Wallets

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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.[1]

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 holds a user's private keys that allows the user to access their bitcoin's address - also known as their public address.[2]

According to the Federal Trade Commission's website, it is imperative to keep the majority of one's cryptocurrency in a secure place, but it is especially important to keep the majority of one's cryptocurrency backed up somewhere that it won't be lost or stolen, or made vulnerable to hackers.[3] Experienced cryptocurrency users agree; suggested practices include backing up one's entire wallet offline, encrypting online backups, using multiple locations to store your coins, and to regularly backup your secure wallet to make sure all recent address changes and transactions are included.[4][5]

It is also important when using wallets accessed through an Internet browser, for users to make sure they type the correct URL; there have been instances where 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, with the URL WalletGenerator.org.[6][7]

"Hot" vs. "Warm" vs. "Cold" Wallets

Cryptocurrency wallets are sometimes referred to as either "hot" or "cold" wallets.[8][9] 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 outside users, such as malicious hackers.[10]

Hot wallets are wallets which are always connected to the Internet.[11] 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.[12] 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.[13] 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.[14][15] Hot wallets also use two-factor identification for security (the website they're held on asks the user to verify their identity using personal information).[16]

Warm wallets are very similar to hot wallets. They differ in two major ways: one, they tend to be based on downloadable software or apps instead of a web-based service like an exchange. Two, they rely on 12-digit passcodes or PIN numbers for security and identity verification, where hot wallets rely on user-created passwords and asking the user to verify personal information.[17]

Cold wallets are not connected to a network, effectively cutting them off from potential hackers.[18] 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 can technically be stored on a piece of paper).[19] Of course, when a cryptocurrency is stored on a physical medium, they become vulnerable to physical theft, or getting lost.[20]

Types of Wallets

There are several different types of wallets one can use:

Online Wallets

These are wallets that are stored in the cloud, which is usually managed by a company that enforces security measures to protect its user's wallets.[21]

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.[22] Besides this, using a wallet that is managed by an online service, such as an integrated wallet (one that is managed by a cryptocurrency exchange service, such as Coinbase/GDAX) means that your private keys may come under the control of companies providing such services. These are excellent examples of "hot" wallets.[23]

Popular examples of online wallets include the integrated wallet included with Coinbase and the Blockchain network, as well as Circle and Xapo. [24]

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, getting lost, or becoming physically damaged in a way that makes the information contained unreadable.[25]

Services such as BitAddress or BitcoinPaperWallet allow users to create new addresses and print them.[26][27]

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. [28]

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. [29]

Besides Electrum, some noteworthy software wallets include Exodus, Bitcoin Core, and Copay. [30][31]

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.[32]

Some popular examples of mobile wallets include Airbitz, Bitcoin Wallet (BTC only), Copay (mobile version), FreeWallet, and Mycelium. [33][34]

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.[35]

Popular examples of hardware wallets include Trezor, Keepkey, Ledger and Case.[36]

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.[37]

Custodial Wallets

Custodial wallets store private keys through third parties. Coinbase and Bitfinex both offer custodial wallets. These wallets are used for their convenience, as users of custodial wallets do not have to remember their private keys - the third-party does that for them. All the user has to remember is their login information. Third-parties also offer greater cybersecurity measures than a typical user might have access to, as well. Custodial wallets are also convenient for trading, as they are considered "hot" wallets. The downside to this is that, in addition to the typical security shortcomings of hot wallets, users of custodial wallets do not have control over their private keys, and thus, their digital assets. The greatest downside of custodial wallets is that, if the third-party is successfully hacked (as has happened many times before, to exchanges all over the world), the user's digital assets may be lost with no way to recover them.[38]

References

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  2. How to store your bitcoins. Coindesk.
  3. Staying current: Bitcoin and other cryptocurrencies. Federal Trade Commission.
  4. Secure your wallet. Bitcoin.org.
  5. How to store your bitcoins. Coindesk.
  6. Watch Out - Fake Wallet Generator Website is Out to Steal Your Coins. Steemit.
  7. Name squatting with phishing at walletgenerator.org. github.
  8. What is a Cryptocurrency Wallet?. Block Geeks.
  9. Bitcoin Hot Wallet vs Cold Wallet. The Merkle.
  10. Bitcoin for beginners. Cointelegraph.com.
  11. What is a Cryptocurrency Wallet?. Block Geeks.
  12. Bitcoin Hot Wallet vs Cold Wallet. The Merkle.
  13. What is a Cryptocurrency Wallet?. Block Geeks.
  14. Bitcoin for beginners. Cointelegraph.com.
  15. How to Store Your Bitcoin. Coindesk.
  16. Crypto Wallets Security: Explained. Cointelegraph.
  17. Crypto Wallets Security: Explained. Cointelegraph.
  18. Bitcoin Hot Wallet vs Cold Wallet. The Merkle.
  19. Bitcoin for beginners. Cointelegraph.com.
  20. How to Store Your Bitcoin. Coindesk.
  21. How to store your bitcoins. Coindesk.
  22. Securing your wallet. Coinbase.
  23. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  24. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  25. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  26. How to store your bitcoins. Coindesk.
  27. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  28. How to store your bitcoins. Coindesk.
  29. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  30. How to store your bitcoins. Coindesk.
  31. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  32. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  33. How to store your bitcoins. Coindesk.
  34. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  35. How to store your bitcoins. Coindesk.
  36. How to store your bitcoins. Coindesk.
  37. Bitcoin wallets for beginners: everything you need to know. Cointelegraph.
  38. Just got some Bitcoin: how to choose your first cryptocurrency wallet. TNW.