Intro to Crypto Wallet Types & Risks
Read this if your favorite cryptocurrency is still sitting on that same exchange where you bought it
So you take a friends’ advice and buy some Bitcoin. Maybe you’re feeling adventurous and also buy some Ethereum? Bitcoin Cash? Dash? Neo? Yes. You ARE awesome.
You’re also patient. You plan to wait and see what happens to the value of cryptocurrency on the long term (months/years) and not all that interested (or don’t have time for) the daily/weekly trading.
This is my open letter to several friends who’ve been asking me about what wallets are, how they work, how to choose the right one for you, and, basically — how to keep their, your, our crypto safe from loss or theft.
Understanding the following concept should make your crypto world way simpler:
Cryptocurrencies are always in the same place. They live and move around on the blockchain. Buying, selling, storing, sending and receiving cryptocurrencies is not so much allocation of funds as it is access management. Think about the bitcoin you own as the bitcoin you control. Any transaction requires a unique combination of an address (where your crypto is) and its private key (simplified, it is the “password” to access that specific address).
It then follows that managing cryptocurrencies is really all about managing your private key and how it’s stored. Right?
Take an exchange, for example. An exchange (aka Coinbase, Bittrex, Bitfinex, etc.) will normally hold on to the private keys associated with their user accounts, which means that you are leaving it up to them to take the steps necessary to secure the private keys for you. In return, you have the advantage of high liquidity and convenience of a simple password protected account.
The Risk: Exchanges don’t always make the smartest choices with regards to how to protect their data and therefore are the most vulnerable to hacks.
The Hardware Wallet
Most online resources will tell you a hardware wallet is “the safest” crypto storage. The main reason for that is that a hardware wallet (basically a pre-programmed, encrypted flash drive) is the hardest to lose, destroy or hack. Especially if you keep it in a safe place and rarely used.
Downside: Average price is about $100, and often takes a long while to be shipped. Not all cryptocurrencies are supported by all hardware wallets (currently there are two wallets dominating the market, see links below). Hardware wallets will require you to install and use a program on your computer/phone to manage your assets.
Risk: Low. If lost or destroyed all content may be restored using a recovery phrase. Obviously, keeping a written recovery phrase lying around also presents additional risk to the user.
The Paper Wallet
My personal favorite type of wallet for long term storage. Requiring minimal effort and zero cash investment, a paper wallet is basically a print-out of your address+private key combination.
Downside: Apaper wallet is like an old school piggy bank — you can regularly add to it by sending funds to the same address, but if you need access to any of the funds on it, you’ll need to break the whole thing. Of course you can always get another one.
Risk: It’s paper, so, imagine anything bad that can happen to paper.
Wallet generator offers paper wallets for (at the time of writing) 197 supported currencies.
Desktop Program/Mobile App
Definitely the most user friendly, often with a visually pleasing interface that’s easy to use, manage and understand.
Risk: Your wallet is as vulnerable as the device it’s installed on. Our laptops and phones regularly connect to the internet and are therefore exposed to attacks. And, as we carry them around with us, loss or theft is not out of the question. Nonetheless, this is definitely a very convenient (and probably the most common) way to save your crypto.
Here are two wallets I like, both picked for supporting multiple currencies, having a nice user interface and active development teams:
Jaxx (Mobile / Desktop)
Why Risk Management?
I’ve focused on the risk factor in choosing a wallet as I see it as the most important element to consider when dealing with high stakes decisions. There are, of course, many other elements to consider.
Here are just a few to keep in mind as you’re exploring the options:
- Transaction fees: Some wallets offer the option of adjusting the transaction fees which could come handy. If you’re not in a rush, you can set a lower fee and just wait a little longer for your transaction to be processed. Having that option on your wallet can save a few pennies (or a whole lot).
- Recovery Options: Some wallets offer a recovery option using a recovery phrase. Could be very convenient if not invaluable in case of loss, theft or destruction. You will, of course, need to keep it safe.
With hopes this has been helpful, look forward to your thoughts and comments! ♥