So you’re into cryptocurrency. You’ve heard about it on TV or YouTube, Facebook, Twitter, Reddit or somewhere. At first you ignored it, but then you got a little interested. And right now you’re starting to go down the rabbit hole. Welcome. Its a deep rabbit hole with many side tunnels and many interesting people to meet along the way.
You understand the concept of cryptocurrency. You may have even bought some cryptocurrency. And now you’re wondering how to store your cryptocurrency. You’ve heard of crypto wallets. You’ve seen advertisements and everyone on YouTube talking about storing your private keys on wallets or people talking about custody solutions.
But what is a crypto wallet?!? Great question. Read on to find the answer!
What is a Crypto Wallet?
A crypto wallet is like a mix/hybrid between a keychain, email, and bank (account). That’s right. Conceptually, a crypto wallet is a hybrid of features from those things.
Going back to the basics of cryptocurrency, the actual “coin” is not stored anywhere. There is a distributed, open ledger where everyone can see who has how much of which cryptocurrency. Each “coin” has an associated public key, which is the component that is visible on the public blockchain. The public key is public knowledge.
The public can see the public key is associated with certain addresses (“accounts”) on the blockchain ledger.
Each public key is paired with a private key. Having the private key is what gives someone access/ability to send the cryptocurrency. As the name implies, the private key is private. Do not share your private key with anyone. The private key is what is stored in your crypto wallet. As it is a private key, and you collect multiple private keys depending on how many cryptocurrencies you own, a crypto wallet can be thought of as a keychain. Because it holds your private keys.
Next, your crypto wallet will have addresses. Right now (early 2019) addresses consist of an alphanumeric string. You can receive cryptocurrency to your address, which your crypto wallet holds. Remember, when people send cryptocurrency, they are sending the private key. On the public ledger, when someone sends you cryptocurrency to your wallet address, the public key will be associated with that address. And the private key will be stored on your wallet. Your wallet address is not meant to be private, otherwise, how would people send you cryptocurrency. In this way, a crypto wallet almost behaves like an email in the sense that cryptocurrency is sent to your wallet address (i.e. much like an email is sent to your email address).
Most wallets have the ability to host multiple addresses/accounts. The ability to send and receive cryptocurrency, store cryptocurrency, make and receive payments in cryptocurrency on pre-set timelines, etc. Many wallets also allow you to store multiple cryptocurrencies. Moreover, your wallet never closes, it works whenever you use it. You can take your wallet anywhere in the world (if it is a physical wallet) or access it anywhere with internet (for hot wallets). In this sense, your crypto wallet is much like your own personal bank with multiple accounts.
Crypto wallets can be accessed with a password and/or a PIN. Most wallets allow you to keep “backup access” to it, should it be compromised or lost or stolen. These are Recovery Seed Phrases, a list of 12 words. The Recovery Seed Phrase is an important aspect of Crypto Wallets that you must pay particular attention to (more on this topic below).
In summary, a crypto wallet is a device that allows you to create addresses/accounts on which you can store cryptocurrency private keys in order to send and receive cryptocurrency 24/7. However, not all wallets are created equal. Of course, there are different types of crypto wallets.
Different Types of Crypto Wallets:
- Offline (Paper)
- Full Node
There are basically two main features of each of the types of crypto wallets: online (hot) vs. offline (cold) and whether or not you hold your private keys or not. The different types of crypto wallets listed have a lot of overlap.
- Online Crypto Wallet – a “hot wallet”
- Basically, software that can run on a device (desktop, mobile phone, laptop etc). The software is on “the cloud” and your private keys are stored online, in the cloud. This puts your private keys at higher risk of being stolen, and technically they are with a third party provider, so you do not own your crypto with online crypto wallets.
- Offline crypto wallet – a “cold wallet”
- Offline crypto wallets refer to when the private keys are stored on devices that do not directly connect to the internet. This can be a paper wallet, a hardware wallet, or brain wallet.
- Paper wallets are quite literally storing your private keys on paper. Additionally, you can opt for a Brain wallet, which is when you memorize a “passphrase” which is a series of 12 to 24 words that gives you access to your private keys.
- More on hardware wallets below.
