Which Crypto Wallet Should You Use?

Why do you need a wallet for cryptocurrency?

A crypto wallet is a place where you can access your cryptocurrency. While a regular wallet physically stores your cash, a cryptocurrency wallet works differently. If you know the basics of cryptocurrency, you must be aware that cryptocurrencies don’t exist in a tangible form. All that exists is a record of your transactions.

So essentially, a cryptocurrency wallet is a place from where you monitor your transactions. If the word ‘store’ is used in the context of cryptocurrency, it does not mean storing in the conventional sense. 

How does a cryptocurrency wallet work?

A crypto wallet stores your public and private keys. A public key is given to other people when you want to receive cryptocurrencies from them. A private key is used to send cryptocurrencies to others, and is known only to you. Both are crucial for the security of your wallet. 

Let’s say your friend has sent you some bitcoins using the public key you gave them. The blockchain will see if that public key matches with your private key. If it does, then only the bitcoins will reach you.

Do bitcoin wallet addresses change?

Yes, in the Bitcoin system, once you have received bitcoins on a public key, i.e. the public address, the address changes. A new address is automatically generated for every new transaction. You can still use the old address, but if you do that, anyone can track your transaction history and thus invade your privacy. 

How to get a cryptocurrency wallet?

Before understanding how crypto wallets work, let’s get some clarity about different types of wallets. First, there are hot and cold wallets.  

• A hot wallet is connected to the internet and used for daily transactions. 
• A cold wallet is stored offline and is more secure.

Think of it this way- hot wallet is your purse and cold wallet is your bank vault.

The second distinction is custodial and non custodial wallets. If you have a custodial wallet, it is controlled by a trusted third party like Bitfinex, Coinbase or other cryptocurrency exchanges. 

• On the plus side, it makes transactions convenient and puts less responsibility on you, e.g. you can reset a forgotten password.
• However, if the third party is compromised by cybersecurity threats or shut down by a government order, you are in trouble. 
• Also, when the blockchain forks, you may not receive your coins. A fork happens when a group of developers is updating the blockchain with new features, but they cannot agree on one thing. So they go their separate ways, and the blockchain forks into two chains after a certain point. 
• If you are holding a custodial wallet, there is a chance that your coins are not restored after the fork.

On the other hand, a non custodial wallet allows you to fully control your funds, their transactions and their security. It is better suited for someone who is experienced in handling cryptocurrency.

Now that we know the concept of hot/cold and custodial/non custodial wallets, let us look at the four main types of wallets.

1.    Online wallet/web wallet

An online wallet lets you access your cryptocurrencies by entering your public and private keys on a server. Most online wallets are custodial. 

• On the plus side, they offer fast transactions and accept multiple cryptocurrencies.
• However, they are highly vulnerable to hacking and viruses. 

To set up a wallet, you just have to sign up on the concerned platform and complete a two step verification process. Some examples of such platforms are Coinbase, Binance and Gemini. Some of them accept multiple cryptocurrencies, while some don’t, e.g. Binance only keeps Bitcoins.

2.    Software wallet

A software wallet is an app downloaded on your mobile or computer. For example, Bitcoin Knots is a desktop wallet and BitGo is a mobile wallet. While mobile wallets are mostly hot wallets, desktop wallets can be hot or cold, depending on whether you need an internet connection to access them. 

• On the plus side, it is safer than an online wallet. 
• However, if the device gets hacked, your software wallet might get hacked too. 

You can get a software wallet by downloading a mobile or desktop app, creating an account and getting your private key. 

3.    Hardware wallet

A hardware wallet is a special device, about the size of a pen drive. It is a cold wallet, meaning that it is disconnected from the internet. The trading of cryptocurrencies is done online, but afterward they are transferred to the offline device. 

• The greatest strength of a hardware wallet is that it is highly secure from viruses and hacking. It is also portable. 
• However, it costs more than other wallets. 

Ledger and Keepkey are examples of a hardware wallet. You can set up your wallet by buying the hardware and installing the required software.

4.    Paper wallet

A paper wallet is a printout of your public and private keys and QR codes, by which you can transfer crypto to your software wallet whenever needed. 

• On the plus side, they are the most secure of all other wallets. 
• However, there is a chance that you lose or spoil the printout. Also if the ink fades or smudges, you will have problems scanning the QR code. 

BitAddress and Mycelium are examples of paper wallets. 

As with everything else, the best choice depends on where you stand in terms of preferences and priorities. Before choosing a wallet, think about factors like how much crypto you want to store, how often you want to transact, and how much experience you have.