What is a Bitcoin and cryptocurrency wallet? Types of cryptocurrency wallets and how do they work? – MindYourCrypto

Bitcoin wallets

After learning some basics of Bitcoin’s functionality (How Bitcoin works?), the most obvious question that comes to a crypto beginner’s mind is definitely related to the safe storage of Bitcoins and other crypto assets, i.e. How to store crypto assets securely?, What is a Bitcoin wallet?, How does a Bitcoin and cryptocurrency wallet work? Which one is best for me? and so on.

Whatever your questions may be, by the end of this reading, you will definitely get the answers in the most simplistic and easy to grasp manner. Meanwhile, you will also learn to choose the best cryptocurrency wallet as per your personal needs.

Obviously, Bitcoin is a different kind of money that enables its users to make independent choices and allows them to have full authority over their money. But this self-governance comes with added responsibility too. Because there is no central governing authority (banks etc.) to take care of your crypto assets. As a result, you need to be more than aware, regarding the security of your crypto assets.

What you will learn?

1. What is a Bitcoin and cryptocurrency wallet?

2. How do cryptocurrency wallets work?

1). Public Key

2). Private Key

3. Classification of Bitcoin and cryptocurrency wallets

1). Cold wallet storage

2). Hot wallet storage

4. What are the different types of cold wallets or Offline wallets?

1). Hardware wallets

2.) Steel wallets

5. What are the different types of Hot wallets or Online wallets?

1). Desktop wallets (Windows, Mac OS, Linux)

2). Mobile/Tablet wallets (Android, iOS)

6. What is a Paper Wallet?

7. Which type of cryptocurrency wallet is best for me?

8. Cryptocurrency exchanges Vs Wallets

9. How to fund your Bitcoin and cryptocurrency wallet?

10. Associated risks and security breaches in past

11. Safety measures to consider

1. What is a Bitcoin and cryptocurrency wallet?

A Bitcoin and cryptocurrency wallet is a software application, online platform, or a hardware device that allows cryptocurrency users to store, send, receive Bitcoins, and other cryptocurrencies. Basically, a cryptocurrency wallet that holds a user’s Bitcoin (or other coins) balance does not actually store Bitcoins (or other coins).

In reality, it stores the user’s Public key (i.e. coin address) and Private key (i.e secret code) associated with that particular wallet. Hence it’s a combination of the recipient’s public key and your private key that makes a coin’s transaction possible and vice-versa.

Note: There are wallets that are Bitcoin-only wallets i.e. holds only Bitcoins and also there are multi-crypto wallets that can store 1000s of cryptocurrencies simultaneously.

2. How do cryptocurrency wallets work?

In simple terms, a Bitcoin and cryptocurrency wallet, – also known as a digital currency wallet, is a software application or can be a hardware device that interacts with blockchain to propel cryptocurrency transactions using already stored public and private keys.

Let’s understand this way!

You can compare your wallet address with your bank account.

For example, you have a bank account in the traditional monetary system. While using online banking services your account number provides you with a unique interface and allows you to make transactions using your secret password.

In a similar fashion, your wallet’s address (public key) is your unique interface to the blockchain, holds your cryptocurrency balance, and allows you to receive cryptocurrency payments using your address. At the same time, your wallet also holds a private key that proves your authority over the wallet and allows you to make transactions by digitally signing the wallet transactions.

Thus, it’s now clear;

A Bitcoin and cryptocurrency wallet only stores keys, namely public key (wallet address) and private key (secret code) instead of storing actual cryptocurrency.

1). Public key (Wallet address)

A cryptocurrency wallet’s address is a compressed and shortened version of a public key and you can share it with anyone to receive Bitcoin and cryptocurrency payments. It identifies your account on the blockchain network.

2). Private key (your secret Code)

A private key is a randomly generated secret code that is known to you only. The private key proves your authority over wallet funds and allows you to make transactions of your crypto coins.

Note: Bitcoins and cryptocurrencies that you have bought are ONLY SAFE if you have safely stored the associated Private keys.