- Full Node Crypto Wallet
- These are cryptocurrency specific wallets, or “official wallets”. It involves you running a “full node” aka, hosting an entire copy of the blockchain and then also storing your own private keys. Generally speaking, this requires a lot of hard disk space.
- Custodial vs. Non-custodial
- Custodial refers to someone else having custody of your private keys. Non-custodial refers to when you hold your own private keys. I find this confusing because if I hold my private keys I consider myself as having custody of them. I believe in a legal sense, the word “custody” refers to an entity having legal guardianship over something, which is probably the reference point with respect to crypto wallets.
- Software wallet
- Refers to any wallet that is purely software-based. It may be custodial (someone else holds your private keys) or non-custodial (you hold your private keys)
- Desktop Wallet
- A very common type of wallet. Self-explanatory. Your crypto wallet is on your desktop computer, typically on an app. This can be online or offline, although most computers have an internet connection, this makes them vulnerable to attack. A type of software wallet. Usually non-custodial, so you hold your private keys. A little more secure than software wallets, theoretically, but still not very secure since it is typically connected to the internet.
- Mobile Wallet
- Another self-explanatory wallet. A crypto wallet that is an app on a smartphone/mobile device. A type of software wallet. Typically non-custodial.
- Hardware wallet
- A piece of hardware designed specifically to hold cryptocurrency private keys. Typically there is a separate chip inside the hardware that is never directly connected to the internet and is protected by a PIN and/or password. There is software that allows you to interface/interact with the hardware wallet to send and receive cryptocurrency.
- Typically a hardware wallet is a cold wallet.
As mentioned earlier, each wallet is a combination of the above types. For example, a desktop wallet is typically a hot wallet that can be either custodial or non-custodial. An online wallet can be a desktop or mobile and custodial or non-custodial.
Crypto Wallet Recovery Seed Phrase/Pass Phrase
What is a Pass Phrase/Seed Phrase? Also known as “Recovery Seed Phrase” or “backup seed phrase”, they are a set of words which give you access to the cryptocurrency on your wallet. Basically, access to your private keys. Since it gives you access to your private keys, only wallets that hold your private keys will have a Recovery Seed Phrase. Typically they are 12 randomly generated words from a list of 2048 English words. Software selects the random words from the word list and the order of the words matters. When you first set up a crypto wallet you will be asked to write down these words.
Do NOT type them onto any device. Do NOT type them into a word document, or as a note on your phone, do not text them to yourself, do not email them to yourself, do not write them in an excel sheet or google docs. Do not even take a picture of them and keep it on your phone, iCloud, Google Drive or Google Photos etc. If these words are ever on a digital medium (other than when you write them down) then consider them compromised. Write down your Recovery Seed Phrase with old fashion pen and paper. Keep the words in order. Do not misspell them. Double, triple and quadruple check, because once the seed phrase has been displayed it can never be displayed again.
Do not try to come up with your own Recovery Seed Phrase as humans are unable to truly generate random words.
It is more important to protect your Seed Phrase than it is your wallet. If your wallet is stolen or hacked you can buy a new hardware wallet or download a new mobile/desktop wallet and use your Seed Phrase to effectively “transfer” your private keys to your new crypto wallet. However, the same applies to a hacker who gains access to your Recovery Seed Phrase. A hacker with your Seed Phrase only needs to set up a crypto wallet and enter your Seed Phrase and they automatically transfer all of your crypto from that wallet to their wallet, like magic. The Seed Phrase was developed in case you were to lose your hardware wallet or your mobile device is compromised, lost, stolen or broken, you would still have a way to recover your cryptocurrency.
You might be wondering why this feature exists… as it may be seen as another vulnerability. This is a consequence of the decentralized nature of cryptocurrency and is only a feature of non-custodial wallets (i.e. you own your private keys). Since it advocates that you control your own cryptocurrency and that no one can take it from you, if you were to lose your wallet you have a decentralized way to access it again. There is no “password reset” since there is no central authority to reset your access. You only have the Recovery Seed Phrase that is associated with the private keys at your crypto wallet address.
