What are cryptocurrency wallets, and why do you need one? Actually, some crypto enthusiasts have more than one wallet for maximum protection against losing private keys that identify the holder as being the owner of the crypto represented by those keys. But why?
Why You Need A Crypto Wallet
If you’re reading this and you are brand new to Ethereum, Bitcoin, Dogecoin, and platforms like Coinbase, you might or might not fully understand that the key to ownership of cryptocurrency is the private keys you are given when you buy or trade for crypto. The keys are a unique string of data that identifies each coin individually.
These keys are given to you once, and there is no backup. It is the owner’s sole responsibility to safeguard these keys. That’s where a crypto wallet comes in–it’s essentially a means of storing your keys in a centralized way.
The dangers of using a crypto wallet include losing the wallet itself in the case of paper wallets or hardware-based types, losing your keys due to hacking or social engineering when it comes to software wallets, etc.
The dangers of NOT using a crypto wallet? All forms of loss, including loss of any paper or electronic record of the keys, forgetting the location of your crypto keys, etc.
When you provide the keys for purchase or trade you are giving those keys away to someone else. Then they own that individual coin or coins and must take steps to secure the keys themselves.
If you lose your private keys you no longer have access to the funds. It is a bit like losing your bank account number except in this case there is no one to help you in a customer service capacity to get those keys back. For everyday “I lost my keys” issues, nobody can type in a code, hack the system, or send you a recovery code to get that data.
In general, you should assume that if you lose the private keys to any cryptocurrency asset, you have lost access to it until you find the keys again.
If you read that and infer that no third party has access to your private keys and therefore cannot restore your access to them, you are CORRECT. That is the nature of cryptocurrency and you can Google plenty of horror stories about people who lost their private keys and could not access their Bitcoin or other currency.
What Is A Cryptocurrency Wallet?
Depending on the configuration, a cryptocurrency wallet may be a simple list of your private crypto keys printed and stored in a safe place. The secured storage is the “wallet” in this case. You can keep the keys in a safe, a safe deposit box, in the attic, etc. What really matters is that the keys are safe from theft, destruction, etc.
Why doesn’t everyone print out their private keys and keep them in a safe just in case? Why use a hardware or software wallet? Printed keys are likely the most secure way to store this information (assuming your storage solution is as secure as it should be).
But if you store these keys exclusively offline, you must retrieve the physical printout every time you want to spend crypto.
What Is A Cold Wallet?
The paper wallet described above is a form of “cold wallet”, or a method of storing your crypto keeps 100% offline. Cold wallets are physical and when you read reports such as the one on Time.com discussing these issues, you’ll be told, “There is no back up to this form of storage; if you misplace your wallet, you lose access to your investments.”
That is true if you only use one type of cold storage. But where crypto keys are concerned, redundancy is never a bad thing. It pays to use both hot and cold storage methods, with “hot” storage referring to wallets that are accessible online.
Hardware Crypto Wallets
As the name implies, your crypto keys are stored in a piece of hardware like a USB drive, and kept offline. This is a step above the paper printout but it is similar in that you are storing these keys offline and must take an extra step or more when trying to use your currency.
A hardware wallet that you purchase online such as the Ledger hardware wallet may or may not be compatible with the type of currency you want to use–you will need to make sure the wallet you purchase can work with the currencies and platforms you’re familiar with.
Software Crypto Wallets
Software wallets are likely the easiest to use as they let you pursue crypto transactions online more directly. There are web-based wallets, some of which may help you make certain crypto transactions, DeFi arrangements, and more.
There are also desktop wallets and mobile wallets including one courtesy of Blockchain.com and have features that let you send and receive crypto transactions and transfer crypto keys from another wallet into your new one.
Crypto Trading Apps Versus Crypto Wallets
If you are new to crypto, it’s likely that you might experience some confusion about crypto apps versus wallets–especially on platforms like Coinbase that offer both. In typical cases, it’s good to keep in mind that the app is used for the transactions.
The wallet is used to pay for those transactions. Confusing the app and the wallet is likely a mistake few will make, but it pays to anticipate such issues in the early stages of your experience.
What are some recommended crypto wallets? Your experience will vary depending on your needs, financial goals, and the volume of crypto buying and selling you plan to do.
In general, the Ledger Nano X wallet gets high marks for being a safe bet for newcomers, while Exodus gets a nod for being the easiest to use for trading crypto. Bitcoin maximalists may love Electrum–one of the stalwarts in the crypto field. It’s Bitcoin only but features a higher level of security and the ability to use “customized” transaction fees.
Some like the Mycelium wallet for its ability to take more control over fees and it has the ability to work with a hardware crypto wallet, too.
It pays to shop around for any type of purchase, but when looking for wallets you should take the time not only to review the site or the vendor, but also to explore the reputation that wallet has in the crypto community. Word of mouth travels fast about good and not-so-good options for trading, storing, and using your crypto. It’s smart to take advantage of the good and bad experiences others have had with the hardware, software, or platform you wish to use.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.