The new millennium came over, and you could say that the future has arrived. If you are over 30, you probably think that not much has changed. It’s hard to grasp the notion, but we are already 20 years in the XXI century, and while there are no flying cars yet, change keeps happening all around us. Sometimes it happens at such a fast pace that it is hard to keep up most of the time.
The basic notion of money changed back in 2009. A man named Satoshi Nakamoto introduced Bitcoin as the first-ever cryptocurrency in the world, and finances would never be the same. Today we have endless numbers of copycats and products trying to replicate the success of Bitcoin. While some of them have been pretty successful, others are more of an ongoing joke.
You might be learning about cryptocurrencies for the first time in 2020. There is no problem with that since the concept is still relatively new. The sole existence of these currencies challenges the established market of Fiat currencies. Fiat is an acronym used to call regular, government-issued money such as the American Dollar and the Euro.
The main difference between Fiat money and Cryptos is pretty simple. Fiat money is issued by federal institutions and is declared legal by them. Governments also get to determine their value on their national markets, but not their universal value in the open market. Cryptocurrencies have a global value determined by a trading market based on pure supply and demand.
Unlike Fiat currencies, cryptocurrencies do not have a physical representation. If your bank account says that you have $300 and you withdraw three bills of $20 from an ATM, the bank will say that you have $240 now. Cryptocurrencies exist within the realm of the internet, and they are handled using tools found in the same place where they originated. You’ll know these tools as “Digital Wallets.”
Digital Wallets and How to Handle Cryptocurrencies
Before we throw around names like Bitcoin, Ethereum, Litecoin, and others, we need to understand a few basics about this market. There quite a few ways to get cryptocurrencies these days, but the most common way to get these digital assets is through an exchange that trades these types of digital money. You can find a lot of them online and choose one based on reputation alone.
After you buy your cryptocurrencies from any exchange, you need to place them somewhere to keep them safe. When you have cash in hand, where do you put it? Easy answer: in your wallet. With cryptocurrencies, tokens, and other digital assets, you can do the same. Choosing the right online wallet service, however, can be pretty challenging if you don’t know about their services.
A digital wallet works the same way a regular wallet works with a significant difference. The way you handle its contents, it’s only done online. Your cryptocurrencies will be stored in a blockchain ecosystem, and you will be able to use the funds available in your wallet at your convenience by using a website, an app, or a QR code.
The following guide is the most complete walkthrough we can offer about cryptocurrencies and digital wallets. You will learn how these financial tools of the future work. By the end of this brief study, you will be able to understand how to manage these online instruments to handle your cryptocurrencies.
Now let’s get started. As you probably wonder, the first question that comes to mind is what exactly a cryptocurrency wallet is. Let’s take it from there.
What is a Digital Wallet?
Digital wallets and cryptocurrency wallets are synonymous. Any of the terms can be used to name the software used by people to store, send, and receive digital assets. It can be used for trading or to pay goods and services. As we mentioned earlier, cryptos do not exist as physical assets, they are stored in the blockchain, and all transactions done with them are registered online.
A lot of the crypto assets in the market need their own software to be handled. You can find a lot of service providers that allow you to have multiple types of cryptocurrencies under the same ecosystem. Wallets are always identified by an alphanumeric code that ranges from 25 to 36 different characters. Sometimes these codes are backed up with a QR code. Most wallets, however, are drifting away from this practice since it has been deemed insecure by many of them.
Given the different coding of all the cryptocurrencies found in the market these days, it’s safe to say that you will need a wallet for some of the most unique or the most valuables of them. Bitcoin is the leading example of the group. The only way you can store Satoshis (Bitcoin’s fractions of a digital coin) is using Bitcoin-specific wallets, the same thing that happens with Ethereum and some of the assorted coins which are traded using tokens.
How Do Digital Wallets work?
For lack of a better term, we can safely say that it’s all in the proverbial key, no pun intended. We mentioned a code earlier, one with a rather large number of characters, maybe too much for you to remember. Digital wallets work with a public key and a private one that only you have access to. If you need a reference, think about your bank account and the pin code used for your ATM and debit card transactions.
The public code is the one you will offer to receive funds when you buy or trade cryptocurrencies. This number is only provided with this purpose. The private key will become the most precious piece of data when you use a digital wallet. The key works very much like the PIN we already mentioned.
