This article was originally published on Cointelligence. It is republished here with the permission of the author.
Use this simple guide to understand what a cryptocurrency wallet is, how it works, how to find the most popular cryptocurrency wallets, and the most secure ones available on the market today. We will help you choose the most suitable wallet to serve your needs.
What is a cryptocurrency wallet?
A cryptocurrency wallet is a client that stores the private and public keys of a single coin or multiple coins and/or tokens. The coin wallet is the means by which a user manages these keys and interacts with different blockchains, in order to send and receive cryptocurrency transactions, and check their balance(s). Unlike the concept of a “pocket” wallet, a cryptocurrency wallet doesn’t actually store the currency. Instead, it only includes records of transactions and balances that are stored on the blockchain(s). Actually, a cryptocurrency does not get stored in any digital location, or exists in any physical form, only on the blockchain public ledger.
When you send bitcoin, or any other cryptocurrency, to someone, you are actually using the coins’ private keys stored in your wallet to sign off ownership of the coins to the receiver. For the receiver to be able to spend the received coins, the private keys stored in their wallets have to match the public address to which the coins have been sent. If the private and public keys match, the receiver’s wallet balance will increase, and yours will decline accordingly. The idea is that there is no actual exchange of coins between the wallets. The transaction is marked by a transaction record on the public ledger that confirms the change of balance between cryptocurrency wallets.
Types of cryptocurrency wallets
There are multiple types of cryptocurrency wallets that offer users various means for storing and accessing their coins and/or tokens. Wallets can be divided into the following categories:
Software wallets can be further broken down into desktop, web based (online), and mobile wallets:
By far, desktop wallets are the most secure forms of cryptocurrency wallets. However, using a desktop wallet is not a simple task and requires considerable experience, otherwise all stored funds can be lost. A desktop wallet requires downloading the coin’s whole blockchain, before it can be used to send and receive transactions. Bitcoin’s blockchain is currently estimated to be around 185 Gigabytes, so one would need a few days to be able to fully download it and be able to use the Bitcoin Core desktop wallet client, which is inconvenient to many.
A desktop wallet is downloaded and installed on a PC or laptop, and a special file is used to store private key information. For example, the original Bitcoin Core client stores private key information on a file named “wallet.dat” which is located by default in the Bitcoin data directory, and can be encrypted with a password or a mnemonic phrase. Usually, a local bitcoin wallet file is intended to be used on a single computer, as attempting to clone a wallet file to use it on multiple computers can lead to “weird behavior”.
Online wallets run on the cloud and can be accessed via any computer from anywhere. Even though online wallets are much simpler to use than desktop wallets, they are less secure. Some online wallets store your coins’ private keys, which renders them more prone to theft and hacking attacks. Online bitcoin wallets like those offered by Blockchain.com do not store your coins’ private keys so they are highly recommended over any other other online wallet.
Mobile wallets are increasing common and you can find a bitcoin wallet for Android or a bitcoin wallet for iPhone, as well as altcoin wallet apps for both systems. They are very convenient as they can be accessed via your phone anywhere and a bitcoin wallet app can be used to pay at retail stores. Mobile wallets such as the Coinbase wallet are much smaller in size than desktop wallets, yet they are less secure, as the coins’ private keys are usually controlled by the mobile wallet provider.
Hardware wallets are more secure than online wallets, because the private keys are stored on the hardware device offline. Most hardware wallets are compatible with multiple online interfaces and support different cryptocurrencies. Sending a transaction is simple – you just plug in the bitcoin hardware wallet to any computer connected to the internet, enter a pin, send the desired coins, and confirm the payment.
A paper wallet is as secure as a desktop wallet, and is relatively easy to use. A paper wallet is simply a printout of your coins’ private and public keys. Furthermore, the term paper wallet refers to a software client that can generate the coins’ public and private keys, which are then written down or printed out. To receive funds to your paper wallet, all you have to do is send funds to the public address written on your paper. To spend funds from your paper wallet, you first have to transfer funds to a software wallet which is done via entering the private keys shown on the paper wallet into the software client.
Is your cryptocurrency wallet secure?
The security of different cryptocurrency wallets varies greatly. The security level depends on the type of wallet, i.e. desktop, online, mobile, hardware, or paper. A cryptocurrency wallet relying on a web server to store your private keys is much riskier than a wallet that stores your private keys offline. Online wallets render users prone to loss of funds via hackers compromising the web server used to store the coins’ private keys, or via exit scams planned by providers of the wallet services. On the other hand, offline wallets cannot be compromised as they don’t rely on a web server, or a third party for storage of private keys.
Even though online wallets are known to be vulnerable to hacking attacks, following certain security measures, with your blockchain wallet login, can maximize their security and minimize the risk of a loss of funds. Always remember that regardless of the type of wallet you use, losing your private keys leads to a permanent loss of funds. Also, it should be emphasized that cryptocurrency transactions are irreversible, so if you send your coins to a scammer, you can never reclaim your funds. You can maximize your wallet’s security via the following measures:
1- Back up your wallet
Software wallets, including desktop, online, and mobile wallets, can be backed up to prevent loss of funds. Backup can be accomplished in different ways:
- The desktop wallet’s wallet.dat file can be encrypted with a password. After encrypting the file, copy it to another device such as a CD, a USB drive, another computer, or a cloud drive.
- Online wallets and hardware wallets can be backed up via a mnemonic phrase which usually consists of 12 to 24 randomly selected words. A desktop wallet can also be backed up via a mnemonic phrase which is used to generate a root key, from which all the coins’ private keys can be regenerated.
- Multi-factor authentication can be used to boost the security of online wallets. Most online wallets offer users the option to use two-factor authentication, e.g. Google Authenticator, for an extra layer of security. This prevents loss of funds even if a hacker uses a keylogger to phish the wallet’s password.
