What are cryptocurrency wallets?

Cryptocurrency wallets are digital wallets with which digital currencies can be sent, received, and stored. It is technically a virtual wallet. Most coins or exchanges have an official wallet or refer users to third-party wallets. Cryptocurrency wallets are different from cryptocurrency exchanges. If exchanges go bankrupt, just like a real bank, you cannot access your money. However, if you store your Bitcoin or other cryptocoins in a wallet, you can go about your normal transactions with the value you own irrespective of what happens to the exchange.


Cryptocurrency Wallet

 

Public and Private Keys

A public key is an ambiguous alphanumeric value that is used to encrypt data. In nontechnical terms, it is known as a wallet address. This key is software-generated and is published so that the user can send or receive secure data. It is used to encrypt data for the receiver. A private key (password) is a tiny bit of code that triggers algorithms for data encryption and decryption when paired with a public key. It is created as part of public key cryptography through asymmetric key encryption, and it is used to decrypt as well as transform a message (data) to a readable format with a matching public key.

Every cryptocurrency is represented by an entry in the blockchain, which is associated with a public key. Public key cryptography is an encryption system that is based on pairs of public and private keys, which in turn uses them to encrypt and decrypt data. These keys are simply large numbers that have been paired together but are not identical. The encryption strength is linked directly to the key size. Hence, doubling the key length delivers a significant increase in strength, even though it does impair performance a little bit. Public key cryptography depends on algorithms to generate public/private key pairs, so that it is computationally impracticable to determine a private key from a public key.

In order to move your cryptocurrency—whether to exchange it or to convert it to another currency—you will require your private key to unlock it. Your private key is found in your cryptocurrency wallet, and, as the name implies, it should be kept private.

It is worth noting that your private key is the only way you can access your funds, and if you lose it, all of your cryptocurrency is lost. Some private keys are kept offline to prevent them from getting hacked, so you should prioritize research and make informed decisions with regards to where you wish to store your key when you choose your wallet.

Knowing what kind of cryptocurrency wallet to choose can be quite daunting. This article aims at giving you a clear perspective as well as enlightening you on the various categories and types of wallets.

 

Categories of Cryptocurrency Wallets

There are four major categories of cryptocurrency wallets:

1. Multisig wallets

Multi-signature wallets or “multisig wallets” require more than one signature in order to complete a transaction. It is considered to be an added security measure, so one would not be able to access the account without the permission of the other users of the account.

2. Multicurrency wallets

Multicurrency wallets allow you to hold different digital assets at a time in one location. If you deal in several coins, it saves you the hassle of having multiple wallets. There are two types of multicurrency wallets available: hardware and online multicurrency wallets. Examples include Ledger Nano S (hardware) and coinbase (online). Multicurrency wallets have different features based on the manufacturer. For instance, Exodus has a customizable user interface while others are loaded with features that allow you to convert one form of cryptocurrency to another.

3 & 4. Hot and cold wallets

Hot or cold wallets simply refer to whether the wallet is connected to the internet. Hot wallets are connected to the internet and are often exposed to breaches from hackers and fraudsters. As a result, they are seen to be less secure, even though they are usually user-friendly.

Cold wallets, on the other hand, are offline wallets. They have lower risk and are technically more secure. Cold wallets are best compared to a vault or safe in a bank. They are best for long-term holdings—hot wallets can be used for day-to-day transactions without hassles, but cold wallets require too much protocol for day-to-day transactions.

 

Types of Cryptocurrency Wallets

1. Online wallets

Online wallets or web wallets are accessible solely through web browsers and belong to the hot-wallet category. However, they should not be referred to as a hot wallet in its entirety because hot wallets do not refer to all other wallets that are online; hot wallets can also refer to mobile and desktop wallets, which you access via an internet connection. Web wallets should not be used to store large amounts of cryptocurrency because virtually everything online can be hacked.

2. Desktop wallets

Desktop wallets are among the most secure types of cryptocurrency wallets. Whether this is the right wallet for you depends on how committed you are to keeping and being up to date with the latest online security measures. Desktop wallets are probably the most used type of wallet. A desktop wallet is just what the name implies—a piece of software or an app that is installed on a computer that is then linked to the cryptocurrency client itself. They can be the “official” wallet provided or recommended by a project that stores its cryptocoin exclusively, or it can be a multi-coin wallet like Jaxx that supports multiple currencies. Examples of desktop wallets include Exodus, Jaxx, Armory, and MultiBit.

3. Mobile wallets

Mobile wallets can be used on the go. One of the good things is that some of them provide more features and, in some cases, more security than other wallets. It does not mean that they are risk-free, however. Examples of mobile wallets include Blockchain, coinbase, Mycelium, and Coinomi. They are available in Google Play Store and iOS App Store.