You will use the key to access your funds and manage your transactions. You can also check your balance anytime you need to with this key. Keys works differently depending on the wallet; some of them hold on to your crypto assets as they confirm your transaction.
Blockchain and Wallet Interactions – How does it Work?
All cryptocurrencies are contained on their own decentralized blockchains. The data of these blockchains are open public records to follow the transactions made with these digital coins since the moment they are originated. You will be able to see these transactions in your wallet since digital currencies are built on the principle of transparency. The rest of the chain is used to track funds in your wallet, as long as they remain there.
- We can use one of the most straightforward transactions as a scenario to show you how blockchains work. Picture your cryptocurrency wallet with a full Bitcoin on it.
- Bitcoins are rarely sold in units, especially since their price keeps increasing since 2017.
- You will probably sell a fraction of your coin and send the specific amount to a public address given to you by the buyer.
- Let’s say you sold 0,0001 BTC. The moment you authorize the transaction with your private key, a record will be created on the ledger of your wallet, and it will show the amount you sent to the buyer.
- When the buyer confirms the transaction, you are done. The information about your sale will be made public to people who wish to track the origin of the Bitcoin should they need to.
How Many Types of Different Cryptocurrency Wallets are Out There?
We mentioned earlier that there is a ton of options out there to store and handle cryptocurrencies and digital assets. Not all of them work alike. Some of them grant you full control over your digital assets, while others will hold on to them and offer you tokens to make transactions inside their ecosystems. The following are some of the most popular options out there. Take a moment to review them so you can weigh their pros and cons.
- Desktop crypto wallets are probably the most user-friendly products out there.
- They are very secure as long as you don’t access them from public places or open networks.
- They also offer plenty of options to manage your funds.
- They don’t charge you for any add-ons, and they do a great job of keeping their software updated.
- The only issues faced by these wallets are viruses and malware in your computer and the fact that they are not practical for on-the-go transactions.
Most desktop crypto wallets are compatible with popular operative systems. You can be a native user of Windows, Linux, or Mac, and you will find something that suits your hardware and software settings. The main advantage of desktop wallets is that they are still the best option to handle crypto-specific coins such as Bitcoin and Ethereum. Since you will likely set the wallet in a single device, this is probably one of the most secure options out there.
The only downside is something that you have to deal with even if you don’t handle digital assets with your computer. You need to have increased levels of security to avoid any attacks. Your firewalls and antivirus must be top-notch and updated with frequency. It’s also crucial that you never use autocomplete features to remind you of the keys related to your account. Keep your digital assets safe, never engaging with anyone asking for information about your wallet.
One of the most unique traits of desktop wallets is that they work with long strings of words after installation. These keywords are there to map your private key for cases of emergency. You can also handle the recovery of your account quickly. You need to keep this information written and secured in a physical place. While desktops are more durable than laptops, they do die out on their users too. Some of the most popular desktop wallets are Exodus, Jaxx, and Electrum.
Mobile Cryptocurrency Wallets
- These crypto wallets are some of the most common apps installed in smart devices around the world.
- They are pretty easy to use, and most of them have friendly interfaces.
- They are also convenient for on-the-go transactions, and they have a lot more options than desktop wallets.
- You can get most of them by downloading their software for free.
- The only notable downside they have is that they are easy to hack in public networks, and if you are careless, it could cause trouble if you lose your smartphone or tablet.
Mobile wallets are great for mobility and on-site transactions, but they face a pretty big issue. If you set your autosave features for your keys of access to the app, you risk losing everything. This is not an overstatement. Mobile crypto wallets can scan each other to make transactions faster. If you are not careful with your smart device, someone could quickly scan your phone and rip you off.
On the bright side, most of these apps include a two-factor authentication feature to increase security. This is excellent news since your phone can use any of its built-in security settings to grant access to your funds, such as your digital imprint, face recognition, or a second code that only you will know. The list of options for mobile wallets is even longer than the previous option. The most popular choices are Jaxx, Edge, and MyCelium
Web-Based Cryptocurrency Wallets
- If you work on trading, this is probably one of the easiest ways to handle your cryptocurrencies, since web-based services are pretty user-friendly most of the time.
- Their convenience is mostly focused on the easily accessible interface and the fact they can be accessed from any browser.
- Most of these wallets are also free to use. They just charge a small fee for using their services on each transaction.