3. Classification of Bitcoin and cryptocurrency wallets?

On the basis of accessibility, connectivity, and inherent security features, the Bitcoin and cryptocurrency wallets can be broadly classified as Cold wallets and Hot wallets. There are even several types of Cold and Hot wallets, which we will explore in subsequent steps. But, first of all, let’s understand how does a cold wallet is different from a Hot wallet.

1). Cold wallet storage

The Cold wallet storage refers to a method of storage for Bitcoin and cryptocurrencies where wallet keys are generated and stored offline in a physical hardware device. Cold wallets are often referred to as hardware or offline wallets. Because of the offline storage of digital assets, cold storage wallets are the least susceptible to hacking and phishing attacks. Hence these are the safest among all other storage methods.

Moreover, they are the ideal wallet for long time storage, especially when you are holding a large amount of cryptocurrency. Yet they are not as convenient to use.

Cold wallet pros;

a). Private keys are generated and stored in an offline environment, hence cold wallets are least susceptible to hacking and phishing attacks.

b). Cold wallets are the most secure way to store crypto assets for long term storage.

c). If you hold a large amount of crypto assets, a cold wallet is always advisable.

d). You can use indestructible steel wallets as a 2FA alongside your hardware wallet (such as Ledger and Trezor) to store mnemonic/seed phrase.

Cold wallet cons;

a). Not ideal for short term storage of crypto assets.

b). Cold wallet storage is a costly method, as you have to buy costly hardware devices. (But it’s worthy if you have to store large amounts of crypto assets)

c). Cold wallets are least convinient in terms of day-to-day crypto transactions.

d). Cold wallets can be stolen, hence required to be held in a safe place.

2). Hot wallet storage

As the name suggests, a Hot wallet is a type of wallet that is somehow connected to the internet. A hot wallet is basically a software that runs on internet-connected devices like pc, tablet, mobile, or a web browser. Hot wallets are multifunctional and more convenient as you can use these wallets for making day-to-day transactions.

But, at the same time, these wallets are less secure because hot wallets generate and store private keys on internet-connected devices and hence more vulnerable to hacks and phishing attacks. Most of the hot wallets are free to use. You can easily download one from the respective digital wallet website and use it without any delay.

4. What are the different types of cold wallets or Offline wallets?

There are numerous types of Cold wallets available in the market with different features and price tags. But in this article, I’ll list and introduce you with the most reliable and feature-rich hardware and steel cryptocurrency wallets. Let’s explore each one in detail.

1). Hardware wallets

Ledger Nano S

Ledger Nano S is a widely used hardware cryptocurrency wallet developed by the French company Ledger. It natively supports 1100+ crypto assets, including major coins like Bitcoin, Ethereum, Ripple, Dash Cardano, and Bitcoin Cash. Nano S is one of the cheapest ($59) hardware wallets with a screen which makes it quite easy to set up and operate.

Ledger Nano X

Ledger Nano X is the latest hardware wallet
Ledger Nano X is a bluetooth enabled wallet

The Ledger Nano X can be considered as an advanced version of Nano S, that offers top-notch features and robust security. It offers Bluetooth connectivity that allows users to use Nano X with an iOS or Android device wirelessly. The Nano X has an advanced chip that makes it more powerful, secure, and responsive than Ledger Nano S. More than 1500 crypto coins and tokens are supported. Currently, it’s available at a price of $119.

Trezor model One

Trezor One

The Trezor One is one of the two hardware cryptocurrency wallets offered by SatoshiLabs. Trezor One is the first hardware crypto wallet launched in 2014. It is known for its robust security measures and ease of use. It is a USB 2.0 device with a display that is fully compatible with Windows, Linux, and macOS. Trezor One supports 1000+ crypto coins including all major cryptos. It’s definitely an affordable choice for those who want a great wallet at a reasonable price. ($59 only)

Trezor model T

Trezor Model T

The Trezor Model T is the newest addition in its product range by SatoshiLabs. Model T is the second generation Bitcoin and cryptocurrency hardware wallet that offers a full touch display. Similar to model One, it can also be used on all devices provided the platforms are compatible (Windows, Mac OS X, or Linux). It supports more coins than model One and offers advanced firmware. In a nutshell, it’s an ultimate digital wealth management hardware device, if security is your prime concern. Yet it’s more expensive than its peers and costs around $159.

