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Every Cryptocurrency Wallet Explained

July 23, 2020
10 min
Every Cryptocurrency Wallet Explained
Beginner
You will learn

    Wallets can be divided into three main categories: software, hardware and paper wallets. Depending on the operating mechanisms, they can also be defined as hot or cold wallets.

    A cryptocurrency wallet is a tool you can use to interact with a blockchain network, and where you can store your cryptocurrencies.

    Most cryptocurrency wallet providers are software-based, which makes them more practical than hardware wallets. However, wallet hardware tends to be the most secure option. Paper wallets, on the other hand, consist of a sheet of paper where the public and private key is printed, but their use is now considered obsolete and unreliable.

    Exchange Wallet

    For those approaching the cryptocurrency market for the first time, exchanges are the best solution. First of all, because you can have a wallet for every cryptocurrency you own and use them all from the same interface.

    exchange

    Since it is a custody service on an exchange platform, you have the advantage of operating whenever you want in an immediate way. To deposit money into your account, buy, sell cryptocurrency or transfer money from the exchange to your bank account you don’t need to make any additional steps.

    Furthermore, centralized exchanges, developed and managed by companies, help users in the management of their account, keeping the private key and performing accurate security checks. In this way, the user is more protected: in case he loses his credentials he can get them back and recover his cryptocurrencies. No other wallet can recover the currencies if the private key is lost.

    It is worth knowing that some exchanges keep about 85% of all their users’ cryptocurrency on cold wallets, which means they are disconnected from the internet and safe from hackers and malicious criminals, while guaranteeing, thanks to complex calculation systems, the liquidity needed to make daily trading operations

    Features 

    • Access to your funds with e-mail and password, no need for public and private keys.
    • The funds are linked to an account, as on any online platform.
    • At the time of registration, personal data is requested in compliance with the anti-money laundering and anti-terrorism regulations in force.

    Regulated exchanges ask their users to verify their identity, with a procedure called Know Your Customer (KYC). In this way, they guarantee their community that the people active on the platform are real and traceable people, and that no illegal activities are being carried out. 

    Operating on an exchange platform has a number of advantages and disadvantages 

    Pros

    • Since the wallet is already connected to the Internet, operations are faster.
    • You can buy and sell cryptocurrency with fiat currency (euro/dollar) or convert from crypto to crypto very easily.
    • In case of loss of your access data, the platform can recover both your account and your cryptocurrencies.

    Cons 

    • Both the exchange and your account may be subject to hacker attacks due to online exposure.
    • It is advisable to carefully evaluate the platform to which you rely in order to avoid fraud.
    • The private key is created and stored only by the exchange platform.

    Software Wallet

    Software wallets can be desktop, mobile or web

    Desktop Wallet

    In order to use this wallet you need to download and install a desktop program on your computer.

    When you generate a new desktop wallet, a file called “wallet.dat” is saved on your computer. For this reason it is accessible only from the device where it was installed and set up. The file contains sensitive information – i. e. your private key.

    In order to protect it you can encrypt the wallet and login with a personal password. However, if you lose the file or password your cryptocurrency is unrecoverable. The only way to prevent this is to periodically back up your wallet.dat and keep it in a safe place with your password. It also allows you to access your cryptocurrency from other computers.

    Desktop wallets offer one of the highest levels of security, but if your computer is hacked or infected with a virus there is a chance that you may lose your cryptocurrency.

    Pros

    • A convenient choice for those who prefer to buy and sell cryptocurrency on desktop.
    • Private keys are not stored on third party servers. 
    • If your computer has never been connected to the Internet before, it can be extremely secure

    Cons

    • It’s hard to use your cryptocurrency when you’re on the go
    • When connected to the Internet, it turns into a less secure hot wallet
    • If you have not backed up your computer and it crashes, the cryptocurrency will be lost.

    Web Wallet

    You can use a web wallet to operate on the blockchain via a browser without having to download or install anything. They may either be owned by known exchanges or developed by third-party wallet providers.

    Features

    Web wallets are cloud-based and accessible from any device anywhere. Although they are the most convenient to use, they are controlled by the site or browser extension you rely on, which makes them more vulnerable to hacker attacks.

    Many providers only require a password for access, ensuring private key management on behalf of the user. Although this might be more convenient for inexperienced users, it is a delicate practice if you keep large funds.