- The only downside they have is that you need to do some heavy homework on them before using them for anything.
Web-based crypto wallets are the tools of choice for most exchanges. These outlets hire third-party developers to create the necessary code to handle transactions online. You can set up one with an e-mail address at most and a strong password. They are known for being the preferred option of people who are careful with their privacy, and they are easy to use since most transactions are pretty straightforward.
We mentioned a hot take regarding the homework you need to do on them. These are the things you need to look for:
- Their reputation,
- Their proven record with security,
- Their history with safekeeping assets for their customers
- The level of control you’ll have over your cryptocurrencies once they are deposited on their ecosystems.
If you need to use your funds on short notice, try to avoid wallets that use their own tokens to handle transactions. The most popular web-based options out there are Coinbase, Cryptonator, and MyEtherWallet.
Hardware-Based Cryptocurrency Wallets
- If you are a maniac about security, it doesn’t get any safer than using a hardware-based crypto-wallet.
- It is safe to say it is one of the most secure options out there because they offer offline storage.
- The hardware on these wallets is also really easy to set-up.
- The only downside is that they are pretty expensive, and they are incredibly slow for funds withdrawal, which is inconvenient if you need your cryptocurrencies for an on-site transaction.
If there is one thing you can trust when it comes to security, it’s a physical device that holds all your crypto assets in a place that you know will never be stolen, hacked or scammed from you. Hardware-based crypto wallets are nothing more than a fancy USB stick that has been specially modified to hold your digital currencies. You can handle trades and other types of deals on many platforms without actually releasing the digital assets until you are sure it will go as you expect it.
As you can probably imagine, this is perhaps the most secure to save your cryptocurrencies if you plan on keeping them for a long time. You can store the device for as long as you need without fearing deletion.
The only downside of hardware-based crypto wallets is that they cost a pretty penny. The cheapest one can run you up to $150. Security-wise the device will only be accessed by you, but if you fear to lose the device for any reason, you can protect the contents with a PIN serial number. The most popular physical wallets are the ones created by Trezor, Ledger, or KeepKey.
Paper-Based Cryptocurrency Wallets
- If you are old-school and you rather have some paper trail regarding your digital assets, a paper wallet is probably the best option for you.
- This is one of the most secure options out there since it certifies your digital currencies on writing.
- The best news is that this can’t be hacked or invaded by any form of malware.
- It can also be easily set-up since you only have to make a deposit and print your keys to store them safely.
- The only problem with this instrument is that paper wallets can be misplaced, damaged, and stolen.
If you want to measure how bad it would be, think about what happens when blank paper bonds to the bearer get lost. Anyone could collect them, and while bond money can be traced in the real world, it is not that easy with cryptocurrencies. To get your money in a paper wallet, you will have to place your currencies in a blockchain account. After you are done, make sure to use the software of the wallet to print the key and the QR code that grants you access to your assets. The most popular paper wallets out there are offered by WalletGenerator.net and Bitaddress.org.
Additional Pointers – Everything You Need to Know About Hot and Cold Wallets
We have already mentioned how you need to do your homework about every single crypto wallet that catches your interest. We have mentioned the stuff you should look for and the features you need to notice with most of them. There is one additional feature you need to pay attention to. As you read about digital wallets, you will see the words “hot wallet” and “cold wallet” throw around a lot. Here is what they mean:
Hot Crypto Wallets
This is a term used to refer to wallets that need an internet connection to work. Since the internet is a very insecure place to hold digital assets, the “hot” part is related to the risks you face by keeping them there, such as software bugs or DDOS attacks.
Cold Crypto Wallets
These are the word of choice used to name crypto wallets that rely solely on hardware and can’t be compromised by the actions of a third party unless you lose them.
Saving Your Cryptocurrencies – Should You Hold Your Assets Using an Exchange or a Wallet?
You can bypass having a crypto wallet in a separate outlet by securing your cryptocurrencies in the wallet offered in the exchange where you make your deals. If you are planning a dynamic strategy of trade, this move makes sense. You will have instant access, and you can pursue your transactions with the promptness you need. This, however, has quite a few downsides so it would be in your interests to keep reading:
The first issue you will have to deal with is that the exchange will fully control the private key to your wallet. As long as the asset is in their platform is not 100% yours. The second reason is that exchanges are easy targets of hackers and lurkers. Just in 2018, Coincheck lost $534 million to hackers, and none of these currencies can’t be traced back. If you search online, you will find how frequent this happens.
