of the transaction.
Depending on the blockchain in use, the transaction might take some time to be verified because for most blockchains, a miner needs to confirm and add the transaction to the blockchain. This might be anywhere between a few seconds to ten minutes (or longer) depending on the cryptocurrency being used.
Keeping your wallet secure
Your wallet might not contain your actual coins, but it’s the gateway to those funds. Coins are sent to a public + private key combination, and if that combination is lost (by, say, accidentally uninstalling your desktop wallet), you will never be able to match those transactions to yourself, and all your digital currency will be lost.
So how do you make sure you keep your coins? By keeping your wallets secure.
Employ standard best practices
Wallets are built to be secure. They are almost completely unhackable and the weakest link is most often the user. So make sure to follow standard security best practices when using a computer on which you have a desktop wallet installed or when accessing an online/smartphone wallet:
- Always use strong usernames and passwords
- Install antivirus and anti-malware software (and keep them up-to-date)
- Set up a secure firewall
- Never install software developed by companies you don’t trust
- Only use verified and trusted wallets
- Update your wallet software as soon as possible
- Double-check your public address when giving it to users sending you money
- Double-check your recipient’s public address when sending money
- If accessing an online wallet, make sure the address is secure (https://)
- Never access online wallets from public Wi-Fi
If you’re using a desktop, smartphone or online wallet, and follow these best practices, your coins should stay safe.
While these wallets enjoy a higher level of security by their nature, they still require the use of digital software (desktop/smartphone/online) and so these best practices should still always be observed.
Keep a backup
Most people nowadays backup their vacation photos, their texts, their documents, their game saves. Keeping a backup of your wallet is no different. Most desktop wallets will let you define a backup folder upon installation. Every time you are done transacting, you should always save a copy of the backup folder onto a USB stick in case something happens to your computer.
This will let you recover your wallet as it will contain your private key.
Backups should always be done on an offline medium. Keeping your wallet’s backup on the cloud could lead to disaster if that backup service provider is hacked.
Additionally, if your wallet provides you with a mnemonic key (as discussed in an earlier section), you should keep a copy (or two or three copies) of that key just in case.
Finally, make sure to keep a copy of your usernames and passwords in a secure location just in case it’s been a while since you last accessed your wallet (after all, you should be using a password so strong you can barely even remember it with regular use).
Always use the best wallets
Some wallets require only a username and password to access. Other wallets have two-factor authentication or require a PIN-code generator to access. The more security layers a wallet provides the better. It might make it a hassle to access and transfer funds quickly, but wouldn’t you rather take a while longer to access your wallet than lose everything because you were using a wallet with weak authentication?
Used by the most secure and trustworthy wallets, two-factor authentication requires a regular username and password combination and another authentication method. This is often a PIN code that is sent to your smartphone as an SMS and is different every time you log in. This means that an attacker needs to know your username and password as well as be in possession of your phone.
Some wallets also require the use of a secondary app installed on your smartphone that generates these PIN codes for you, again adding another layer of security.
Where to go from here
Hopefully, this guide has provided you with some much needed information on what wallets are, what they do and how to use them, and how to keep the money in them secure.
Your next course of action depends on where you are on the cryptocurrency adventure. If you have yet to decide on a cryptocurrency to purchase, check out some of the guides on our website for more information. If you’ve already decided on a favourite coin, we suggest downloading its developers’ desktop wallet and giving it a spin. Once you’ve played around with that wallet for a bit, revisit this guide and give some other type of wallet a try.
If you keep it safe, your wallet will become your next best friend.
Frequently asked questions
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