Why Do You Need Wallets?

When wondering why you really need a crypto wallet, you should first consider what cryptocurrency is really for. The Bitcoin whitepaper published by Satoshi Nakamoto on the 31st October 2008 proposed a peer-to-peer cash system that removed the need for intermediaries and middlemen. The system used a decentralized network of computers expending power to build the trust that the intermediaries and middlemen have always provided.

If you buy cryptocurrencies and you leave the funds on the wallet provided by the exchange, you are returning the trust back to an intermediary, which in this case is the exchange. The only way you can be in complete control of your cryptocurrencies is to own your own wallet and control the private keys.

While some users of cryptocurrency are only interested in speculation and do not worry too much about not being in complete control of their funds, there are also other factors to consider. Cryptocurrencies are an emerging field and have only been developing for around ten years. This means that many of the businesses being set up now are destined to fail in the years and decades ahead. This includes exchanges. By leaving funds on an exchange, users take extra exposure to the risk of losing their funds as the exchange might file for bankruptcy. Back in January 2019, the well known Cryptopia exchange filed for bankruptcy after it has been the victim of a hack worth $16 million to the company and its users.

Cryptocurrency Wallet Types

We have already covered hardware wallets, desktop wallets, and mobile wallets. There are other forms of wallets also including paper wallets, web-based wallets, and exchange wallets. Each type of wallet has its benefits and drawbacks. Security is typically the most important factor to account for and the following are presented in order of best security.

1. Hardware Wallets

Hardware wallets use a high level of encryption to provide the best possible security to the funds stored. They come in different shapes and forms, some look like a pen drive, others like a credit card and others like a tiny calculator. These devices leverage the best benefits of both cold storage and hot storage solutions to provide its holder maximum security at all times. Overall, they all use the same concept, that is, keeping your funds off the internet and away from hackers as much as possible, yet do it in a way where you can then efficiently transfer the funds to another wallet or to an exchange.

The private key is stored on the device itself and even if a user accesses the wallet on a compromised device, the funds will still be secure due to the high level of encryption applied. Apart from the price, hardware wallets tick all the boxes when it comes to security and features.

When purchasing a hardware wallet, it is important to purchase the device from the official retailer’s website. There are numerous fake versions online so don’t bother buying it second hand or from any other site, including Amazon and eBay. You can use the links found on this site to take you directly to the official retailer’s websites.

2. Paper Wallets

This type of wallet should only be used if the user is comfortable knowing how it works. Paper wallets are exactly what they say they are, they provide both a public and a private key printed on paper. Paper wallets can be generated from online services such as walletgenerator.net.

Users can use the public key to receive cryptocurrency transactions. It is important that the paper wallet is generated for the particular cryptocurrency the user wishes to store. Different cryptocurrencies will have different public and private key formats. One of the key benefits of paper wallets is that funds are stored completely in cold storage. When the funds need to be accessed, there are services online that enable users to import their paper wallet such as blockchain.com.

The key drawback with paper wallets is that if anybody gets access to the paper, they will know the private key. For this reason, extra measures are typically taken to store the paper securely or to store halves of the private key in two separate locations. Another drawback is efficiency to access your funds. There can be difficulties when it comes to retrieving your funds from the paper wallet if the user is not comfortable with how wallets work.

3. Desktop Wallets

Desktop wallets come in a wide variety. Desktop wallets will typically store the private key of the wallet on the users hard drive. This is a secure way of holding private keys as it mostly keeps the private keys offline.

The main risk with this type of wallet is if the device gets compromised. Devices which are hacked will have a serious risk of losing their funds. Where the private keys are stored on the device is another key point to note. If the private keys are stored in a cloud-based storage system, this also runs the risk of the private keys being accessible to third parties. It is also important for users of these wallets to carefully record the recovery procedure.

In the case that the device gets lost or stolen, users will be able to recover the wallet and funds from another device via the recovery phrase. While the private keys are secured offline, users can still benefit from the features of being connected to the internet via the wallet interface. Desktop wallets make it quick and easy to move cryptos from one place to another but come with higher risks than their hardware wallet competitors.

4. Mobile Wallets

Mobile wallets are similar to desktop wallets in the manner that they come in a wide variety and mostly store the private key on the device itself. While mobile wallets are typically not as secure as desktop wallets, as most mobile devices are constantly connected to the internet, they have a number of benefits in terms of convenience and functionality.

Wallets such as Coinbase Wallet enable users to interact with DApps. It is also easy for users to make and receive payments as they conduct their daily activities. Additionally, users can easily use mobile wallets to make payments to merchants who accept cryptocurrencies.

A QR code can be easily loaded from the wallet to accept payments. Some mobile wallets will be far less secure. It is important to research how each mobile wallet secures the private key before trusting funds within these wallets.

Another great solution to send, store and manage your cryptocurrency is offered by Freewallet.org. As the name suggests the service is completely free of charge to download. They only charge a small transfer fee when sending your funds to other wallets. The fee solely depends on the network load and on the level of difficulty to perform that transaction. The beauty is that off-chain transaction between Freewallet customers is free of charge. Available on both mobile and desktop, on Freewallet you are able to store 127 different coins and tokens, including the most popular ones such as Bitcoin, Ethereum, Stellar, Monero and Ripple, with new ones added frequently. A couple of unique features offered by this wallet service is the possibility to choose between 4 different transaction fees (the higher the chosen fee the faster the transaction will be executed) and the ability to top up your mobile directly from the wallet.

5. Web Wallets

Web-based wallets are a poor form of security for funds compared to the already mentioned cryptocurrency wallets. They typically store the private key with the third party that is providing the wallet. Sometimes, the private key is encrypted so that access to it is limited. This is better than a web-based wallet without encryption but it is still a poor level of security compared to the higher tiers of wallets as encryption can be decrypted.

Other web-based wallets also enable the users to add a further layer of security to the wallet by adding their own password or 2FA. This is better but web-based wallets still remain one of the lowest quality of wallets in terms of security. Yet, their convenience is not to be disregarded. They come in very handy for trading and safekeeping small amounts of money.

6. Exchange Platform Built-in Wallets

Exchange wallets vary widely based on the exchange operating the wallet. These are the lowest tiers of wallets in terms of security as in most cases, users have no idea whether the funds are even there. Exchanges may only reserve a fraction of the funds and use the rest to make risky investments. Some exchanges such as Kraken have applied methods where users can verify that the exchange holds the funds for their account but in most cases, there is no way to verify this. Many exchanges also pool all of the user’s funds together as opposed to providing a secure account for each. This represents an even further risk if the main account is hacked, all of the user’s funds are at risk. Exchange hacks such as the 740,000 Bitcoin stolen from Mt.Gox are clear examples of this.

However, even though exchange based wallets are the least secure form of storing your cryptos, it is inevitable you’ll be making use of one. These wallets are an extra service offered by the exchange platform that allows crypto traders to store a small percentage of their portfolio on the platform. The benefit is that traders have quick access to their funds directly from the exchange. In a world of high price volatility, quick access to funds is crucial as it allows traders to instantly trade cryptocurrency to make a profit out of price drops and bull-runs.