The best course of action, for your financial sake, is going the safe route and keep your digital currencies in a personal wallet. One that offers the best features based on your needs as well as the plans you have for your cryptocurrencies in the long run. With your currencies under your control, you will be the sole person to call the shots about what to do with them.
Step-By-Step – What to Do to Choose the Best Cryptocurrency Wallet?
With all the knowledge you have in hand at this stage, you could make a well-educated guess based on your research. If you still have some doubts, just read the following steps and make a decision based on your needs. Making this choice it’s not that hard, but you need to put some thought into it, given the number of service providers you can find online. Now pay attention. Your choice is determined by two main factors: your preferences and your capital.
If you are concerned about security, hardware wallets, or paper wallets are the best course of action for you. They are especially useful if you plan to put some savings into digital assets in the long run. You will let the ups and downs of the market decide the worth of your investment. This is ideal if you have other sources of financing, and cryptocurrencies are just a portion of your portfolio.
On the other hand, you probably have in mind a different strategy regarding the dynamics of your digital assets. If you are into fast-trading and need to handle opportune transactions, you will be better off with a mobile, desktop, or a web-based wallet. They are easy to set up and use. They also are pretty handy if you need to move fast as you strategize. Online tools are the leading choice of experienced brokers.
There is a lot more you will notice as you gain experience and decide the curse of your investment. These are some of the most relevant features you will analyze as you learn:
The Reach of the Features Provided by Your Wallet
A crypto wallet that makes it easy to change your currencies into Fiat currency is one worth your attention. If the wallet allows you to handle the trade of your assets for other cryptocurrencies, that’s a plus too.
The Number of Currencies Supported by Your Wallet
If your wallet of choice can hold your cryptocurrencies as you traded or bought them, you have a winner. Keep in mind as you grow your portfolio that some cryptos can only be held as they are in their own ecosystems.
The Reputation of the Team Behind your Wallet of Choice
Given the number of cryptos available in 2020, you could believe that doing some research on the team behind a wallet or an exchange can be difficult. The fact is that most of the people working in cryptos are well-known and have a public profile that can be searched and confirmed using Google.
Costs and Commissions
Nearly every single crypto wallet you choose will let you set up an account for free. The little details about the costs of their services are in the fine print, so you better take a moment to read the full terms of services of the wallet you want to use. If you find this bothersome, read online reviews about them. People tend to very vocal when a service provider is abusive with their commissions.
Overall Reputation of the Service
All crypto wallets have a community that rallies behind them. Some of them are paid for, while others are wholly sincere in their feedback. The best advice we can offer is to check their ratio of reviews. If the good ones outweigh the bad ones, that’s a good sign. If the bad ones are thoroughly specific on their issues, pay attention to what they have to say.
How to Use Your Cryptocurrency Wallet – All the Stages
We mentioned at the beginning three concrete things you can do with your digital wallet. You can send payments using your cryptos, you can receive payments made with cryptos, and you can hold your cryptos in them as you would do with savings using Fiat money. We are going to explain how to handle yourself on every single one of these steps, so let’s get started.
Sending Payments Using the Cryptocurrencies in Your Wallet
You can send payments to other crypto wallets using the public key of the recipient. These payments can be handled using an app, a QR code, a website, or a desktop app. This public key is composed of 25 to 26 alphanumeric characters. With the code in hand, you only need to do the following:
- Log to your wallet
- Enter the recipient’s wallet address
- Specify the amount, and the currency you want to transfer if your wallet allows it
- Check the transaction fees that apply, if any. Make sure you have enough to cover the fees
- Take a final look at the details of the transaction and make sure you have offered the correct information
- Click send, and you are done
Please keep in mind that the process we described is just a general overview of how these transactions go. The method may change depending on the wallet you use. Also, remember that some wallets can only receive certain types of currencies, and very few can actually manage a successful conversion.
