Wallet

A cryptocurrency "wallet" is a collection of private keys, acting as digital addresses, used to store cryptocurrency (such as bitcoin or litecoin) or move it from one wallet to another. In this way, it is functionally similar to a bank account. Unlike a bank account, wallets are not tied to the user's personal information in any way.

Overview

A "wallet" is the digital address through which individuals may store and exchange their bitcoins, or other cryptocurrencies. Rather than actually holding one's coins as, for example, data clusters, a wallet actually records a user's private keys that allows the user to access their cryptocurrencies' address - also known as their public address.

According to the U.S. Federal Trade Commission, it is imperative to keep the majority of one's cryptocurrency in a secure place. It is especially important to keep most of it backed up somewhere where it won't be lost or stolen or made vulnerable to hackers. Experienced cryptocurrency users agree; suggested practices include backing up one's entire wallet offline, encrypting online backups, using multiple locations to store your coins, regularly backing up your secure wallet to make sure all recent address changes and transactions are included.

When using wallets accessed through an Internet browser, it is important for users to make sure they type the correct URL; there have been instances in which exact copies of web-based wallets were generated as part of phishing scams, with slightly different web addresses. For example, in 2018 many cryptocurrency users were scammed by entering their personal and public keys on a fake version of WalletGenerator.net that used the URL WalletGenerator.org.

"Cold" vs. "Hot" Wallets

Cryptocurrency wallets can be either "hot" or "cold." This distinction is meant to highlight fundamental differences in how the private keys are stored, how readily they are capable of moving cryptocurrency in and out of the wallet, and how exposed these wallets are to malicious hackers.

Hot wallets are wallets which are always connected to the Internet. An example of a "hot" wallet is an integrated wallet on Coinbase. The benefit of a "hot" wallet is speed and flexibility; a hot wallet is often updated along with all the other wallets in a given network, and they are easily exchanged from wallet to wallet. Experienced cryptocurrency users recommend that those who frequently make purchases with cryptocurrency should keep an "everyday" amount in a hot wallet, but hold the majority of their total coins in a secure, "cold" wallet. They are especially beneficial to those who regularly engage in a lot of transactions with cryptocurrencies. However, because they are tied to a public network, any security flaw in the network can mean significant vulnerability to the user's wallet.

Cold wallets are not connected to a network, effectively cutting them off from potential hackers. A cold wallet can be stored on a USB flash drive, embedded in a mobile device - even written on a paper ledger (all you really need for a wallet, technically, are the private and public keys of a bitcoin address, so provided one has the correct information, this could be stored on a piece of paper). Of course, when a cryptocurrency is stored on a physical medium, they become vulnerable to physical theft, or getting lost.

Types of Wallets

There are several different types of wallets one can use:

Online Wallets

These are wallets that are stored in the cloud, usually managed by a company that enforces security measures to protect its user's wallets.

Because they are typically hosted by a provider, if the provider goes offline or suffers a security breach, the user's digital assets may be compromised. Besides this, using a wallet that is managed by an online service, such as an integrated wallet managed by a cryptocurrency trading platform or service like Coinbase, means that your private keys may come under the control of companies providing such services. These are examples of "hot" wallets.

Examples of online wallets include the integrated wallet included with Coinbase, as mentioned, and the Blockchain network, as well as Circle and Xapo.

Paper Wallets

Essentially, a document or physical ledger that contains a public address used to receive cryptocurrency, and a private key, which allows the user to spend The simplest, most low-tech solution is to keep pieces of paper on which the private and public keys of a bitcoin address are printed. These are sometimes printed as QR-codes that can be quickly scanned. Obviously, paper wallets are impervious to hacker attacks or malware, but they are still vulnerable to physical theft, being lost, or becoming physically damaged in a way that makes the information contained unreadable.

Services such as BitAddress or BitcoinPaperWallet allow users to create new addresses and print them.

Software, AKA Desktop Wallets

It is possible to install wallet software directly onto a computer via wallet software. Some software-based wallets, such as Electrum, offer a "cold storage" service, which stores bitcoins offline for extra security.

Because software wallets store a user's private keys on their computer's hard drive, they are more secure than online and mobile wallets and do not rely on third parties. They are still connected to the Internet, so they do have some security risk.

Besides Electrum, some noteworthy software wallets include Exodus, Bitcoin Core, and Copay.

Mobile Wallets

Wallets can be downloaded on a smartphone. This can be particularly convenient, especially if you want to pay for something in a shop with cryptocurrency, assuming you find a shop that accepts it. Mobile wallets take advantage of simplified payment verification (SPV) technology, which operate on limited subsets of the blockchain, relying on nodes trusted by the bitcoin network.

Some examples of mobile wallets include Airbitz, Bitcoin Wallet (BTC only), Copay, FreeWallet, and Mycelium.

Hardware Wallets

Hardware wallets are small devices that can be connected to a PC, like a USB flash drive. They connect to the Internet only occasionally and are thus extremely secure. They can, of course, be stolen or lost, as the private keys they contain are confined to the physical devices.

Examples of hardware wallets include Trezor, Keepkey, Ledger and Case.

Physical Cryptocurrency Although it sounds like an oxymoron, some companies have begun creating physical, redeemable tokens loaded with fixed amount of cryptocurrency. Currently, these only exist for bitcoin, or BTC.