When dealing with cryptocurrencies you've certainly heard of so-called wallets. Maybe you already hold some crypto-currencies- and therefore, also a wallet. But what is a wallet and what do you need it for?
Did you also know that you can choose between different types of wallets? Are you aware of the pros and cons of each alternative? What type of wallet is best for you? Let’s have a closer look!
A wallet basically gives you the ability to store and manage your cryptocurrencies. It’s just like the real purse in your pocket- only that it contains a cryptographic currency, like Bitcoin or Ether instead of a fiat currency like Euros or Dollars.
With a wallet, you have the possibility to receive, store, and send cryptocurrencies. However, there are decisive and very important differences to the wallets you usually carry with you.
First, cryptocurrencies are not actually stored in a wallet. A wallet is basically just a software program, that only holds the information where to look for your coins on the blockchain. Second, unlike your purse, which can hold any type of currency, one single crypto wallet cannot be used to store all your cryptocurrencies and tokens. Rather, for each individual cryptocurrency, you need a separate and compatible wallet. For instance, you can only receive or send Bitcoins if you also own a Bitcoin wallet.
However, if you do come up with the idea of transferring a currency other than Bitcoin into this specific Bitcoin wallet, it is very likely that your coins will be irretrievably lost - which would of course be very frustrating. So please always make sure you have the right wallet before receiving a certain type of cryptocurrency.
But before knowing about the different types of wallets, we first need to understand the very important concept of public and private keys: Wallets always have a public and a private key. You will be given these two numbers when you open up a new wallet.
The public key of a wallet is comparable to the account number of your bank account. In order to receive money from someone you normally share your account number with the respective person. With this number, the other party is able to transfer the money to the correct account - namely yours. In this particular instance, it is totally acceptable to share this number with other people, as your bank details are not sufficient to access your account or to withdraw any money. The same holds true for the public key of your wallet, which consists of a long series of letters and numbers. This key is used to receive funds from other people. By sharing it, nobody will ever have any access to your wallet and therefore to your coins, so you can go ahead and share it when necessary.
And now, a very important point, it’s a completely different story with your private key. The private key of a wallet is comparable to the pin number of your credit card. The pin number is secret for a reason and should only be known by you.
If it falls into the wrong hands, it is very easy to gain access to your account and therefore to your funds. Again, and very importantly, the same holds true for the private key of your wallet.
A private key is a secret and unique sequence of numbers, normally a 256-bit number, that allows its holder to spend the coins held in the wallet. So, anyone who knows your private key can access your coins in your wallet and possibly steal them. Therefore, you should never share or disclose your private key to anyone, even if someone asks you to. Always keep this private key safe and inaccessible to other people.
Types Of Crypto Wallets
Now that we understand what a wallet is and what you need to bear in mind when receiving and sending cryptocurrencies, it's time to give you an overview of the most common types of wallets. Each of these types of wallets has its advantages and disadvantages, be it availability, convenience, or most importantly security.
Desktop-wallet
Let’s start with the so-called desktop-wallet. This wallet is downloaded to your PC and installed like normal software. However, for most wallets of this type, you will need some storage space, as they download the complete blockchain of the respective cryptocurrency. That can quite often be a few gigabytes. The wallet can then only be accessed on the computer to which it was downloaded. This type of wallet offers a high level of security since your private key is not stored on an external server, but on your own hard drive. Also, you don't have to buy any additional hardware to keep your coins safe, as you can simply use your own PC. However, the security of the desktop-wallet is only as good as the security of your PC. When using this type of wallet, it is necessary to install a good antivirus program and a firewall to make it difficult for hackers to access your private key. Also, when using this wallet, it is urgently necessary to make regular backups of your hard disk, since a malfunction on your PC can lead to the loss of your coins. This type of wallet is therefore particularly suitable for people who attach great importance to security and do not carry out transactions frequently.
Paper Wallet
A very safe alternative way to store your coins is the so-called paper wallet. A paper wallet, as the name suggests, is a physical piece of paper on which the private key is written. You can then keep this piece of paper in a safe place of your choice. This option is protected against all dangers of the Internet. However, care must be taken to protect the piece of paper from physical damage such as moisture, sunlight, or fire. This type of wallet is particularly suitable for holding coins in the long term. However, this option is not useful if you want to execute a large number of transactions. That’s because a new paper wallet would have to be created after each and single transaction because your private key was pressed on the computer, which consequently reduces the security level of your private key.
Mobile Wallet
Another way to manage your coins is the mobile wallet. This wallet is probably most commonly used. Similar to the desktop wallet, the software is being downloaded, but this time to your mobile phone and not your PC. You can easily download this type of wallet from your mobile phone manufacturer's app store. Often, this type of wallet is also offered by popular crypto exchanges. Here, in the majority of cases, your private key is kept on external servers. The main advantage of mobile wallets is that users can quickly access their coins, making them suitable for carrying out many transactions. A big disadvantage of this alternative, however, is that the private key is managed by a third party and you have to trust their security measures. Therefore, this option is especially suitable for those who want to use their wallet to store and spend smaller amounts of coins. Those who want to securely manage larger sums should use a different option.
Hardware Walle
To securely manage large sums of money, the hardware wallet is probably the ideal choice. Similar to the desktop wallet, the private key is not stored on external servers but remains in your possession. However, the private key is not backed up on your computer but on a separate device. Hardware wallets have a secure chip, so when you plug them into a computer to send out your cryptos, you never have to enter your private key on the computer itself. This makes it very tough for hackers to steal your private key, even if your computer is infected. To carry out a transaction, a predefined password is entered on the device's built-in display.
A disadvantage of these hardware wallets is that they are usually not the cheapest. Therefore, you probably want to spend this amount of money only if you happen to hold a large position in cryptocurrencies. If this is the case, this option is a meaningful and sustainable investment in the security of your funds.
Okay, let’s sum it up. Each of the options presented has its advantages and disadvantages. No wallet can provide 100% protection for your cryptocurrencies but choosing the right wallet can significantly increase security. Before you decide on an option, always ask yourself what you wish to do with your funds. Do you want to be as flexible as possible and buy or sell frequently? Then the mobile wallet is probably the right choice for you.
Would you like to keep your coins for a long time and therefore store them as safely as possible? In this case, it may be a good idea to use a desktop or hardware wallet.
Whichever wallet you use, make sure you have backup arrangements. Though hacking is a clear risk when it comes to cryptocurrencies, there are many more currency losses due to personal negligence than hacking. The security of your coins starts with you!