A Beginner's Guide To Crypto Wallets - EVERYTHING YOU NEED TO KNOW!
Today, we're going to talk about how crypto wallets function, the different types of wallets, how to store your crypto safely, and the best wallets that I use regularly!
Let's jump right in!
How A Wallet Works
To understand how a crypto wallet works, I think it's important we start with asymmetrical cryptography or "public key encryption".
Public key encryption essentially means that a wallet utilizes two separate keys: a public and a private key.
A public key is an address where you accept cryptocurrency. It can be shared with the public and can only be decrypted (aka access the funds within the wallet) by the private key.
A private key must be protected by the owner of the wallet. Think of this as the password to your safe. You wouldn't post that online, would you?
Unlike a regular cash wallet, cryptocurrency is not actually stored in the wallet. In fact, your cryptos are stored on the blockchain! Let's go through a little example so you understand why this is important.
Say one night you're illegally streaming Game of Thrones when all of a sudden the stream messes up and you can't fix it. You let your rage get the best of you and you throw your laptop 10 feet across the room - it snaps in half. You then remember, "damn, I had 100 BTC in my Exodus wallet...". Well, because of asymmetrical cryptography, you can restore your wallet on a new computer as long as you have your seed words (more human-readable way of the private key) written down in a safe place.
)Read that over a couple times if you need to fully grasp the concept.
Now that you have mastered asymmetrical cryptography, the next step is to understand the difference between wallets as you want to ensure the safety of your cryptos. Would you keep $100,000 in your leather wallet that you carry everywhere? probably not.
Different Types Of Wallets
Different wallet types can be confusing at first, can't they?
"What is a cold storage wallet? How about a hot storage wallet? What is a hard wallet? Why so many damn wallets?!"
In order to know which type of wallet you should use, you should understand the difference between them! Each has their associated pros & cons that you should be aware of.
There are two main categorizations of wallets: hot storage and cold storage.
Hot Storage Wallet
Hot storage is simply a wallet that has some sort of connection to the internet. These wallets are perfect for accessing funds for frequent use. However, due to their exposure to the internet, storing the majority of your cryptos on a hot wallet is not recommended.
Think of your hot wallet as your current cash wallet. It's great for daily use, however it isn't the most secure. Only store as much cryptocurrency in these that you can afford to lose.
Online, desktop, and mobile wallets are all examples of hot wallets
Cold Storage Wallet
As you may have assumed, cold storage wallets have no internet connection. Thus, they are a much safer alternative to the hot wallets listed above.
Think of these wallets as banks that you control. Here is where you should store the majority of your funds, or the funds that you can't risk losing. Hardware wallets (commonly referred to as hard wallets) and paper wallets are types of cold storage that you could use to secure your cryptocurrencies.
How To Store Cryptocurrency Safely
If you are just getting into the world of cryptocurrency, does the safety of your cryptos worry you? Are you a little nervous about starting due to the lack of knowledge you possess in regards to storing your cryptos?
Don't worry.
I remember this very thing is what kept me from investing in Bitcoin for the first time. I heard about people losing their cryptos by hackers and I was kind of nervous to start. But luckily I did and I learned; now I want to share what knowledge I have with you.
Keep Private Keys Private!
"If you don't own the key, you don't own the coin"
This may sound obvious, but never give your private key to anyone. Don't post it in your Gmail account or keep it in google docs; just store it offline. Write your private key/ seed words on a piece of paper and keep it somewhere safe.
This is why I recommend you not to keep your money on exchanges. Poloniex, Coinbase, or Bittrex for example, hold your private key and "secure" your funds for you. By storing in their wallet, you are essentially placing the power and responsibility on them to keep your funds safe.
Not only that, but exchanges attract hackers, as there is a large reward for a successful breach. It isn't uncommon for exchanges to face attacks. In fact, exchanges such as Poloniex, Mt.Gox, and Bitfinex have lost millions of dollars to hackers.
Diversifying Wallets
I think this also is a super important step to ensuring the safety of your cryptocurrency. What this essentially means is having different wallets and spreading your wealth between them. You've most likely heard the expression, "don't keep all your eggs in one basket", right? It most definitely applies to storing your cryptocurrency security.
Personally, I use 2 paper wallets (learn how to set up a paper wallet here) and a Ledger Nano as my offline (cold) storage. For hot wallets, I use Exodus desktop wallet and other alt-coin specific desktop wallets. I also have Mycelium on my mobile in case I ever want to spend, however, I'm in it for the long hodl so I typically don't use it.
Best Cryptocurrency Wallet(s)
As you can now tell, perhaps there is no single "best" cryptocurrency wallet. However, I will tell you my most trusted and favorite wallets starting from cold storage to hot.
Paper Wallet
The paper wallet is great for storing the large majority of your cryptos on. It's completely offline which is great, and it's free. Although the paper wallet is great, it definitely has some cons.
One con is that the wallet is made of paper. If anything were to happen to that wallet in a flood, fire, or zombie apocalypse, you would not be able to access it anymore. This is why I would suggest investing in a safe. In one of my previous posts (not on Steemit), I pass on a way that the Bitcoin legend, Andreas Antonopolous advises on storing your paper wallet in a safe.
First, he (Andreas Antonopolous) suggests printing your wallet and then laminating it to avoid water damage. Then he recommends putting it in a fireproof safety deposit box in case your house engulfs in flames. Now your wallet is waterproof, fireproof, and anti-theft, thus ensuring nothing happens to your Bitcoin!
Another con is the process involved in withdrawing cryptos from the paper wallet. Firstly, it's suggested by many that the paper wallet only be withdrawn at one time. This means that you should withdraw your entire paper wallet funds out, then create a new paper wallet. Then send the funds you intend on storing to this new paper wallet.
This is recommended because you must type your private key into another hot wallet in order to withdraw funds. This compromises your private key, and it is now nothing more than a hot wallet.
Ledger Nano S
The Ledger Nano is an awesome hard wallet to store a large amount of your funds. In regards to security, it stores your private key offline and signs your transactions offline as well. What does this mean? This means that even if you insert the Ledger in a computer infected with malware, your funds will still remain safe.
In addition to the superior security, the Ledger Nano also has multi-currency support. Check out the image below to see the various alt-coins supported on the ledger.
Finally, the Ledger Nano can easily be backed up if anything happens. Did your Ledger spontaneously combust? No worries. Just use your recovery seed in either a new Ledger or in Mycelium wallet and you'll be good to go.
Get your own Ledger Wallet here and learn how to set it up here!
Note: you should get your wallet from the actual site as opposed to Amazon or eBay. Resellers could tamper with the wallet or provide fraudulent wallets, thus jeopardizing your cryptos!
Exodus
The Exodus desktop wallet is definitely my favorite wallet I have. The UI (User Interface) is absolutely amazing and is very user-friendly. Exodus also allows for inter-wallet exchanging, meaning that you can exchange your Bitcoin for Litecoin, Ethereum, or one of the 18 coins available on the wallet.
Coins mentioned in post: