Keeping Your Bitcoin and Cryptocurrency Safe – An Introduction to Crypto Wallets
Posted On July 27, 2018
Congratulations! You’ve bought some crypto! Maybe you bought a piece of a bitcoin, a whole bitcoin, a litecoin, some XRP, a Lumen, some Ethereum, or Digibyte…it doesn’t really matter. The good news is that you bought some crypto and you are asserting your currency independence.
Or are you?
Here’s something a lot of people don’t think about. When you buy cryptocurrency, what you are doing is claiming a piece of the blockchain. Your public key allows anyone to see that your crypto belongs to the address that you have parked it at. Your private key allows you to move it to a different address if you want to. Remember, blockchain is a permanent (immutable) ledger of transactions. Which brings up a good point – the only way your transaction is private is if you are using a privacy coin like Monero which tears up the transaction records or if there is no way to associate you with your public address. When people buy crypto – most people buy it on an exchange. Exchanges like Coinbase handle all of this for you and because of anti-money laundering laws (AML) and know your customer (KYC) rules…there is no such thing as privacy AND – and this is important, while you are the legal holder of your crypto – the private keys are actually held by the exchange – so you can request them to move your crypto to somewhere else (another wallet, a friend, etc) but they have the custody and if something happens (a big hack like Mt. Gox for instance) your coins and tokens can be lost and never recovered.
And that, my friends, is why the old timers in crypto advise you to never keep your cryptocurrency on the exchanges. You need to have control of your own keys and to do that, you have to have a way to account, move, track, send, and recieve. Welcome to the world of crypto-wallets. This will be a brief guide and in time, I will be adding individual reviews of the various solutions presented here.
There are many different wallets.
There are the aforementioned exchange wallets which allow the exchanges to control your currency. This is important if you are actively trading. Some exchanges guarantee that your holdings are protected. Binance is one of these. Advantages of exchange wallets are that you can buy, sell, and trade. Exchange wallets usually take care of airdrops, forks, and mainnet swaps for you. The disadvantage is that your every move is being monitored, your accounts are clearly tied to you, and you do not actually control your keys. So, if currency independence or privacy are one of your reasons for investing in crypto – keep your crypto somewhere else.
Browser wallets aka Web Wallets use an online interface to keep track of your crypto. Again, if privacy is an issue, you have to take some extra steps because your computers IP address and other factors are showing the world who has control of that wallet. Probably the most popular browser wallet is MEW aka MyEtherWallet.com
Since Ethereum has been used to build thousands of ERC-20 compliant tokens – a browser wallet like MEW is very useful because it can hold them all. Also, since the contents of the wallet are visible to anyone on the blockchain – if you hold your Ethereum in a MEW or similar wallet, you will get air drops of new ERC-20 tokens from time to time if you are holding any Ethereum.
Similar to MEW but downloaded onto your machine or device are software wallets. Software wallets are also known as desktop or mobile wallets. The main advantage to using a software wallet is that they are more secure because they are on your machine or device. Some examples are JAXX, Mycelium, Electrum, and Green Wallet. Generally, when you set these up, your private key is given to you and encrypted using a series of words which are also given to you. This means you can recover your wallet even if your computer or phone is stolen or broken. A similar system is used with browser wallets. The difference is that a browser wallet can be logged into from anywhere as long as you have your keys, the software wallet is only on your device.
There are a growing number of hardware wallets. Ledger, Trezor, Bitific, and more. I will offer reviews of some of these in the future. One wallet which I ordered and was excited to demo was the HooFoo wallet. The company has unfortunately proven to be a fly by night scam and has not shipped wallets to any of their backers or offered refunds. It’s a shame because it looked like a very good solution. In any event, hardware wallets are not dependent on your computer, the web, or exchanges. By storing your cryptocurrency on a hardware wallet, you are retaining full control of your crypto and retaining the maximum amount of currency independence.
Paper Wallets, Wallet Cards, etc
A paper wallet is little more than a bitcoin or crypto private key printed on a piece of paper. Nothing complex about it. Wallet cards are a way of digitally managing private keys offline but still loading and spending online. Paper wallets are as secure as you keep them – think of them as almost the same thing as dollar bills. If you leave them lying around, they will probably disappear.
So, in summary: cryptocurrency is moved around with numbers and math. The math is complex and for all intents and purposes impossible to counterfeit unless you have two sets of numbers – the public key and the private key. Wallets are a way of managing and keeping those keys safe. Many people call any wallet with an online component a soft or hot wallet and any wallet that is offline a cold or hard wallet. Cold wallets are safer than hot wallets.