2- Keep your wallet’s software updated
Whether you’re using a desktop wallet or a mobile wallet, you should always know how to get a bitcoin wallet software client up-to-date to guarantee that you have the latest security enhancements.
3- Use long, complex, and meaningless passwords to minimize the risk of your password being cracked.
Services like Passwordgenerator.net can generate passwords for you. Don’t share your passwords with anyone, even your online wallet service provider. Administrators of online wallets will never ask you for your password.
4- Use multiple authentication requirements for your withdrawals from online and mobile wallets.
To allow withdrawal of funds, enable multiple authentication steps, e.g. entering your password, two-factor authentication, and SMS code via your mobile phone.
The best cryptocurrency wallets
There are currently dozens of cryptocurrency wallets, so picking the best cryptocurrency wallet can be quite confusing. To help you choose a suitable wallet, we will present you with the best options as per our experience and the recommendations of members of the crypto community.
Blockchain is by far the world’s most widely used cryptocurrency wallet. It is used by over 15 million individuals from all around the world. Blockchain wallet can be used to store bitcoin, ether, and bitcoin cash. Despite being an online wallet, users’ private keys are never stored on Blockchain’s servers, which renders it the most secure online wallet on the market today. The wallet is also available for Android and iOS smartphones.
The wallet features advanced security options such as two-factor authentication, mnemonic phrase back-up, and a pin code for the mobile wallet. This is an easy wallet to pair with a smartphone simply via scanning a QR code. Users can exchange between bitcoin, ether, and bitcoin cash through the wallet’s interface via ShapeShift.
Atomic wallet is a relatively new online multi wallet that can be used for storage of around 300 coins and tokens including bitcoin, ether, litecoin, ripple, and others. Coins’ private keys are encrypted on the user’s computer, so no one can confiscate their funds. Atomic wallet has a desktop app which is available for Windows, Linux, MacOS, Fedora, and Debian.
Atomic wallet supports Atomic Swaps, which will help users greatly reduce fees on exchange between various coins. The wallet also enables users to purchase cryptocurrencies with USD and EUR via Changelly or ShapeShift.
Green Address is one of the most easy-to-use software wallets that is ideal for newbies. Green Address offers desktop, online, and mobile (Android and iOS) wallets. Enhanced security features include two-factor authentication and multi-signature addresses. The wallet’s software is open source, which reflects high levels of transparency. The downside of the wallet is that Green Address has to pre-approve all transactions before they are actually executed.
Jaxx is a multi cryptocurrency wallet that supports multiple coins including bitcoin, ether, dash, ether classic, litecoin, DAO, zcash, and others. Jaxx is available online, via a desktop app (Windows, Linux, and MacOS), and via a mobile app (Android and iOS). It is also available in the form of Chrome and Firefox browser extensions. Users can easily exchange between bitcoin, DAO, and ether via ShapeShift through Jaxx. If you are looking for a multi-currency wallet, Jaxx is a perfect choice.
Trezor is a hardware wallet that was originally created to store bitcoin. However, it can now be also used to store bitcoin cash, litecoin, ether, ether classic, dash, zcash, namecoin, dogecoin, and various ethereum based ERC20 tokens. Trezor is resistant to malware infection and keeps your private keys safe. It is easy to use and is compatible with Windows, MacOs, and Linux operating systems. Trezor is an ideal multi currency wallet choice for those who want to store large amounts of cryptocurrency.
Mycelium is considered by many members of the crypto community to be the best mobile bitcoin wallet available on the market today. It is available for both Android and iOS smartphones. Mycelium software is open source. It is compatible with Trezor and Ledger hardware wallets.
Armory is an open source desktop wallet for bitcoin. If you are an experienced user looking for an open bitcoin wallet, then Armory should be your choice. Armory’s top notch security features include multi-signature and hierarchical deterministic (HD) support. The software Armory used to create their bitcoin wallet is open source and has been trusted by members of the crypto community for years.
The Ledger Nano wallet is a new hardware wallet for bitcoin and 22 other cryptocurrencies including ether, litecoin, dogecoin, zcash, dash, stratis, ripple, bitcoin cash, ether classic, expanse, vertcoin, viacoin, HELLO, komodo, POSW, UBIQ, PIVX, ARK, FIDO U2F, bitcoin gold, and digibyte. The wallet features multi-signature and hierarchical deterministic (HD) support. Ledger Nano wallet is compatible with Windows, Linux, and MacOS operating systems. Moreover, third party wallet apps can run from the wallet’s device.
The enormous number of cryptocurrency wallets available on the market today can make it quite confusing to pick up the most suitable wallet for one’s needs. In addition to going through our wallet reviews, ask yourself the following questions to pick up the best wallet that matches your needs:
- Will you be using the wallet frequently, e.g. daily, for sending and receiving crypto? Or will you use the wallet to hold your coins for long term?
- How many different kinds of coins do you need to store in your wallet? You can find a free bitcoin wallet, dogecoin wallet, or Ethereum wallet online if you only want to use one kind of token. However, most users will find a multi coin wallet more useful.
- Are you looking to be able to receive free tokens via ICO drops?
- Or maybe looking to purchase tokens from an STO?
- Will you access your wallet from a single device? Or will you have to access your wallet from multiple locations using multiple devices?
Answer these questions and take some time to carefully assess your needs, and you will surely be able to select the best cryptocurrency wallet.
About the Author
Cointelligence conducts data research and analysis for the crypto economy. They create relevant tools for investors, namely an impartial and accurate ICO/STO listing and rating system, and a new crypto exchange rating system. While it is possible to find huge amounts of data widely available to the public, collecting everything and taking only what you need is not an easy task. Cointelligence was created to bridge this information gap in the crypto economy