KeepKey

KeepKey is a well built (multilayer security) hardware cryptocurrency wallet
KeepKey offers a large display as compared to other hardware wallets

The KeepKey wallet is a well built (multilayer security) hardware cryptocurrency wallet from Shapeshift that is totally different from Trezor and Ledger. It is somewhat heavier and bigger in size than other wallets on our list. Yet, the size factor has its own benefits. Its large screen is capable of displaying the entire address in one row, as well as address QR code for payments, and gives clarity to every crypto asset sent and received on your device.

Shapeshift integration is an added benefit that allows you to quickly exchange between different crypto coins. It supports all major crypto coins including Bitcoin, Ethereum, Dash, and 40+ ERC-20 tokens. KeepKey is one of the cheapest hardware wallets and currently retails at $49.

2). Steel crypto wallets

5. What are the different types of Hot wallets or Online wallets?

As described earlier Hot wallets are wallets that run on internet-connected devices such as pc, mobile, tablet, or even a web browser. Consequently, hot wallets generate private keys on an internet connected device, hence these private keys can’t be considered 100% secure. Below is a list of hot wallets specifically designed for desktop, Android, and iOS platforms.

1). Desktop wallets (Windows, Mac OS, Linux)

Electrum

source : electrum.org

Electrum is one of the earliest Bitcoin wallets that is known for simplicity and fast transactions. Founded in 2011, it’s available for Mac, Linux, and Windows platforms. It’s an open-source wallet that allows its users to customize preferences according to a user’s requirements. You can set custom transaction fees, and can select the level of security by choosing between a standard and multi-signature wallet. You can also utilize 2FA for enhanced security.

It has a simple interface but allows a lot of customization, and thus suitable for both beginners as well as advanced users. Another great feature of Electrum is that it supports hardware wallets such as Ledger, Trezor, and KeepKey. The only biggest downside as a user you can expect is the single cryptocurrency support i.e. Bitcoin.

Exodus wallet

source : exodus.io

Launched in 2016, Exodus is a neat and handy wallet for Mac, Linux, and Windows platforms. Even, if you are a beginner, you can use Exodus without any complication. It allows you to securely manage and exchange 110+ cryptocurrencies in one application. It also offers 24/7 online support which is an added benefit especially if you are a beginner. Exodus also offers a mobile version for both Android and iOS platforms. Further, its integration with the Trezor hardware wallet gives added utility to Exodus users.

Yet the biggest downside that I have found is that Exodus is a closed source wallet. It means that its source is not open to everyone and can create some security concerns.

2). Mobile/Tablet wallets (Android and iOS)

BRD wallet

source : brd.com

BRD Wallet is the simplest and beginner-friendly hot wallet for mobile devices (Android and iOS). It is a fully decentralized wallet that directly connects to the blockchain via a 12-word seed key. Being an open-source wallet it’s more secure and reliable. It’s as easy to use that even you don’t need to create an account or need a password to remember.

Guarda wallet

source : guarda.com

Guarda is another great multi-functional and multi-platform hot wallet. It offers an easy to use intuitive user interface for mobile devices. Guarda is a partially open-source wallet that offers a ton of features including staking, multi-signature, Ledger compatibility, and 100+ crypto coins and tokens. It has scored decent user ratings on Appstore, Google Play, and Trustpilot.

Mycelium

source : wallet.mycelium.com

Mycelium is one of the most renowned Bitcoin wallets in the cryptocurrency industry today. Launched in 2012, it’s a Bitcoin-only wallet known for advanced security and privacy features. Being one of the safest Bitcoin wallets, it was awarded as the “Best mobile app” by Blockchain.info in 2014. It offers users to open 5 different types of accounts i.e. HD, BIT ID, Single address, Watch only, and accounts for offline hardware devices. You can choose accordingly.

Note: Hot wallets generate private keys on internet-connected devices, and hence are not 100% secure. Thus always use Hot wallets to store only a small amount of crypto assets.