    To meet this problem, many web wallets now allow you to manage your keys either in complete autonomy or through a shared control system (multi-signature).

    Pros

    • It provides the fastest way to process transactions without any server and application delay. 
    • It is the best choice to operate with small amounts.
    • The TOR network can increase the level of privacy
    • You can use your wallet anywhere, without taking up space on your devices and without worrying about device failure.

    Cons

    • It’s susceptible to malware and hackers.
    • Third party platforms store access information. 
    • Few web wallets allow users to manage multiple cryptocurrency.     

    Mobile Wallet

    Mobile wallets are downloadable apps on your phone and are very handy since you can use them anywhere, even to pay in the stores that accept cryptocurrencies. All you need to make payments is a QR code. Due to their convenience and the possibility of making payments in Bitcoin, they are what brings cryptocurrency closest to the real world.

    It is good practice to protect your mobile wallet with a password and back up your private key (or seed phrase) to protect your funds even from trivial phone loss or breakage.

    Pros

    • They are quite simple and immediate to use, thanks to the QR code scanning that allows to send or receive cryptocurrency. An excellent solution for daily buying and selling operations. 
    • They facilitate the management of your funds on the move.

    Cons

    • Like computers, mobiles and apps can also be infected with malware. So it is good practice to protect your mobile wallet with a password and backup your private key (or seed phrase) to protect your funds even from trivial phone loss or breakdown. 

    Hardware Wallet

    Hardware wallets are ideal for storing most of your cryptocurrency. They are USB flash drives and are as good as real safes, especially for long-term investments, i.e. to store those cryptocurrency that you do not intend to sell or trade in the short term.  
    Since they are always offline, the keys are stored in the device itself.

    Hardware wallets must have special software installed if you want to use them to make transactions or view your balance, since they are offline

    It is important to make a backup of the USB flash drive in case of theft, loss or destruction. This is what the seed phrase or passphrase, which is requested during the initialization of the key, is for. It is a sequence of words that serve to recover funds on a new device. 

    It is important to buy hardware wallets only from reliable retailers, because they may be used or manipulated before the delivery.

    Pros

    • Very high security level.
    • Management of cryptocurrency and private key in full autonomy.
    • Even if someone manages to get their hands on your hardware wallet, you will have additional protection in the form of a PIN code. 
    • Cost-effective solutions to restore funds in case of hardware loss or damage

    Cons

    • You cannot send cryptocurrency directly from this wallet. In order to use your cryptocurrency and see your balance you need software that creates and authorizes transactions.
    • If you lose both the USB flash drive and the seed phrase, you will not be able to recover your cryptocurrency in any way.
    • It is important to buy wallet hardware only from reputable retailers, because they may be used or tampered with before delivery. 
    • higher price.

    Paper Wallet 

    One of the safest ways to store your cryptocurrencies is to write your private key and public address on a piece of paper and hide it in a safe or deposit box.

    Alternatively, you can print the Paper Wallet directly when creating the keys on a site like Bitcoin Address in the form of QR code. Scanning these codes allows you to perform cryptocurrencies transactions. A somewhat vintage and rather limiting method, so a hardware wallet is always recommended. 

    These wallets are highly resistant to online cyber attacks and can be considered as an alternative to cold storage.

    In order to use your funds and send them to a wallet address, you have to import your private key into a software wallet.

    At this point, you have to transfer the entire amount of your paper wallet, not just part of the cryptocurrency stored there. If you spend only part of the funds and not all of them, the remaining coins are sent to a new address that is automatically generated by the Bitcoin protocol (change address). If the change address is not set manually as the property address, the funds will be lost.  

    The paper wallet will be empty after its first outgoing transaction – regardless of its amount. So you cannot reuse it later if you try to move only part of its amount. 

    Pros

    • High level of security
    • Management of your own cryptocurrency and private key in full autonomy.
    • cheap and fast

    Cons

    • If you lose the sheet of paper, there is no way you can recover the cryptocurrency.
    • They’re hard to use. To use your funds and send them to a wallet address, you need to import your private key into a software wallet.
    • The paper wallet will be empty after its first outgoing transaction – regardless of its amount. So you cannot reuse it later if you try to move only part of its amount. 

    Memo

    Paper wallets are like paper receipts. They are neither recyclable nor reusable.

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