If your crypto wallet is stolen/hacked the thief/hacker would need to break your PIN or Password in order to gain access to your cryptocurrency. If they manage to do this and send your cryptocurrency to their wallets or exchange accounts, then even using your Recover Seed Phrase would not save your cryptocurrency. This is why it is important to keep both your seed phrase and your PIN/Passwords safe and secure.
Common/Popular Crypto Wallets
So… we know what a crypto wallet is. We know the different types/classifications of different crypto wallets. But what are some common crypto wallets? For simplicity sake I will list some of the different wallets as categorized as either hot (online) or cold (offline) and custodial (you do not own private keys) and non-custodial (you do own private keys)
- Hot wallet, custodial (you do not own private keys):
- Really any centralized exchange wallet…
- Hot wallet, non-custodial (you do own private keys):
- Jaax (desktop, mobile)
- Exodus (desktop)
- Bread Wallet (mobile only)
- Mycelium (mobile)
- Cold wallet, custodial (you do not own private keys)
- I do not know of any… I don’t think this is technically possible since the definition of cold wallet is having your own private keys and storing them offline.
- Cold wallet, non-custodial (you do own private keys)
- Ledger series (Ledger Nano, Nano S, Nano X, Blue)
- BitBox (previously Digitial BitBox)
- Paper Wallets
- EthAddress (https://ryepdx.github.io/ethaddress.org/#/)
Do I Need a Crypto Wallet?
Great question. Have you ever heard: “Not your keys, not your crypto”, or as the original goes “Not your keys, not your bitcoin”. This refers to the fact that if you do not store your own private keys, then you do not technically own or have full control over your cryptocurrency.
Today, banks store your fiat currency, and they loan it out 9 to 1. You do not directly own it; unless you hold a ton of cash under your mattress, or gold bullion in a vault, which I think most people do not. Also, people do not trust banks very much, especially after the 2008/2009 financial crisis/recession.
Trusting your cryptocurrency private keys with a third party, such as an exchange, is akin to leaving your fiat in a bank account. Perhaps one day, everyone will store their cryptocurrency with “trusted” third parties. However, that defeats the whole purpose of the social movement behind cryptocurrency, which was/is to take back control of your financial assets.
To answer the question directly, “do I need a crypto wallet?” – No. Should you have one. Definitely. Even if you do not trust yourself to store your own private keys, you could hold a small amount of cryptocurrency on your wallet and the remainder on an exchange/third-party provider. However, most people do the reverse of this: they hold the majority of their cryptocurrencies on their cold storage wallets, and only a small percentage of their cryptocurrency on an exchange or hot wallet for daily use or trading.
Which Crypto Wallet is Best for You?
Well… I can’t decide that. You have to decide which crypto wallet is best for you. In order to figure that out, you must determine your needs and match the crypto wallet that best meets those needs.
If you are a high-frequency crypto trader you may want to keep crypto on an exchange.
If you are a HODLer you may want to put your crypto on a cold storage hard wallet, hide it in your house and forget about it.
If you are a casual user of cryptocurrency perhaps you’ll want to keep some crypto in small amounts on a hot mobile non-custodian wallet such as Mycelium.
Keep in mind that you can be all of the above or any combination of the above. There is no set rule!
The most important thing is to remember to be aware of your own crypto security. Know the risks and weak points of each crypto wallet and how to mitigate them.
Have you ever heard of people fleeing oppressive countries or countries with out of control fiat inflation at astronomical rates? I have heard stories that often they are unable to leave the country with real gold/silver or USD in cash or even their own country’s fiat in cash because their border guards will not let them. But I have heard of them doing one of two things: (1) walking out with their crypto in their head, aka with a memorized Recover Seed Phrase; or (2) walking out with their crypto on a USB cold hardware wallet, since the border guards do not think twice about letting them leave with a USB stick (or even on their phone, which of course they are allowed to take with them).
Cryptocurrency is open, decentralised, uncensorable, peer-to-peer money/value. Crypto wallets are what allow people to literally take their money into their own hands (or brains). This has helped many individuals escape tyranny with some monetary value to bring to another country to start their new life.
Crypto wallets are what give you the financial freedom and security to do as you wish.
I hope you enjoyed this brief introduction to crypto wallet and I hope that I answered the question “What is a Crypto Wallet” sufficiently. Please add any knowledge, content, questions or comments in the comment section!