Crypto Wallets: Everything You Need to Know
Dear Rich Lifer,
Imagine having over $300 million worth of Bitcoin saved on a small password-protected hard drive.
The only thing standing between you and this life-changing money is the password you wrote down on a piece of paper.
As luck would have it, you seem to have misplaced the paper and for the life of you can’t remember the password.
If you thought things couldn’t get any worse, the hard drive you chose to save your Bitcoin on only allows for 10 guesses before it seizes up and encrypts your data forever.
You’re down to your last two guesses…
You Are Your Own Bank
This might sound far-fetched but it’s the exact situation Stefan Thomas, a German-born programmer living in San Francisco, found himself in this past January.
The New York Times covered Thomas’s story and a few other crypto millionaires who have locked themselves out of their fortunes.
According to the Times, “Of the existing 18.5 million Bitcoin, around 20% — currently worth around $140 billion — appear to be in lost or otherwise stranded wallets.”
For anyone reading this wondering how it is possible to be locked out of your crypto wallet… or what a crypto wallet even is…
Today we explain everything you need to know about safely storing cryptocurrency.
You can think of a cryptocurrency wallet as a bank account for your digital money.
Except instead of having to rely solely on a third-party institution to guard and access your funds, the power and control are in your hands.
Crypto wallets let you monitor your balance, receive and make payments, and are a central location where you can view all your digital currency transactions to date.
Essentially, you are the bank now.
How Do Crypto Wallets Work?
Crypto wallets store your private and public keys and are able to interface with a blockchain.
Before your head starts spinning, let’s define a few of these terms. First, what are private and public keys?
A private key is a randomly generated string (numbers and letters) that allows you to send cryptocurrency to someone else. It’s sort of like a password or signature you need to approve a transaction.
Your private key should be guarded at all times, since losing it means you’ve essentially lost all your coins. And, if someone gets ahold of your private key, they can use it to send all your coins to their wallet — and you can’t do anything about it.
On the other hand, a public key can be viewed by everyone. It’s derived from the private key and hashed to create an address for your wallet. This address is then used by others to send you cryptocurrency.
The Mailbox Analogy
An easy way to think of public and private keys is like a mailbox. Your public key is your mailbox address. If a friend wants to send you money, they would mail you an envelope with cash in it to your mailbox address (public key).
To open your mailbox, you need a key (private key). Your private key is used to open the mailbox and access the envelope with cash. So, if anyone else finds your private key, they now have access to your mailbox and can steal all your mail.
Crypto wallets store both your private and public keys. Without a crypto wallet, you can’t store Bitcoin, Ethereum, Dash, or any coin for that matter.
If you’re new to crypto investing and crypto wallets, you might already have a crypto wallet and not even realize it.
Whatever exchange you’re buying and selling coins through will have a wallet to store your coins in. We’ll talk more about the pros and cons of this in a second but first, let’s go over some of the types of crypto wallets that exist.
Different Types of Crypto Wallets
There are three main categories of crypto wallets: software, hardware, and paper.
According to Android Authority, each crypto wallet category can be further broken down into five different wallet types. Here’s Android Authority’s explanation for each wallet type:
Desktop wallet (software): This is a wallet you download and install on your computer. It’s stored on a hard drive, so you can only access it from a computer. It’s a relatively safe method of storage but far from bulletproof. If your hard drive gets hacked or damaged, you could lose all your funds.
Mobile wallet (software): This wallet runs locally on your smartphone. It’s more convenient than a desktop wallet, as it allows you to quickly make transactions on the go. However, it suffers from the same security issues — getting hacked or damaging your phone could lead to losing your funds. Not all mobile wallets store info locally on your smartphone. Some let you access online storage servers, same as online wallets described below.
Online wallet (software): An online wallet lives in the cloud, which means you can access it from any computer with an internet connection. You also save yourself the hassle when switching to a new PC or phone, and don’t have to worry about your device getting damaged. It’s not as safe as a desktop or mobile wallet. Your online wallet is controlled by a third party and is constantly online, making it more vulnerable to hacking attacks and theft. They are mainly offered by online exchanges, which let you buy and sell cryptocurrencies.
Hardware wallet (hardware): This is one of the safest options available. A hardware wallet looks like a USB flash drive and stores your private and public keys offline, making it impossible for someone to hack. However, losing or damaging the device could lead to a loss of the cryptocurrencies you own. Also, these can be expensive.
Paper wallet (paper): A paper wallet is a form of offline storage. It’s basically your private and public keys printed on a piece of paper, usually as QR codes. It’s a safe way to store your info, although you could still get yourself in trouble by losing your paper wallet or if it gets damaged. But keep in mind that you can’t send someone cryptocurrency from your paper wallet — you must first sweep or import the funds into a software wallet.
What are the Best Wallets?
Here are some of the best-ranked wallets on the market today for each category:
Best Desktop Wallet: Exodus
Best Mobile Wallet: Coinomi
Best Online Wallet: Blockchain
Best Hardware Wallet: Ledger
Best Paper Wallet: Bitcoin Paper Wallet
Anyone serious about investing in cryptocurrencies should own a crypto wallet outside their online exchange. If you can, avoid wallets that require an internet connection.
And if you go the paper route, consider laminating your paper wallet and storing it in a safety deposit box or vault hidden inside your home. The world of digital currencies is new and exciting. Even though it may seem safer than traditional money transfers, you still need to follow some basic security steps to safeguard your wealth.
To a Richer Life,
The Rich Life Roadmap Team