4. Paper wallets

Paper wallets used to be very popular for cold storage. A paper wallet is simply a document that contains all of the necessary data needed to generate Bitcoin private keys. Your private key and public key can be printed onto a normal piece of paper with a normal printer and comes with a QR code. This allows you to exchange virtual currency as with any of the digital wallet options.  The document can store a number of different keys while allowing you to keep a physical document containing very sensitive information.

5. Hardware wallets

Hardware wallets are dedicated hardware that has been built specifically to hold cryptocurrency and keep it secure. Hardware wallets usually come in a number of forms, and they get sold out very quickly, so it is paramount to carry out research with regards to your chosen hardware wallet prior to placing money there. They have stronger security than all other wallets, for the most part. They are usually cumbersome for beginners, although it is an absolute necessity if you want to store large quantities of cryptocurrencies.

 

The rationale behind cryptocurrency wallets is to create an avenue for seamless and safe digital currency transactions and storage. Safety will be determined by the type of wallet you use, and how it is being handled. Most cryptocurrency wallets have added security features such as two-factor authentication. It is advisable to embrace such features and benefit from the extra layer of security it provides. Also, as a general rule of thumb, never keep larger quantities of cryptocurrencies than you need at a time in a single wallet.

32 Comments

  • James Boyce November 2017 - Reply

    Good read for beginners. I can now start to look at various Wallets. Very informative, I noticed that some of the currency listed for many wallets was special hot wallet. I did not see a definition of that term in the article. Can someone please confirm it and if needed explain why it is found as a coin. What is the difference between having a hardware device that you listed and just normal mobile wallets?

  • Maria Suarez November 2017 - Reply

    Just like normal currency, crytocurrencies can be received, stored and transacted from a digital wallet. This is a secure yet easy-to-use platform that relies on heavy encryption and security protocols to ensure peoples’ cryptocurrency remains safe, accessible, and usable. These encryption keys include private keys and public ones, with the latter being software-generated. These digital digital wallets are categorized into hot, cold, multisig, and multicurrency wallets. Additionally, the wallets include online, mobile, desktop, and paper-based digital wallets.

  • Sam November 2017 - Reply

    This is a great article for anyone knew to the world of cryptocurrency. I currently have a desktop wallet and mobile wallet to manage my investments, both of which are categorized as multicurrency wallets. They are important for allowing safe and seamless digital currency transactions with enhanced security and authentication methods.

  • Norbert Lemieux December 2017 - Reply

    Hi, I saw some news about rise of Bitcoins in my local newspaper and decided to learn more about it and other cryptocurrencies. I’m so happy that I found your article. It’s very informative. I’ll signup for blockchain as it seems the promising wallet and also a secured one. Keep up the good work!

  • Josh December 2017 - Reply

    I currently have a desktop wallet but want to expand to something that allows for more accessibility (and mobility). I am also interested in an interface that will allow me to convert one type of cryptocurrency to another so I can appreciate your mention of Exodus. As my comfort level grows and builds, it’s only natural to want to experiment and delve into the other currencies and wallets. I do recommend that people use some sort of cold or paper wallet for longer term strategies, storage and protection. Great post!

  • John Manson March 2018 - Reply

    Should I take action or am I safe?
    I have my BTC in ARMORY offline. Today I discovered Armory is now defunct?
    Should I move my BTC out of ARMORY to someplace else? And if I keep it there, would I receive BTC Cash thru Armory automatically.
    Days before the split… any advise… or stay put?
    Thanks!
    Love your page.

  • Melissa Doyle March 2018 - Reply

    Exceptional post and the best read of the day so far! Probably, it is the best article about cryptocurrency wallets for those who are new traders. The only issue with the cryptocurrency wallets is security and with each passing day, they are improving it. Keep sharing your knowledge with us!

  • Kamil March 2018 - Reply

    If someone is using cryptocurrency faucets to collect small amounts of Satoshi (Bitcoin) then I highly recommend signing up with Faucethub.io, this is a micro-wallet that allows you to store small amounts of coins to save on transfer fees.

    Then the best wallets would be Coinbase.com and Luno.com (South African friendly), you can link your bank account to Luno and exchange your Bitcoin into Rands (ZAR) by selling it then deposit into your local bank account.

    To be 100% safe get yourself a Ledger Nano S or if you can afford the new Ledger Blue. However not recommended for smaller amounts of BTC due to the transfer fees.

  • Ty Hutchinson March 2018 - Reply

    I am blown away by the concept of cryptocurrency and cryptocurrency wallets. Incredible. I am glad I read about the different security measures because cryptocurrency seems like something you have to be extra careful with. The rewards seem greater than banks (which isn’t saying much as banks don’t pay so little interest), but you need to know what you’re getting into. If you’re asking “what are cryptocurrency wallets?” this is the place to start.

