Once you acquire cryptocurrency of your choice, you should find a cryptocurrency wallet to secure your funds according to your needs.
Cryptocurrency wallets do not contain your coins!
Your coins are a part of the blockchain network, and, through private keys, you have the exclusive control over them.
Cryptocurrency wallets keep your keys which enable you to access the blockchain and your funds stored on it.
According to the system integrated, level of security, and what it can provide, we can differentiate five kinds of cryptocurrency wallets:
- Hardware
- Desktop
- Online
- Mobile
- Paper
Hardware Wallet
The most secure place for keeping your cryptocurrency is a hardware wallet.
Hardware wallet holds your private keys offline, making them unhackable. They can be connected to your computer via USB, and then you can transfer your funds.
Say Liz decided to buy Bitcoin (BTC) as a long-term investment. Since she doesn’t need to transfer her coins frequently, she acquires a hardware wallet to keep her BTC as safe as possible.
She stores her private and public keys inside when she transfers her funds, and until she decides to sell or trade her Bitcoin for some other cryptocurrency, her BTC is 100% secure.
When a year has passed, Liz is satisfied as her investment grew by 110%, and she decides to sell her Bitcoin.
She connects her hardware wallet to her laptop, transfers her funds to a cryptocurrency exchange, and sells her BTC for EURO.
Desktop Wallet
Desktop wallets are, basically, applications that are installed on your computer.
Desktop wallets have to synchronize with the blockchain network, and then funds can be deposited or withdrawn at any time.
Almost every cryptocurrency has a desktop wallet developed, and it can be used for various purposes.
E.g., Leon is mining Ravencoin (RVN) cryptocurrency, and his miners have to have a place to send mined coins.
Leon installs Ravencoin desktop wallet on his laptop, backs it up, and directs his miners to automatically sent coins to the wallet.
As it is continuously synchronized with the network, coins arrive in real time, and Leon can transfer them where he needs to.
Remember, ALWAYS backup your desktop wallet, because if you don’t, and your HDD breaks down, you will lose your keys needed to access your funds.
Online Wallet
Online wallets are those which are controlled by the third party, which is keeping your private keys safe on your behalf (e.g., cryptocurrency exchanges).
For example, James is a cryptocurrency day trader, and he needs to be able to quickly buy and sell cryptocurrencies when he is satisfied with gains.
By entrusting his coins with the exchange, James can instantly make trades when he recognizes the opportunity, rather than having to wait for the funds to transfer from other kinds of wallets to a trading platform.
The problem with online wallets is that you are not in control of your private keys, which has more cons than pros.
By not controlling your private keys, you are not able to vote for the changes on platforms which allow that kind of user control.
Furthermore, online wallets are the easiest to hack, which was proven many times when cryptocurrency exchanges lost their clients’ funds to hacker attacks.
Mobile Wallet
Mobile wallets are, in fact, Apps for your smartphone, which store your private and public keys in your mobile devices.
User downloads the App from the App store, install it, make an account, and immediately he can deposit funds into his mobile wallet.
When we look at the benefits of mobile wallets, we can take an example of an energetic young businesswoman, Olivia, who travels much.
Because all that time she has to spend on the road, Olivia needs a tool which will enable her to make cryptocurrency transfers on the go. Therefore, she installed the Coinomi multi-currency wallet App on her Huawei P9 Lite, and now she can do everything on her business trip from Paris to London, provided that she has the internet connection.
Just as you need to do with your desktop wallet, you should ALWAYS backup your mobile wallet, as some malfunction of your mobile device may render your mobile wallet useless, and prevent you from accessing your funds.
Paper Wallet
Simply put, paper wallets are private and public keys written on the piece of paper.
There is no digital version of the wallet involved, but rather a “portal” that opened up for you to be able to enter those keys and get access to your funds.
Just the same as hardware wallets, paper wallets are considered unhackable, unless you reveal your keys to somebody.
Let’s say that Mark, just the same as Liz, realized that Bitcoin could be a lucrative long-term investment. But, unlike Liz, he spent all his money to buy as much Bitcoin as he could, so he doesn’t have any more funds to acquire the expensive hardware wallet.
Nevertheless, Mark realizes the importance of security, so he wants to secure his BTC using a paper wallet.
He visits the website which will walk him through the process step-by-step, and enable him to print his first paper wallet.
Mark takes his paper wallet and puts it into his home safe behind the painting, and his funds are considered to be safe as safe they can be.
Pros and Cons
Every described sort of the cryptocurrency wallet has its upsides and downsides.
The only thing you have to consider when deciding is what you want it to provide.
The most secure hardware wallet can prove to be awkward for a day-trader to use, as a more extended waiting period needed for funds to get transferred from the wallet to the exchange can make him lose a percentage of his daily gains due to the high volatility of the cryptocurrency market.
If you want to keep a share of your coins for the longer period and day-trade with the other share, divide your funds and store the first share into a more secure storage, while you keep your day-trading share on the exchange’s online wallet.
There is no perfect wallet, just the one best suited for your needs.
Related post:
Bank of America Wants to Develop a Secure Crypto Storage System
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