One of the most frequent misconceptions about cryptocurrency wallets is that they are digital entities that are used to store your funds. This is actually not the case. The term “cryptocurrency wallet” serves solely to describe where a set of digital keys that are used to receive or spend cryptocurrency are stored.

— What Is a Cryptocurrency Wallet? —

The wallet can be web-based, a mobile app, a piece of software for your computer commonly referred to as a “desktop wallet,” hardware-based, or even paper-based.

The key-set that is stored in a wallet will normally consist of two individual keys. One is designated as the public key and the other as the private key.

The public key is used when cryptocurrency is going to be received. It is the key that would be given to the party that will be sending the cryptocurrency to you. This will ensure that it lands in your account.

The private key is used when you are going to spend or send cryptocurrency. Using it allows you to write on the public ledger contained on the blockchain of your cryptocurrency. That is what authorizes the specified amount from your account to be sent to another specified party.

A simplified analogy for understating these keys is to imagine the private key as what gives you “check writing” and “signing” privileges. The public key can be seen as the address that you give someone so they can send you a payment.

This is why losing your public key would be an inconvenience but losing your private key would be catastrophic. A lost public key would mean that others would not be able to send you cryptocurrency. If you were to lose your private key, however, whatever cryptocurrency you had associated with that key would be lost forever. Public keys, if lost, can usually be regenerated from your private key.

— Hardware Wallets —

One of the main reasons for choosing a hardware wallet is that it keeps your private key segregated from the online world. In other words, it is stored on a device that is not constantly connected to the internet. You will sometimes hear them referred to as “cold” wallets. Conversely, those wallets that reside on web servers or on a device that is constantly connected to the internet are called “hot” wallets.

As their name implies, hardware wallets are stand-alone individual pieces of hardware. They are only connected to your computer (usually via a USB port) when you have to validate a transaction.

The TREZOR cryptocurrency wallet is a good example of such a device. Resembling a car alarm control unit in size and appearance, it stores your private keys in an encrypted format on the device. It also has a unique button-based system that requires the owner to provide physical input in the form of pushing a key before allowing final approval of any transaction. Although small and lightweight, the TREZOR includes a small display screen that allows users to verify important details about a transaction before confirming it. Sturdy, water-resistant and tamper-proof, it is one of the best choices available. Presently, the TREZOR cryptocurrency wallet can be used for Bitcoin, Ethereum, Dash, and ZCash.

The Ledger Nano S wallet is an example of a device with an even smaller form factor than the TREZOR. Resembling a small flip-out USB flash drive, it comes equipped to handle multiple cryptocurrencies. It can be used as a wallet for Bitcoin, Litecoin, and Ethereum.

The Ledger Nano S can also accommodate multiple accounts for each of those cryptocurrencies. All of the private keys are secured in a segregated section of the device’s memory. This is encrypted and locked by a PIN code which you have to enter before confirming any transaction. Even though it is a small device, it also comes with a built-in display that makes interacting with it a breeze.

Buy Ledger Nano S

 

The KeepKey wallet has a somewhat larger form factor than the previous two wallets mentioned, but it is extremely thin. While not as convenient to carry on your person as the previous two wallets, it does compensate by having a slightly larger display screen. More importantly, the KeepKey has powerful security measures such as a hardware-based random number generator that is used for generating your private key. This means that key generation is handled on the device itself adding even more security. The KeepKey wallet can be used to secure Bitcoin, Bitcoin cash, Ethereum, Litecoin, Dogecoin, Dash and Namecoin.

All of these wallets use a mnemonic code in the form of a “recovery sentence.” This consists of 12 unique words that can be used to recover your private key in the event of loss or theft. Obviously, this recovery sentence must be physically written down and stored in a highly secured location.

— Mobile and Web-Based Wallets —

Mobile and web-based wallets offer the convenience and speed of accessibility that comes with any service that is based entirely online. These wallets store your private key in highly secured and highly encrypted online servers. Normally, these types of wallets are issued by online cryptocurrency exchanges as a part of their one-stop solution for those who are getting started with cryptocurrency.

Having a mobile or web-based wallet makes paying for goods and services, be it online or in brick and mortar businesses, much more practical than carrying around a hardware wallet. That convenience, however, must be counterposed to the potential risks that come when the integrity and storage of your public key are left in hands other than your own.

Once you start accumulating significant amounts of cryptocurrency, it is not a bad idea to hold the bulk of your holdings using hardware-based wallets while having more modestly sized balances on accounts using web or mobile wallets. Think of it this way, with traditional currency you have the majority of your savings in CDs, retirement plans, etc. You only carry with you a modest sum to cover the direct expenses that you will incur during the day. You should do the same with cryptocurrency.

— Desktop Wallets —

Desktop wallets share some characteristics with both hardware and web-based wallets. Similar to hardware wallets, desktop wallets do not store the private key on a server. They store the private keys on your computer’s hard drive. This makes accessing your private key to make an online purchase nearly as fast and as convenient as when using a web-based wallet. However, it also exposes your private key to the risk of loss due to the corruption of your computer, malware, or hackers. Similar to web-based wallets, desktop wallets may not be the ideal choice to mitigate the risk of loss or theft, but they can be practical for holding smaller sums for day-to-day use.

When you are searching for a desktop wallet you will come across two different types — “full node” and SPV or “lite” wallets. Full node wallets will download the full blockchain of the cryptocurrency that you are using. This requires additional time to set up and can hog a lot of hard drive space on your computer. Lite desktop wallets do not download the blockchain when installed. While that makes them faster to install and easier to use, it also requires the validation process to take place outside of your own computer. Some people might few that as a security risk.

Etherwall is a desktop wallet for the Ethereum blockchain that gives users the option to install a full node or lite version. Bitcoin Core, on the other hand, is full node only.

Other examples of desktop wallets include Exodus and Armory. Exodus has a very user-friendly interface and can be used for Bitcoin, Ethereum, Litecoin, Dash, and EOS. Armory is lauded for its keen focus on security. It allows for multi-signature wallets. These allow users to create wallets that require keys from two people or that can only be used from a specific device, or that require multiple devices to be connected simultaneously in order to validate a transaction. Also, they allow you to create watching-only wallets. These allow you to keep the private key on a separate — preferably permanently offline computer. This gives you the convenience of being able to check balances and previous transactions at any time, but also provide you with the added security of keeping your private key air-gapped. It does require, however, that you create an unsigned transaction when you want to send cryptocurrency. You must then manually port the unsigned transaction to the air-gapped machine to have it signed by the private key and then return it to the online machine to conclude your transaction.

— Paper Wallets —

When you think of cryptocurrency the last thing that you associate it with is legacy technology such as good old-fashioned paper. After all, it is digitally-based and is designed to be entirely paperless. However, when it comes to cryptocurrency wallets, paper-based variants are available.

At their most basic, a paper wallet is nothing more then the printed out version of the public and private keys. Websites, such as bitaddress.org, allow you to generate your key-set for Bitcoin in a matter of seconds. You can then print them out and keep them in a secure location.

WalletGenerator.net works on the same premise. However, running key generators from a live website is not the ideal solution if you want to mitigate potential threats that could come from spyware or viruses. The sites themselves recommend that you download and install the generator so you could run it offline. That process, however, may be too complicated for those who are not technologically versed.

Another solution is to use a device such as the Mycelium Entropy. This consists of a small USB device that generates the public and private key internally. You never connect it to the USB port of your computer — only to the USB port of a printer. Once connected, the entropy device generates the key set and prints it out. This way your private key never touches a computer either directly or indirectly. It completely removes the risks from viruses and hackers.