For a more comprehensive list of Bitcoin and cryptocurrency wallets, please do check out the related post, 8 Best Cryptocurrency Wallets to consider!

6. What is a Paper wallet?

This is how a paper wallet looks like.

As the name suggests, a paper wallet is a method of storing Bitcoins that involves “printing and storing of private keys and Bitcoin address” on a piece of paper in an offline mode. A paper wallet is another form of cold wallet that can be an extremely secure way to keep Bitcoins safe from cyber-attacks, malware, etc. Yet it has several downsides too, that outweigh potential security benefits. These downsides include the same address reuse, misreading, losing, or damaging the paper wallet. Additionally, if you are a beginner setting up a paper wallet can be a little bit terrifying and the bigger risk with a paper wallet comes down to user error.

Personally, I will not suggest you to use a paper wallet if you are a beginner. Instead use a hot wallet for a small amount of crypto holdings, else hardware wallet is the best option for storing large amounts of crypto assets.

7. Which type of cryptocurrency wallet is best for me?

This can be a tricky question, but it’s not that tricky if you can properly evaluate the purpose (investing/spending) or your specific set of needs.

The biggest determining factor while choosing a Bitcoin and cryptocurrency wallet is the amount of crypto assets that you need to store. An additional factor that you can consider is the frequency of transactions that you make.

Seems, evaluating the above-mentioned factors you may find it easy to conclude.

You can easily choose between different type of cryptocurrency wallets as follows;

1). Should go for Hardware wallets;

If you own a substantial amount of Bitcoins or other crypto assets that you want to store for a long period of time than a Hardware wallet is the best choice.

A hardware wallet may be a costly way to store your cryptocurrency, but paying that price is worth to keep your crypto assets secure.

2). Can opt for Hot wallets;

You can go for a hot wallet if you need to make recurring cryptocurrency transactions. Hot wallets may be comparatively less secure but they are the best option out there when it comes to the convenience of spending and transacting cryptocurrency in day-to-day life. There are several good hot wallets (already discussed) that allow users to send/receive Bitcoin and other crypto coins with ease of use and a high level of security.

“You can think of a Hot wallet like your physical wallet that you use to keep some cash for daily spendings, but it can’t be used as a storage for lifelong savings.”

8. Cryptocurrency exchanges Vs Wallets

Most of the crypto beginners easily got confused between a cryptocurrency wallet and exchange. But, I will give you a simple and concise explanation to properly understand how both the tools are different in terms of security and functionality.

The cryptocurrency wallets and exchanges are two essential tools that provide the basic infrastructure to the users in order to properly utilize the new technology called Bitcoin (or cryptocurrencies).

Below are some points that may help you to understand the basic difference between the two.

Cryptocurrency exchanges

1). A cryptocurrency exchange’s primary function is to make Bitcoin and other crypto coins available and accessible to the masses.

2). Cryptocurrency exchanges are websites that are often referred to as digital currency platforms that facilitate the buy-sell of cryptocurrencies using fiat currencies (USD, EUR, AUD, etc.) and vice-versa.

3). When you keep your cryptocurrencies on an exchange, it means that you have handed over the partial control and total security of your crypto assets to the respective exchange platform (here exchange owns the private keys).

Cryptocurrency wallets

1). The primary purpose of the crypto wallet is to provide unique options in terms of secure storage of crypto assets.

2). Cryptocurrency wallets are tools, as software installed in your pc, mobile, or in a hardware device that helps users to store, send and receive Bitcoin and other cryptocurrencies.

3). In the case of a cryptocurrency wallet, you have full command over the use and transfer of your funds. And most importantly, you own the private keys associated with your wallet, hence also responsible for the overall security of your funds.

9. How to fund your Bitcoin and cryptocurrency wallet?

Funding of a cryptocurrency wallet basically consists of three steps i.e. Choosing an exchange, Buying crypto, and Transfer of crypto coins from the exchange to the wallet.

1). Choosing a cryptocurrency exchange

In order to fund your wallet with Bitcoin or some other crypto coins, you need to purchase those coins beforehand from a cryptocurrency exchange. Below are some of the best digital currency platforms where you can buy bitcoins and Altcoins with fiat currency.

