Cryptocurrency wallets

Cryptocurrency wallets do not resemble traditional ones, as digital currency does not have a physical form. Bitcoin wallets are used to store private keys, which are passwords that allow users to sign value transfer transactions using cryptocurrency. All transactions are recorded in a decentralized database, the blockchain, which shows the holdings of each cryptocurrency address. The basic principle of using wallets is to protect access to private keys, i.e., not sharing them with anyone. The second element of protection is the security of the device (viruses, hacks).

There are 4 main types of wallets to choose from:

  • paper
  • hardware
  • software
  • online (website)

They are listed in order of their security, which also means the reverse order of convenience in their use. A paper wallet has the highest level of security, but its convenience is practically none. On the other hand, an online wallet is very convenient to use but unacceptably risky.

  1. The easiest way is to write down the private and public key (i.e., the address) on a piece of paper. It is best to make a printout of the keys, remembering to use a computer without internet access and protected by a good antivirus program. The printout should be stored in a safe and known only to us place, preferably in several copies. This is the cheapest and safest currency wallet – provided it is not damaged.
  2. The second safest, but at the same time the most expensive type of wallet is a hardware wallet. It usually looks like a flash drive and connects to the computer via USB (optionally BT, NFC, or QR codes). In this group, we have a wide selection of devices from many manufacturers, which mainly differ in the cryptocurrencies they support. The most well-known hardware wallet brands are Ledger and Trezor. Their devices are equipped with special chips, which allow transaction authorization without the need to transfer our private key even to our own computer – just enter the PIN for the wallet itself. In case of device loss, it is possible to recover the stored data using a special sequence of words that appears during the first use of the device (seed). It should be recorded in case there is a need to restore the data stored in the lost wallet in the future.
    Hardware wallets, depending on the manufacturer and model, also offer other features, e.g., some are based on open-source code, which is commonly considered an optimal solution. There are devices that also serve as universal password managers or those that, thanks to the U2F authentication token function, allow for the management of funds transfers and monitoring of bank transactions.
  3. The next, less secure type of wallet are special computer or smartphone applications. We gain access to them wherever we have the device on which we installed the application. It is possible to create a backup and recover data in case of device failure or loss. When choosing among software wallets, it is worth opting for those that do not store keys and passwords in the manufacturer’s databases.
  4. The last option is online services, e.g., offered by cryptocurrency exchanges. They provide access to our keys from any device with internet access, but concerns arise from the fact that by using this type of wallet, we are effectively sharing our private key with third parties. In practice, this means that the service owner can intentionally or unintentionally (hacker attack) take control of our funds. Unfortunately, such cases have happened in the past.

When choosing a wallet, it is also worth considering other aspects besides security. One of them is which cryptocurrencies and tokens are supported by a particular wallet. Paper and hardware wallets are not very suitable for everyday use, e.g., for payments, and are rather for storing cryptocurrencies. In contrast, software and online wallets are not a secure way to store large amounts of cryptocurrencies, especially.

Basic security rules:

  • do not share your private key with outsiders;
  • protect your smartphone and computer with good antivirus and anti-malware programs;
  • do not forget to backup your software wallet;
  • do not permanently store your keys in online wallets;
  • protect your devices from damage and theft;
  • always carefully check the wallet address during transaction finalization.
1 January 2020