  • Perry May 2018 - Reply

    So many types of wallets! It can get overwhelming. Thanks for pointing out the differences between them so I newbie like myself can understand this better. Who knew there’s such a thing as a hot and cold wallet? I sure didn’t.

  • Steven Dorsey May 2018 - Reply

    Cryptocurrency wallets are interesting in how they work, I can’t say I know much about the topic, however. I wonder if a service has combined exchanges and wallets, even some of our larger banks could provide this, making it easier for the customers.

  • Meghan Hackly May 2018 - Reply

    Good discussion about the different types of cryptocurrency wallets. I currently use Coinbase, a mobile wallet, and have it on my iPhone. It offers convenience and is easy to navigate. This article shows just how many options there are. Do your research first!

  • Joan June 2018 - Reply

    I remember the first time I heard about wallets and how many types there were – I got overwhelmed and took a break :)). Then I realized I need to do more digging to find out more since this will became our way of life shortly. Crypto is here to stay.

  • Billie Medina June 2018 - Reply

    Just about all of the currencies should be offering some kind of wallet, don’t you think? I mean, it should be on the feature list if you want consumers to take you seriously. I have read about some that will allow you to use your wallet for offline storage, even being able to put all of your coins in one place. That is huge in a marketplace that is growing each day.

  • Stanley Bass June 2018 - Reply

    You know, just when I thought I knew all there was to know about the cryptocurrency market, there is something new right in front of me. I just assumed a platform like Coinbase would be sufficient when it comes to storing my coins.

  • Ethan Martinez July 2018 - Reply

    One thing that always bothered me about cryptocurrency is the possibility of it being unsecure, this really helps me feel better about using it.

  • Oliver Williams July 2018 - Reply

    I never knew which wallet was right for me, I didn’t know where to begin. This article is a simple guide thanks for sharing.

  • Ben Amstutz July 2018 - Reply

    I am new to exchanging and didn’t know where to begin with a wallet. This gave me great insight on where to begin!

  • Josh Sprunger July 2018 - Reply

    This was a very good article! I am new to the crypto currency world so this helped me with where to begin. I think I am going to check out Multisig wallets. They seem to have very good security in their transactions.

  • Brooke Guzman August 2018 - Reply

    I use Coinbase as my wallet. I don’t have anything to complain of. It wasn’t fully aware of all the different wallet types though. Thanks for providing information about that. So many options out there!

  • Carlie Irving August 2018 - Reply

    I’m using a mobile wallet right now – Coinbase. I’m considering moving to a hardware wallet though for increased security and privacy. I wonder how difficult it would be to move my investments over between wallets?

  • Charlize September 2018 - Reply

    All of these are great! Personally I use Coinbase, but I’ve heard great things about all of these.

  • Adrian September 2018 - Reply

    I see lots of good things about Coinbase. I will have to check it out some more.

  • Paul Sandoval November 2018 - Reply

    This is one thing I was confused about when I first started learning more about cryptocurrency. I like your post, there is a lot of information here that is easy to read and understand. Cryptocurrency wallets are something that is not going away and are quite helpful to consumers with the right features.

  • John Bailey November 2018 - Reply

    Just as a guess, I am going to say that the multi-currency wallets are going to be the most popular. Consumers that are in the cryptocurrency game are likely to be dealing with more than one, don’t you think?

  • Pam Arnold November 2018 - Reply

    This is the first time that I have heard about the “hot and cold” wallets. It makes perfect sense to me, so you must have explained it well enough 🙂

  • Cassie Harris December 2018 - Reply

    We should have known that it would only be a matter of time before “wallets” were available. with so many different currencies out there, it only makes sense that one would have a place to “store” them all.

  • Rachel Velez December 2018 - Reply

    Awesome news! I love that I can store cryptocurrencies and other things in the wallet so that everything is all in one place. Right now, I think I check balances at 5 different sites and that can get annoying.

  • Wendy Sapien December 2018 - Reply

    Nice! This is a great article and it features online AND offline wallet options!

  • Curtis Boykin January 2019 - Reply

    They are a great way to store all of your cryptocurrency information. With so many networks, coins and exchanges out there, you can get lost. Having a virtual wallet with all of that information in it is going to be a great benefit!

  • Victoria Case January 2019 - Reply

    One of the best things about virtual wallets is the “hot and cold” part of it. Storing all of your financial information in one place is a great benefit to the consumer. There is less chance information can get stolen.

  • Henry Santiago January 2019 - Reply

    Take a minute and read through this post if you are really trying to find good information. Some of these seem like a great idea, but pay attention to the security of each of these. That is going to be the feature you want to pay attention to.

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