Crypto wallets can be easily accessed either online through a website, by purchasing hardware from a company, downloading software directly onto your desktop or installing a mobile app on your phone. Wallets are a crucial piece of technology for every functioning digital currency because they let the owners send, receive and store coins or tokens securely on their respective network.
There are more companies offering cryptocurrency wallets today than ever before. Below we have listed all of them for you to review and compare.
How Bitcoin Wallets Work
The best place to begin when explaining what cryptocurrency wallets are and how they work is with Bitcoin. To put it simply, a wallet is a secure place where Bitcoins are stored. You can think of a BTC wallet just like the wallet you use to hold your cash or credit cards. Instead of holding physical paper money, the virtual wallet is used to securely hold your digital currency.
If you are looking for a more technical explanation, the truth is that Bitcoins are not actually stored on wallets at all. In reality, each Bitcoin belongs to a unique address which is generated with a wallet’s private key. In order to access the Bitcoin stored on an address, you need to have the private key of the wallet it belongs to. This makes wallets a crucial part of sending, receiving and storing Bitcoin – even if BTC is not physically stored there.
Since every Bitcoin wallet has its own private key, anyone who has a wallet can create their own addresses for sending and receiving BTC. Only the owner of the Bitcoin wallet has access to the private key, and consequently they have the ability to control all of the funds on all of the BTC addresses associated with that key.
How to Use a Bitcoin Wallet
Once you get a Bitcoin wallet, you can begin creating your own unique BTC addresses. Most wallets are user-friendly and will allow you to generate a new address with just one click. Depending on what type of wallet you choose, you may not even need to know much about Bitcoin from a technological standpoint. In this way, wallet providers hope to make BTC easy to use for everyone.
By using the addresses generated by your personal wallet, you can send or receive Bitcoin at any time. To send Bitcoin, the receiving party just has to provide you with their BTC address. Once you have their address copy it, make sure to thoroughly double-check it to make sure it matches and input the address in the appropriate field on the “send” page of your wallet. When you want to receive Bitcoin, simply copy a receiving address from your wallet and provide it to the person who is sending the BTC.
After a transaction has been initiated, the information associated with it is broadcast across the Bitcoin network and made public on the blockchain. For a transaction to be fully verified, miners need to confirm it on the blockchain. All of the transactions associated with a BTC address need to have at least 1 tx confirmation before they are spendable. Some wallets or Bitcoin-related services require anywhere from 2-6 confirmations for a transaction to be considered fully verified on the network.
Other Cryptocurrency Wallets
Since the creation of Bitcoin, many popular digital currencies have utilized technology similar to Bitcoin which means that the wallets used by a lot of cryptocurrencies today work in the same way as Bitcoin. More and more Bitcoin wallet providers are also beginning to integrate new cryptocurrencies into their existing platforms.
Types of Crypto Wallets
There are four main types of Bitcoin and altcoin wallets. Each one has its own unique advantages and will fit the needs of different types of users. The main types of cryptocurrency wallets that are used today include:
1. Web-Based Wallets
A web-based wallet (AKA an “online wallet”) is a wallet that’s offered as a service by a website. Some websites focus solely on being an online wallet, while others provide it as a secondary service. You can get a web-based wallet by creating an account on any website that offers them.
Web-based wallets provide easy access to your cryptocurrency across multiple devices. As long as you have your password, you can access the funds on your wallet using any internet-connected device. This can be more convenient than having to launch a desktop application or insert a hardware device into your USB port.
Web-based wallets tend to be less secure than other types of wallets. When using one, you are essentially trusting a centralized company to protect your account (including your private key) from being compromised. The company offering a wallet service has full authority over all of the accounts on their website. They can sometimes even limit how much digital currency you can trade or receive or lock your funds if they feel it is necessary. For those reasons, you should always make sure that you store cryptos in well-established wallets that have a good track record.
2. Hardware Wallets
Hardware wallets are one of the only “physical” products made for Bitcoin and other digital currencies. There are just a small handful of companies that manufacture hardware wallets, and they utilize special (often proprietary) encrypted hardware to keep your cryptocurrency secure.
A hardware wallet is one of the safest ways to store cryptocurrency. They keep your coins secure and offline while the device is not plugged into the USB drive on your computer. Most hardware wallets offer a much more decentralized experience compared to web-based wallets by giving you full control over your personal wallet. They will let you set custom TX fees and even give you complete control over your own private key.
If your hardware wallet ever breaks or becomes lost, recovering the coins stored on it can be a technical and comprehensive process for the novice crypto enthusiast. The funds can usually be recovered by purchasing a new hardware wallet from the company and following their recovery procedure.
3. Desktop Wallets
Desktop wallets are available for Bitcoin and many other altcoins by downloading software directly onto your computer.
Desktop wallets give you complete control over your wallet, including private keys. In essence, they provide users with the decentralized experience that the original creator of Bitcoin intended. There are even different types of wallets within this category, and each one focuses on something unique. Some desktop wallets place an emphasis on security. Others provide a more anonymous cryptocurrency experience by integrating coin mixing functionality into their software.
Desktop wallets often require a greater understanding of the technical aspects of Bitcoin and the other cryptocurrencies they support.
4. Mobile Wallets
Mobile wallets for popular cryptocurrencies like Bitcoin, Ethereum and Litecoin are available on popular app stores including the Apple Store, Google Play Store and Windows Store.
With a mobile wallet, you can send or receive digital currency anywhere you have internet or cell service. Mobile wallets also let you use QR codes to send and receive BTC between addresses nearly instantly without having to manually copy/paste them.
Mobile wallets can be less secure than other storage options. They carry the same disadvantages as online wallets, but can also pose a problem if you ever break or lose your phone.
Cryptocurrency Wallet Security Tips
While most cryptocurrencies are built on decentralized platforms using encrypted technology and advanced cryptography, you still need to take the proper security measures to protect your coins. Just because a cryptocurrency itself is secure, that doesn’t mean your computer, phone, tablet or online account are completely protected.
Create a Strong Password and Enable 2FA
The first step you should take to protect your digital currency is using a strong, secure password and enabling 2FA (Two Factor Authentication) on your wallet. Web-based wallets, such as the one provided by Coinbase, will let you configure 2FA in the settings tab. In addition to a username/email and strong password, 2FA will require you to enter a unique code every time you sign in. The code can either be sent to you via a text message (SMS), email, or by using a third-party app like Google Authenticator.
Spread Out Your Cryptocurrency
To limit the risk of losing all your digital currency you own if your account is ever compromised, consider spreading out your cryptocurrency holdings across multiple wallets. If a hacker does manage to gain access to one of your accounts, you will only lose the funds on that one account instead of your entire cryptocurrency wealth. When doing this, make sure the username and passwords are different on each account.
Use a Hardware Wallet
If your crypto portfolio is of high value, consider using a hardware wallet. Hardware wallets can be one of the most secure ways to store Bitcoin, Litecoin, Ethereum and other altcoins. They will only let you access funds stored on the addresses generated by your wallet if the hardware device is physically inserted into the USB drive of your computer. Once the device is inserted, it will generate a random “one-time-use” number that will act like a password.