For people interested in purchasing digital currencies like Bitcoin, one of the first question asked is, “How do you store your coins?”
Virtual coins are typically stored in software programs called cryptocurrency wallets. In extreme cases, the secret keys can even be printed out and stored on paper, called cold storage. If you choose this route, it is advisable to (1) keep more than one copy, and (2) ensure tight control over all copies, because cryptocurrency coins are just as fungible as all legal tender.
How Many Types of Cryptocurrency Wallets Exist?
Cryptocurrency wallets can be grouped into “Hot” and “Cold” storage, referring to whether the coin is stored online or offline. From there, we have four basic options – one hot and three cold:
- Client wallets, aka software wallets
- Online wallets
- Hardware wallets
- Paper wallets
Software cryptocurrency wallets
A software wallet consists of a client that is downloaded and installed on the user’s own computer. The public and private keys for the user’s digital currencies are then stored inside of this software client.
When the owner of the wallet wants to make a transaction, they must have access to the computer where the wallet is stored in order to complete a transaction.
Many software wallets require significant computer storage space. Some wallets contain the entire blockchain history for the digital currency. These wallets can require in the realm of 100 gigabytes, which can make both initial setup and backups problematic.
Online cryptocurrency wallets
An Online Wallet is the easiest to use, most convenient, and least secure of all the ways to store your digital currency.
If you have access to a web portal, you have access to your digital currency… And so does anyone else if managed to compromise your account.
Acquiring an online wallet is simple. It’s just as simple as signing up for an account directly through the website. Because they are not very secure, it is not considered “best practice” to store a large volume currency in an online wallet.
Hardware cryptocurrency wallets
A hardware wallet is the most secure of the commonly-used wallets. Most hardware wallets consist of a USB device. Because the hardware is separate from your computer, a hardware wallet is considered to be safe from many types of malware and hacking.
Robust backup options and additional encryption make hardware wallets the most secure electronic wallet for digital currency. The small size and portability makes it extremely convenient and safe. In the event that you lose your USB device, you simply access your backups and transfer your currency into a new wallet as soon as you discover the loss.
Paper cryptocurrency wallets
The last and least of the digital currency wallets is the paper wallet. A paper wallet is exactly what it says: just paper. You print out your public and private keys and secure them in any way you see fit. If you hold large amounts of digital currency, it is advisable to store your paper wallet in a bank, safe, or other secure location.
It is advisable that the owner print out more than one copy of their paper wallet. Just like traditional bank notes, if a paper wallet is destroyed, then the currency is gone. Unlike traditional bank notes, you can back up your paper wallet by printing out more than one copy. The same blockchain technology that ensures digital currency cannot be spent twice also ensures that coins stored in a paper wallet cannot be spent twice, even if it’s stored offline.
A downside of paper wallets? If someone steals a copy of your paper wallet, they can spend every single coin that’s printed on the paper, making all of your other copies worthless. So while it is vital that print out more than one copy of a paper wallet, you must keep every single one of them entirely secure.
What is the Best Cryptocurrency Wallet?
The best wallet depends on the needs of the consumer. Many consumers use online wallets because of the ease and convenience. If you don’t have a significant amount of money in cryptocurrency, an online wallet might be the best for you.
Many online wallets have been compromised by hackers, costing unsuspecting victims hundreds of millions of dollars. If this is a concern for you, a software wallet may be your best choice.
A software wallet can be stored offline on a desktop or laptop computer. This makes them more secure than an online wallet, but malware and hacking can still be a problem. Backups are still advisable to protect against hardware failures or the physical loss of the device.
Hardware wallets are extremely secure, portable, and convenient. The downside? They cost between $50 and $200. If you (1) have more than a few hundred dollars worth of currency, (2) you are an active trader (or digital currency-based consumer), (3) and are often on the go, then a hardware Wallet is probably the best choice for you. The additional layers of security makes it several times more secure than the other electronic storage choices, and the added inconvenience is minor.
A paper wallet is not a realistic choice for most users. In order to use a paper wallet, the owner has to physically enter the Public and Private keys for every transaction (or print them out as QR codes and use a scanner), and then print out new copies of the wallet at the end of each transaction. As such, it is primarily useful for people who do not trust technology, don’t plan on conducting many transactions, or expect to have their devices exposed to an EMP or other large electromagnetic field.
In almost all cases where a paper wallet is useful, a hardware wallet would be better. The primary advantage that a paper wallet has is that it costs less. As a result, paper wallets have virtually no market penetration and exist mostly as a curiosity.
How Do I Get a Cryptocurrency Wallet?
Most wallets are easy to come by. The online wallet is as simple to obtain as signing up for an online account. The Software Wallet is a little more involved, requiring the download and installation of a software client, sometimes including a large and cumbersome Blockchain.
A hardware wallet can be purchased online through Amazon or directly through the manufacturer. The most popular hardware wallets are:
While these devices can be purchased at general online retailers, buying directly from the manufacturer is usually cheaper, as the price markup is generally substantial.
The paper wallet is easier and cheaper to obtain than a hardware wallet, as you simply need access to a printer, paper, and ink.
Regardless of which option you choose, a little research and planning can ensure that your digital currencies all remain safe, secure, and accessible. There are many options available, and as long as sensible precautions are followed they are generally safer than physical cash, and in some cases, they are even safer than banks.
Being educated and informed is the best way to ensure that you have a bright, safe, and happy future with the digital currencies of your choice.