Blockchain And Cryptocurrency Provider

Cryptocurrency Wallet Guide 2021

Crypto wallet guide

Table of Contents

Introduction

When starting your crypto journey one of the first and most important decisions you need to make is which wallet you should use. But what is a cryptocurrency wallet? How does it work and why are there so many of them? If you ever wondered about this or were confused about all the options – you have come to the right place to find out.

What Is a Bitcoin Wallet?

In the plainest terms: The wallet is any app that gives the user access to create, sign, and broadcast transactions or to store private keys.

Traditionally everyone understands a wallet as a pocket-sized pouch in which you can store your money and items like IDs and credit cards, and the same generic understanding can be applied to a cryptocurrency wallet. This is where you can “store” your crypto, but a common misconception is that a wallet actually holds your bitcoins in it. That’s not technically true. Your bitcoins are in the distributed Bitcoin network, recorded in a ledger with copies all over the world. And your wallet gives you access and permission to send and receive your bitcoin on the network.

So technically speaking, anybody with the full copy of the Bitcoin blockchain has ALL the Bitcoin on their device, but they can only move or send the bitcoin that their wallet gives them control over.

  • Bitcoin Seed
    What a wallet actually holds are your private keys or so-called “seed”. Your private keys are how you prove to the network that you have the right to “move” your coins from one address to another. Your private keys are also used to generate public addresses that you can share with other people to receive transactions.
    From a technical perspective, a seed is simply a number. A very, very large number in fact. A 256 digit binary number to be precise, which translates to 77 digit decimal number. For comparison, it is estimated that the number of atoms in the observable universe is around 79-80 digits long.

    So generating a new Bitcoin Seed is just like picking a random number between 1 and 2^256. You could do it by flipping a coin 256 times and writing down 1 for each heads and 0 for each tails. This is actually a legit way to generate a seed without the use of any technology.

    Since we are not very good at remembering or recording random strings of 0 and 1’s seeds on the practical user side, it can be represented to look like a sequence of 12-24 random English language words. This is just a convention and a way to represent the 256-bit number. You will get a set of words like this when generating a new wallet and it’s important to write them down and keep them safe, as whoever has access to these words can control and steal your coins.

  • Bitcoin Wallet
    On a user level, a bitcoin wallet is any software or hardware that lets you interact with the network. It does that by using your private key to sign and authorize transactions.
    In the last 11 years since the inception of the bitcoin protocol, people have built many different ways to interact with the network. As a result of this, there are different classes and types of wallets.

What are the different classes and types of cryptocurrency wallets?

What are the different classes and types of cryptocurrency wallets?

In the diagram above you can see all of the main types of wallets. The main characteristic that divides them into classes is: “Where is the Seed stored and who controls the Private Keys?”

With online wallets the user doesn’t have full control of the Keys and hence has to trust some third party with their coins.

Hot Wallets are the biggest group and cover all applications that hold the private Keys on your device. They are connected to the internet thus allowing you to quickly and conveniently interact with the network.

Cold Wallets are all wallets that hold your Keys offline. This type of wallet is used for long term secure storage.

Online Wallet

Online wallets usually come as a part of some centralised service. For example, most of the exchanges function in a way that they have integrated an online custodial wallet as a part of your exchange account. This means that you technically don’t own the bitcoin you keep on the exchange. As far as the network is concerned the exchange has the keys and the bitcoin belongs to the exchange. And in turn, the exchange owes you the said amount of coin. In reality this is also how our entire current financial banking system operates.

With all the exchange hacks and previous government seizures of various exchanges, you can see why keeping your coins on the exchange for long periods of time is not the best idea. If you are storing crypto on exchanges it is important to use a reputable and trusted one in a safe jurisdiction.

Exchanges represent centralised bottlenecks in otherwise decentralized ecosystems, but at the moment some service would be impossible without centralisation. We all have to use them at times, but you should always keep in mind: “Not your keys, not your coins!”

