In a previous "Crypto Whiteboard 101" video, we learned that cryptocurrencies aren't physical objects and that owning cryptocurrencies really means owning the public and private keys needed to access funds that are stored on the blockchain. The easiest way to manage those public and private keys is through a crypto currency wallet. In today's Crypto Whiteboard 101 video, we will take a look at the several forms of cryptocurrency wallets and explain how they work.
In a previous video, we learned that cryptocurrencies are not physical objects, and thus, we can't really store cryptocurrency in a wallet in the same sense that we can cram our wallet or purse full of dollars. Rather, when we talk about different kinds of cryptocurrency wallets, we are talking about the place in which we store the keys used to access funds on the blockchain. In other words, owning cryptocurrency means owning the keys required to access funds on the blockchain. All the different "wallets" we will discuss in this article are really just different ways of managing your cryptocurrency keys.
Paper Wallets
The most basic form of wallet is known as a "paper wallet." This is nothing more than a public and private key that have been printed on a slip of paper. You can scan the public key to send funds to the wallet, and you can scan the private key to send funds to another address. Not only is this wallet incredibly simple, it is not connected to the internet and can be very secure as long as you safeguard the paper slip with the keys on it.
Hardware Wallets
There are a variety of different hardware wallets, but most of them resemble a USB stick. When I fist started learning about cryptocurrency, hardware wallets caused me a bit of confusion because I heard people saying "I store my crypto on a hardware wallet" and thought that the crypto itself was stored on the hardware wallet, just like you would store music or documents on a USB drive. However, a USB wallet does not actually contain any cryptocurrency; rather, it stores the public and private keys that allow you to access a certain address on the blockchain. Some of the more popular hardware wallets include those produced by Trezor and Ledger. Hardware wallets are generally considered to strike a good balance between security and ease of use, although they do cost money whereas many of the other types of wallets usually don't.
Desktop/Mobile Wallets
Whereas there is a relatively small selection of hardware wallets, there is a huge selection of the so called "mobile" wallets. Mobile and Desktop/Laptop wallets are included in the same category because they work in a similar fashion. With a mobile or desktop wallet, you install a software program that generates and encrypts your keys on your device. Desktop/mobile wallets also offer the widest range of features. For example, a paper wallet simply allows the user to send and receive crypto, but many mobile wallet developers include a host of features to get users to choose their wallet over competitors. For example, the Atomic wallet allows users to buy and sell crypto directly from within the wallet without having to go to a cryptocurrency exchange. It also allows staking and trading of coins directly inside of the wallet. One nice thing about Desktop/Mobile wallets is that they offer multi-currency support, which allows you to store a variety of cryptocurrencies in one simple location. For someone who wants one crypto wallet to "do it all" Desktop/Mobile wallets are a good place to start looking.
Web Wallets
Web wallets is a term that refers to any cryptocurrency wallet that is installed inside of a web browser. The METAMASK extension for Chrome/Brave is probably one of the most well-known web wallets although there are certainly others. Web (or browser wallets) typically lack the same amount of features as desktop/mobile wallets, but they do provide the ability to log in to web3 compatible websites and interact with crypto-currency based websites.
Exchange Wallets
Many people enter the cryptocurrency world by purchasing cryptocurrency on an exchange like COINBASE or Bittrex. When you purchase crypto through an exchange, you can see the crypto in your account, you can send the crypto, and you can receive crypto from outside sources, but an exchange wallet is not a true cryptocurrency wallet! This can be a bit confusing, so let me explain. Regardless of what type of wallet you use, cryptocurrency always exists as a value assigned to a certain address on the blockchain. Whoever has the private key has the ability to move this value from one address to another. The format might be different as a paper wallet will show you the key in a QR code, and a mobile wallet will encrypt the key on your phone, but at the end of the day, with all of the previous wallets we discussed, YOU have those keys.
By contrast, when you "store" crypto on an exchange, that exchange holds the keys to your cryptocurrency. Sure, you can send coins by logging into your account, but doing so requires the exchange to carry out your transaction for you. For 99% of the time, this is no problem and the exchange will quickly carry out your transaction, but not owning the private keys to your crypto presents many risks. What if the exchange goes bankrupt and shuts down? Without your keys, you can't send the crypto. What if the exchange is a flat-out fraud or gets hacked? This isn't meant to scare you away or say that you should never use an exchange. I'm just pointing out that keeping crypto on an exchange doesn't offer the same level of security as actually owning your private keys, and most crypto experts will advise against keeping large amounts of crypto on an exchange for any length of time.
Choosing Your Wallet
If you are a beginner, you might be looking for someone to simply tell you which is the best cryptocurrency wallet for you to use. Unfortunately, there is no one-size-fits-all best crypto wallet, and most crypto users will have a variety of wallets for different purposes. Although I can't tell you what is the "best" wallet, I'd like to give some general guidelines and considerations that can help you choose. In general, crypto wallets are a trade off between convenience, security, and price.
One of the most secure ways of storing crypto is in "offline, cold storage" which simply means that the crypto keys are not connected to the internet in any way. Of course, the crypto itself will always be on the blockchain, but remember, when we are talking about wallets, we are talking about keys. Paper wallets provide an easy, cheap way of storing crypto offline, but they are hardly convenient for making frequent transactions. For more convenience, you can choose a web or mobile wallet that will allow you to send crypto directly from your phone or browser, but that added convenience comes with a slight disadvantage, and so called "Hot Wallets" that are connected to the internet are generally viewed as more risky than offline storage methods. Like I said, its a balance between security and convenience. Hardware wallets offer some benefits of paper wallets (offline cold storage) while also being able to connect to many crypto websites to make transactions, but they do come at a price.
What Do I Use?
Personally, I use a variety of wallets for different purposes. For frequent transactions, I will use a web wallet. I prefer MetaMask for ERC-20 type tokens and Badger for Bitcoin Cash, but that's just a personal choice. For longer-term crypto storage, I prefer to use a mobile/desktop wallet. I have found the Enjin wallet and the Atomic wallet to both be very good. Atomic does seem to have a few more features than Enjin, so it would probably be my top pick although there are a large amount of great mobile/desktop wallets out there.
Every now and then, I will have to use an exchange wallet, but I usually transfer my funds off the exchange as soon as the transaction is completed. It isn't that I don't trust the exchange, its just that I think it is better to always have true ownership of your coins.
At some point in your crypto journey, someone will probably tell you to get a hardware wallet. While hardware wallets are generally considered more secure than mobile/desktop wallets, this is a matter of degree, and many of the leading, well-designed mobile wallets still offer a good level of security. Currently, the LEDGER Nano S sells for around $60, so its important to balance the cost of the hardware wallet against the perceived increase in security of a well-designed mobile/desktop wallet.
If you want a hardware wallet, go for it. I just don't want someone to think that they can't get started in crypto if they can't shell out $60 right off the start. There are a lot of secure, well designed mobile/desktop wallets that you can use until you feel you have enough crypto to warrant purchasing a hardware wallet.
Conclusion
In summary, remember that when we talk about cryptocurrency wallets, we are really just talking about the different ways of storing our private keys. Different wallets offer different features and there is a tradeoff between security and convenience. At the end of the day, there are a lot of good choices out there, but it is up to each user to make their own choices and choose the wallet(s) that work best for them. Thanks for reading! Not financial advice.
As part of my outreach to cryptocurrency beginners, I have created the "Crypto Whiteboard 101" series in which I answer basic, beginner-level cryptocurrency questions. Some of the previous videos that may also be relevant or helpful in better understanding the concepts in this article include:
What is Cryptocurrency?
What Are Cryptocurrency Keys?
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