Binance

Coinbase

Okex

Changenow

Kraken

Bittrex

WazirX

However, if your fiat currency is not supported on any of these exchanges, you can try  LocalBitcoins or Paxful. These are top P2P Bitcoin exchanges that are available in 200+ countries supporting most of the native fiat payments.

2). Buying crypto coins;

After choosing an exchange you have to buy some Bitcoin or other crypto coins using fiat currency. If you are a beginner, you can follow our step-by-step user guide to buy crypto coins easily.

Our comprehensive Exchange Guides

Binance

Coinbase

Bittrex

Changenow

Kraken

LocalBitcoins

Wazirx

3). Transfer of crypto coins from the exchange to your wallet

It’s seemingly intimidating, especially if you are doing your first cryptocurrency transfer from an exchange to a wallet. But I can assure you, once you are finished with your very first transaction, you’ll be a pro in making such transactions.

In general, the process of transfer is quite similar, however, because of different wallet types and user interfaces, you may find it slightly different.

Before you start to make a transfer from an exchange to your wallet, make sure to complete wallet set-up (if it’s a hardware wallet), or signed-in (if it’s a hot wallet).

Now follow the given process;

– Go to withdrawal section on your exchange platform.

– Select the coin that you are going to withdraw.

– Go to your wallet and choose the coin that you want to deposit.

– Click on deposit and it will show you deposit address of the respective coin.

– Copy the coin deposit address and paste it in the space provided in exchange’s “withdrawal address” section.

– Or you can scan the deposit address QR code, if possible. Scanning a QR is more safe option to enter the coin address.

– You may also need to confirm 2FA if you have applied to your exchange account.

– The desired coin will be transferred to your wallet after required confirmations and the wallet will show the updated balance as soon as the transaction got completed.

10. Associated risks and security breaches in past

The meteoric rise in Bitcoin’s value over time has made it the most lucrative target for hackers and scammers. There have been a countless number of scams and hacks related to cryptocurrency exchanges, resulting in Billion of Dollars in Bitcoins have got stolen. Below are some examples where users and exchanges experienced substantial losses due to security breaches;

Mt. GOX hack is the biggest hack to date, where 8,50,000 Bitcoins worth 450+ million have been stolen.

– Another largest Bitcoin exchange hack is associated with BitFinex exchange, in which users lost approx $70 million.

– In 2019, 12 major cryptocurrency exchanges were hacked, in total $292 million worth of cryptocurrency and 510000 user logins were stolen.

Hence, learning about Bitcoin is not enough as its completely different from that of the traditional fiat currencies. Thus, before buying your first Bitcoins or other crypto coins it’s crucial to equip yourself with the basic functionality, secure storage, and associated risks surrounding the cryptocurrencies alongside learning some good practices to keep your crypto assets secure. Because Bitcoin is an online currency and thus you can’t take things lightly as there is nothing that’s 100% secure online.

11. Safety measures to consider

Now, you maybe more than aware that how easily you can lose your crypto assets. Here are some basic safety precautions that you must follow to keep your cryptocurrency safe.

1). As a Bitcoin owner you are the only person that is responsible for safety of your funds. Hence, your first duty is to keep your computer clean and safe with an up-to-date antivirus.

2). Always try to use a VPN network.

3). Utilize 2FA like Google Authenticator, Authy, or Yubikey (hardware 2FA). It gives your account an additional layer of security.

4). Never store your wallet’s private keys online (except in case of hot wallets).

5). Use a fresh gmail account for your cryptocurrency related online login.

6). Never re-use a password i.e. don’t use a password that you have already used somewhere else.

7). Be aware of phishing mails.

8). Again, use a Hardware wallet for storing large amount of crypto assets and backup your private keys using steel wallets.

By implementing these fundamental security practices you can make your digital wealth more secure and less vulnerable to scammers. Remember, your one mistake is an opportunity for scammers, so be alert and avoid shortcuts.

Have you found this reading worthwhile? If yes, please do share this post with your friends and people around you and spread the security awareness surrounding cryptocurrencies.

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