  • Custodial Wallets
    As mentioned above, these usually come with some service like an exchange or crypto lending services.
    Examples include
    – Exchanges: Kraken, Binance
    – Crypto Lending: BlockFi
  • Multi-signature Wallets
    A multi-signature wallet is a method of splitting the private key into multiple pieces (3, 4 or etc) and sharing those to different entities or people – then the coins can only be accessed or moved if at least a minimum amount of keyholders agree, for example – 3 of 5 or 2 of 3… )
    With multisig wallet the user usually controls at least one Key while a third party controls the other. Hence this type of wallet sits in between online wallet and hot wallet. It offers advanced functionality and interaction with APIs while maintaining high security.
    Examples include:
    Block.io

     

Hot Wallet

Hot wallets are all wallets that hold your private keys and are connected to the internet allowing you to interact with the network. This type of wallet should be your go-to wallet. This group is the largest and offers the biggest selection of uses. Hot wallets are divided into web, desktop and mobile depending on the platform the application is running on and some options have both a desktop and compatible mobile version

  • Desktop Wallet
    Desktop Wallets are all wallets running as a standalone application on your personal computer. They are divided into Full Node Wallets and Light-weight Desktop Wallets

    (i) Full Node Wallets
    “Full Node” part of the name signifies that the wallet has a full copy of the blockchain. This type of wallet offers full functionality and all the features the protocol has to offer. By running a full node you are also contributing to the decentralization of the network and you are improving your own privacy and security because you don’t need to trust anyone. As an old Bitcoin saying goes:

    “Don’t trust, Verify!”.

    Unfortunately in order to verify you need to download the whole blockchain, which can be quite large and can take quite a while for the first time you are downloading and synchronising with the network. The Bitcoin blockchain is about 350 GB at the time of writing. So keep in mind, while a full node is technically the best, it’s an overkill for most users and it’s not very user friendly.

    Examples Include
    Bitcoin Core, Bitcoin Knots, Litecoin Core, Monero GUI, Cardano-node

    (ii)Light-weight Wallets
    “Light-weight” means that the user can interact with the network without downloading the full blockchain. This also means that your wallet needs to connect to and trust other peoples full nodes for the data from the network.
    Regardless of reduced privacy and security this is a type of wallet great majority of users will find the best for their needs.

    Light-weight wallets run on both Desktops and Mobile devices and they can even be integrated with some Hardware cold wallets which we will explain in more detail later. This type of wallet can be dedicated to a single cryptocurrency or be multi-currency and as a result you will find the largest variety and use cases within this category.

    Dedicated Light-weight Wallets
    These would be your old school wallets. Very reliable and excellent if you are dealing with large amounts of crypto.
    You have to keep in mind that all software has bugs. The more stuff the software is trying to do the more bugs there might be. While a multi-currency wallet offers the convenience of a single interface for all of your coins, there can be a tradeoff against reliability.

    Examples Include:
    Electrum Bitcoin Wallet

    — Multi-currency Wallets
    Multi-currency wallets are the most convenient way to store your crypto if you own a large amount of different coins. Some of them only work with 2-3 coins but some support hundreds of different coins and tokens.
    This group of wallets usually also comes supporting a variety of platforms, so you can have the same wallet on your PC and your phone.

    Examples Include
    Coinomi, Edge, Trust Wallet

    — Browser Wallets
    Browser hot wallets are all wallets that hold your Keys on your machine and use the browser as a frontend interface. Because of this people often confuse them with Online wallets, but this is not the case because you control the Keys.
    A lot of smart contract platforms use this type of wallets for interaction with the smart contracts themselves. The Metamask Wallet for example can be used to interact with a variety of smart contract protocols.

    Examples Include
    MyMonero Wallet, Metamask Wallet


  • Mobile Wallet
    All wallets that run on Android or IOS devices are called mobile wallets. In general, all of them are light-weight wallets (it would be very difficult to download the whole blockchain to your phone). And as light-weight wallets they have all of the previously mentioned characteristics and sub-types.

    Examples Include
    – Dedicated mobile wallets
    Bitcoin Wallet, Mycelium

    – Multi-currency mobile wallets
    Cake Wallet, Coinomi, Edge, Trust Wallet

    – Browser Mobile Wallets
    MyMonero Wallet, Metamask Wallet

Cold Wallets

Cold Wallet

Cold Wallets are designed to independently and securely store your private keys and have never been exposed on any machine that is connected to the internet. This makes your private keys unhackable, but with the drawback you can’t interact with the network directly. So this class of wallets is used for long term secure storage, not for everyday use. They are divided into 3 types depending on where and how the keys are stored; On a hardware device, on a plain piece of paper or other physical medium like metal, or remembered in your head, also known as a brain wallet.