Receiving Payments with Cryptocurrencies on Your Wallet
You can also use your digital wallet to accept payments from other accounts. As a matter of fact, receiving them is even easier than sending payments. As with the previous process, you will need a key: yours. The means of payment depend on the device you are using. Mobile devices just need to scan each other for QR codes, while web browsers and desktop apps will need the alphanumeric code provided by the sender. The process goes like this:
- Log to your wallet
- Click on the “Receive” option
- Write the code supplied by the sender
- Send your public key to the person sending you the payment
- Wait for the funds to be transferred to your wallet and you are done
Holding Cryptocurrency Funds in your Digital Wallet
You can use your crypto wallet as a savings account if you are not into trading. This is usually done by people who like to hold on to assets as they increase in price. There is not much you need to do after receiving payment in cryptocurrencies. Check your balance frequently to make sure your assets are still in place. And do a follow up of your security periodically.
Some Tips to Keep Your Digital Wallet Safe
This is probably the most often repeated piece of advice offered to people working with cryptocurrencies: you need to make security your primary concern once you have cryptos stored in your wallet. The best way to do this is by keeping yourself informed and making informed decisions about the products you use to handle your cryptos. Follow these steps to make life easier on you:
Do a Little Research Before Choosing a Service
Never go with the first service you find online. Read as much as you can about the wallet services that look attractive to you. If you need to secure an informed opinion, read the online reviews of their users.
Activate Two-Factor Authentication
This is probably the single most useful means of security you can have for your wallet. If the service offers to work with face recognition or needs your fingerprint to be unlocked, it would be best for you.
Pick a Strong Password
Here is a neat trick about strong passwords: use a phrase that is easy for you to remember and write it without spaces. Avoid dates or names of people and pets.
For Big Transactions Use a Multisignature Wallet
If you are handling a big payment using cryptos, you may want to have a third party involved to secure the transaction. By setting up a multi-signature account, you will need to include a second person related to your login information, and that person will have to sing up on the platform to approve the transaction.
Update Your Antivirus
Make sure your desktop or laptop is using the latest version of the antivirus software you installed on them. Make sure to set up the firewalls of your PC each time you handle any transaction. These utilities can also be installed in your smart device to strengthen their security.
Update the Wallet’s Software
If your wallet requires a secondary app on your smart device, make sure it’s properly installed. These extensions help increase the security of your account by generating a new PIN to access your funds with each new login.
Keep a Backup
Some wallets will allow you to create backups of the content of your wallet in case the login information is compromised. If you have that option, make sure to keep it active.
Avoid Using Public Wi-Fi Networks
For the sake of common sense, never access your wallet using a public Wi-Fi network.
Keep Your Holdings in Different Wallets
One of the best ways to make sure you don’t lose everything when you have an extensive portfolio of digital currencies is splitting everything among many means of storage and savings. Always use more than one account to keep your holdings with you. Keep a good portion of them on physical devices as well.
As you can see, we are nearing the end of our guide, and we haven’t placed the finger on a single product. This is because there is no absolute solution that fits the needs of everybody. All wallets are made different, and they cover the needs of users based on their strategies. It’s up to you and your research to figure out what is the best option based on your needs and the intentions of your investment. There is a lot more to ponder on this topic, but with all this information, you should be able to handle yourself as you test the waters of cryptocurrencies.
Frequently Asked Questions about Cryptocurrency Wallets
1. Since cryptocurrency transactions are managed on an open Blockchain, are the wallets anonymous?
No. Wallets are not linked to your real identity if that’s a concern to you. But the transactions are stored on the public blockchain, and they can be traced to your IP address if you are not using a VPN service.
2. What are the fees collected by cryptocurrency wallets?
It depends on the service provider. Most digital wallets will tell you loud and clear the fees they collect on the terms of service. You need to pay attention to these online contracts before accepting them. If it’s too much of a hassle, you may want to check their community to learn about these fees.
3. Can I store all my cryptocurrencies in the same wallet?
Some services allow this because they have the framework in place to handle these transactions. It is not the most common practice, and it’s never a good idea to place all your eggs in the same basket.
4. What’s the best cryptocurrency wallet?
As we have stated numerous times, that’s a matter of personal choice that depends entirely on the needs you have in place or the strategy you want to pursue investing in cryptocurrencies.
5. What is a light client, and what does it have to do with digital wallets?
Certain wallets require that you run a node of their blockchain. Your computer will become a part of their system to handle transactions. This can drain your systems if they are not up for it. Most of these wallets also offer the option of becoming a light client. This option allows you to navigate their network and manage transactions in the blockchain without having to download nodes. This is the default option for most mobile users.
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