Cryptocurrencies are a brand new asset class, and some of the world's largest banks are beginning to work with these digital assets. If you want to add cryptos to your portfolio it isn't difficult, but there are some new things to learn. One of the most important things any crypto investor needs is a cryptocurrency wallet or some other form of storage solution.
At its most basic level, a wallet for digital assets is means of storing the private keys that establish ownership of tokens (Bitcoin is a token). Some crypto wallets are apps that work on a smartphone, while others are purpose-built hardware devices that are made to store cryptos.
Some wallets will allow you to monitor your token balance in real-time from your smartphone, and others will need to be connected to the internet to work. Wallets will allow you to send and receive cryptos, and all wallets will offer different levels of security.
Let's take a look at some of the terms that will be important for you to understand before we take a deeper dive into the crypto wallet technology that exists today.
Like any area of investment, the crypto sector has industry-specific terms that are vital to understand. Here are some of the most important terms and technologies for any crypto investor to learn.
Any cryptocurrency wallet will have both public and private keys. A key pair allows you to own and spend tokens. The private key is a complex, random number that allows you to access a blockchain (Bitcoin is a blockchain), and move tokens.
The public key is also used to create an address that can be shared, so other people can send you tokens. The public key is automatically created from the private key, but it is safe to share your public key. It is a good idea to own your tokens directly, and not use a custodial service that takes your private keys.
If you were to lose the private keys to your cryptos, you will lose the cryptos. The digital wallet you use is primarily responsible for storing the private keys, so choosing the right kind of wallet is extremely important.
There are two ways to store your tokens. Hot storage refers to a wallet that is connected to the internet, like on a smartphone. Cold storage is the opposite. Instead of living on a connected device, cold storage has to be connected to the internet to be used. Clearly, cold storage is far more secure and way less convenient.
Depending on how you plan to invest in tokens, you may want to consider using a multi-currency digital wallet. Some wallets will only allow you to store a few tokens, but many of the newer smartphone-based wallets have a wide range of supported tokens. Some digital wallets allow you to use third-party apps that do different things, like token trades within the wallet.
Some software wallets allow you to require that more than one person approve a transaction. These wallets are called multi-signature – or multisig wallets. It is similar to a joint account, which adds an additional layer of security to the transaction. While this architecture may not be for everyone, it is a handy tool for many people.
The number of crypto wallets on the market is growing all the time. There are four basic types of crypto wallets to choose from, and they all have different advantages and drawbacks.
Software Based Crypto Wallets (ex. On a Smartphone or Your Desktop Computer)
Paper Crypto Wallets
Desktop wallets allow you to download a program that will store private keys on your hard drive. You will be able to send and receive tokens with these wallets, and many offer advanced security features. Most desktop wallets also offer multi-currency capabilities, and some have third-party apps.
Because the private keys are stored on your hard drive, you are fully responsible for the safety of your tokens. If your computer is connected to the internet on a continuous basis, there are security risks.
Desktop wallets make sense if you use them on a computer that is off-line most of the time, but they may not be the best way to store large amounts of tokens if you are using the computer online. Any machine that is connected to the internet is at risk of being hacked, or compromised by malware.
A mobile wallet for cryptos is very similar to a desktop wallet, but it is made to be used with a smartphone. Many people like the convenience of having cryptos on their mobile devices, but this is one of the riskiest ways to store tokens. Smartphones are made to be connected to the internet 24/7 and are always at risk of being hit by hackers or malware.
Web wallets are usually free to download and come loaded with lots of third-party apps. Some of the largest crypto companies in the world offer free mobile wallets, and generally, they are very well built.
If you are looking for an easy way to keep a little bit of cryptocurrency with you at all times, a mobile wallet makes a lot of sense. The latest generation of mobile wallets functions like a payment app and are super easy to use. That said, your main crypto stash is probably better stored on a more secure type of wallet.
An online wallet might seem like an easy way to store your tokens, but these wallets are prone to hacking due to the fact they are generally kept in cloud-based platforms. On the plus side, these online wallets offer tons of options in terms of being linked to devices, and generally are fast to connect to blockchains.
On the downside, uploading your private keys to cloud servers isn't the safest way to hold cryptos, and offers even less protection than a mobile wallet. These services do exist, although you are probably better off using some other form of token storage system. Even though they are easy and convenient to use, web wallets should only be used with caution due to the risk of loss.
Hardware devices that are built to store tokens are known as hardware wallets. There are a growing number of hardware wallets on the market, and they represent one of the safest ways to store tokens. While these devices can be used to send and receive tokens, they are generally offline devices, which makes them much harder to hack.
Hardware wallets may resemble a fancy USB device, and that is more or less what they are. In general, a hardware wallet will have some sort of simple display, and also a way to be connected to a computer or smartphone. A hardware wallet is one of the best ways to store cryptos that aren't going to be saved for the long term.
It is very important to understand that hardware wallets must be obtained from a reputable dealer. There are many scams out there, and some bad actors have created bogus hardware wallets that will steal your tokens. A legit hardware wallet is very hard to hack, and the technology is getting better all the time.
On the downside, these devices aren't cheap, but when compared to the value of a big crypto stash, hardware wallets easily justify their expense.
It is worth remembering that at their core, cryptos and keys are just numbers. You can use paper to create a crypto wallet, and it will be almost impossible to hack. There are different ways to make a paper wallet, and you may want to do some research before going this route. Just be sure to store the paper in a fire/flood proof box, as paper isn't the most durable material out there.
Like anything in life, there is no 'single best' way to store cryptos. The basic formula is that convenience is traded for security, so if you plan on using cryptos on a regular basis, you should probably invest in more than one kind of wallet.
-How often do I need to access my tokens?
-Will I need to have 24/7 access to my tokens, or is it ok for them to be kept offline?
-What kind of tokens do I plan to buy?
Again, you may be better served by using two or more wallets to hold your tokens.
Smartphone wallets are extremely convenient (as also free), but they don't make sense for larger value token holdings. Hardware and paper wallets are far less easy to use but offer much higher levels of security. If you are planning to hold tokens for a year or more, it makes sense to lock them up in a cold-storage device.
Make sure to stay up-to-date with any updates there are for your wallets, as hackers are always looking for new ways to steal tokens. Make sure you plan out your crypto storage strategy before you start buying so that you understand the risks involved in owning digital assets!
Generally, there is no single right way to store your cryptocurrency reserve and that you can use a combination of multiple storage options to achieve your desired custody strategy. Regardless of the wallet you choose, backup your information regularly, make use of available security layers and always keep your wallet software up to date.