  • Hardware Wallets
    A hardware wallet is a cryptocurrency wallet that stores the user’s Private Keys in a secure hardware device (like a secure USB). The main principle behind hardware wallets is to provide full isolation between the private keys and your easy-to-hack computer or smartphone.
    These devices can cost a bit of money but they combine the security of a cold wallet with the convenience of a light-weight wallet. Most of them offer both a Mobile and Desktop interface while keeping your Keys secure on an USB like device at all times.

    Examples include:
    Ledger Wallet, Trezor Wallet

  • Paper Wallets
    Considering that paper can last for hundreds, if not thousands of years. This type of wallet is good for long term storage. Even better than hardware wallets because you don’t need to worry about flash memory going corrupt, or worry about solar flares and EMP storms. Most people protect their paper wallet by laminating it to protect it from water, and putting it in a fireproof envelope or safe. With this, you can be pretty sure your great-great-grandchildren will still be able to access your coins.
    Nowadays some wallet backups are not even made from paper but rather stainless steel for extra security and longevity.

    Examples include:
    – Paper Walletgenerator 
    – Steel or Titanium: Cryptosteel, Cryptotag

  • Brain Wallets
    Brain Wallet refers to the concept of storing the wallet mnemonic seed phrase in your head by memorising it. Different types of memorisation techniques can be used to memorise the 12 or 24 words provided. This type of wallet is perfect if you are at risk of being interrogated by the KGB anytime soon.
    Read more about it here: https://en.bitcoin.it/wiki/Brainwallet

Open Source vs Closed Source

Another consideration to keep in mind: is the application you are considering open source or closed source? Open source is any project worked on by a community that makes the code public so it can be verified and trusted by anyone. Closed source, or proprietary software solutions are where you don’t have access to the source code to see how it was built and how it operates under the hood.

The cryptocurrency community puts high trust and emphasis on software being open source. Bitcoin itself is an open source project. If you are using closed source software you are putting your trust in the company that made the software whereas with an open source wallet that is established in the space, you can be sure that hundreds of programmers looked at the code to find and resolve bugs and security issues which you can check yourself.
Again it goes back to the ethos of the crypto community; “Don’t trust, verify!”

Organizing Your Wallets In Terms Of Trust

As you can see it’s not simple to “Be your own Bank”. The main things to keep in mind are the 3 main classes of wallets: Online, Hot and Cold. Treat each as a separate security level in your stack. Meaning you should treat online wallets with a degree of caution. You shouldn’t leave any significant amount of crypto in an exchange wallet if you are not using it for active trading purposes.

Some hot wallets should be your go-to option. And depending on the coins and services you wish to use you can narrow down the choice. Treat this security level how you would treat an actual physical cash wallet in real life. You’ll go out of the house with a few hundred in your wallet, but you aren’t going to put your life savings in it and go for a walk.

The most trusted level is your cold wallets. Use some of the options in this level to store greater amounts of coins. You can think of it like storing cash in a high end safe. It’s not very readily available, but it’s nice and safe.

Conclusion

The bottom line is with crypto you are your own bank and you need to decide how to set up your wallets. Everybody will find a different combination of wallets depending on the services and coins they wish to use.

We gave you a lot of information in this article and it may look overwhelming and complicated.
So to help you with the choice of wallets for each class (security level) we will publish an article next week with a more in-depth review of specific wallet apps.

For now just remember: “Not your keys, not your coins” and “Don’t trust, verify!”

Share this 

Facebook
Twitter
LinkedIn
Ozzak

Ozzak

Ozzak discovered blockchain technology in early 2017 and decided that this is exactly what he wants to do with his life. In 2018 he was accepted in the Computer Science course at University College Cork. He's now in his 3rd year working for Boinnex as a part of his internship. As you may imagine he's deeply passionate about everything blockchain. Ozzak's other interests include calisthenics, blues harp and Austrian economics. He also has an impressive collection of tarantula spiders.

Have any questions? Write them below

Leave a Reply

Sign up for our Newsletter

Receive daily updates directly in your favorite email.