Beginner's Guide to Crypto Wallets
Where do you actually have crypto? Where is it held and how does it move? The answer is Wallets! Here we'll explore the different types of wallets and how to make some.
Remember from the cheat sheet I posted that a crypto wallet is similar to a physical wallet in that it holds your currency, but unlike a physical wallet that can hold multiple currencies all at once, Cryptocurrency wallets can only hold the currency they are designed for. If you send coins the wallet can not take, they are gone forever. For example, if you try to send Bitcoin to an Ethereum wallet, the coins will go into the abyss. There are several different styles of wallets with their own individual pros and cons. Also from the cheat sheet, I go over public and private keys and addresses, make sure you understand those (especially private keys) before tackling wallets! It's also a good habit to practice sending small amounts with new wallets until you get the hang of it.
To start, wallets are divided into Hot Storage and Cold Storage. Basically, hot storage is or has been connected to the internet, cold storage has not been connected.
Hot Storage Wallets
Hot storage is (or even was at one point) connected to the internet or is stored online. These are the most simple and fastest to access type of wallets but are also the most vulnerable to attacks. Think of it like a checking account, a place where you have an amount that you are sending or trading but you don't want to risk having large quantities. Do not keep a large value of currency in hot storage!
Note that 'large' is going to be different for everybody. General rules of thumb I've heard are anything above 5% of your annual income, but you must decide this for yourself.
Online Wallet / Cloud Wallet
These are the easiest to use and easiest to compromise. They are quick for transactions and can be accessed wherever you are, but your private keys are being stored on someone else's server. Furthermore, if you are accessing these on public WiFi, an unsecured connection, or anything that can be tapped into, it is possible for someone to grab your private keys. Here's a story about a man in Australia losing about 14 BTC valued around 100,000 Euro at time time... over public WiFi. Again, do not use these to store large value of currency!
Wallet on an Exchange
Do not keep your long-term coins on an exchange either. Exchanges are like cloud wallets and are the most vulnerable to attack. With the current (early 2018) legal status of how crypto is recognized in many countries, many exchanges do not have strict regulations. Of course exchanges want to protect their reputation and they hire advanced security teams, but most do not have insurance policies or refunding of lost coins. If there is crypto you are not trading, get it off the exchange and put it in a wallet! Mt. Gox is the infamous story of an exchange getting hacked.
Furthermore, not all exchanges will reward hard forks. A well-known example, when the 1st Aug 2017 Bcash ('Bitcoin Cash') fork happened from a group of miners trying to solve some Bitcoin problems (while creating some others). The original miners gave an equal amount of Bcash to everyone holding Bitcoin in a wallet. Anyone who had Bitcoin on an exchange was not given this free crypto (which is about $2,600 per coin as of writing this).
Desktop/Mobile Wallet
This is a program you can download to store your coins on your desktop or mobile phone. Many coins have their own programs for just that coin, and some programs can handle several coins. These wallets are more secure than cloud storage but have the obvious troubles of losing your coins if the desktop or mobile device is damaged or from your device getting hacked. If you have the resources and know very well how to, it is recommended that you do a fresh OS install before getting these wallets (installing the latest Linux off a flash drive, etc) to help ensure there is no malware.
Multi-Signature Wallet
These are a type of wallet that try to fix some of the issues with private keys. These styles can vary, but we'll use BitGo as an example. Here, three private keys are made - one is held by the company and two are given to the user. You need at least two of the three keys to make a withdrawal. This allows for a democratic approach where you and a trusted friend or business partner can each guard your keys but you will need both of them to access the crypto. If something were to happen, the account owner can submit a time-delayed request with the company to retrieve it and notify key-holders (in case one key is lost, someone passes away, etc). This makes it much more difficult for hackers since they need to get two separate keys instead of one, and if they get one then the other holders will be notified before the account can be unlocked.
Cold Storage Wallets
If internet is the hot new thing, cold storage has not touched it. It's a little more complicated than the former, but if done correctly then the risks are extremely minimized. These methods include Hardware wallets and Paper wallets and are more like savings accounts, where you put your crypto to stay safely for a longer period of time.
Hardware Wallet
This is a piece of hardware that is designed specifically to hold crypto and they are notoriously secure. The two most common are the Nano Ledger S and the Trezor, their websites have a list of the coins they can store. Always buy these from the manufacturer's website, there are many stories about people who bought second-hand hardware wallets that had secret malware on them and lost all their crypto. Hardware wallets also have special seeds that you can store in a safe place - then if the hardware itself gets damaged, you will still be able to recover your coins with the seed (note: before you have to use them, the seeds have never been on the internet and it is still considered cold storage). A rule of thumb I've heard is when the cost of one of these is about 10% of your long-term crypto holds, it's worth it to buy one!
Paper Wallet
This one has the most info, get ready.
This is a piece of 'paper' (or whatever medium you pick) that creates a public and private key, usually both in alpha-numeric strings and a QR code that you can scan. These can (and should) be made totally disconnected from the internet! So they are the most secure as far as cyber attacks, but the material you put the keys on remains vulnerable. Many people may laminate paper, store in special steel containers, or even stamp the keys into metal to preserve them long term, then also put them locked away in a safe or a trusted bank's safe deposit box. Some people also make a few copies in case something tragic happens to their home, and they store a copy with a trusted family member or store a copy in a bank safe deposit box.
Since the creation process of this is very extensive and beyond the scope of this particular post, I'm going to leave it to Coindesk.com's article to go through every detail of paper wallets.
Thanks for reading! I hope this helps you figure out wallets. If this has saved you some time or crypto or just made you laugh and you're inclined to donate, the addresses are below!
BTC: 16BQtRdNp4fsFViHVQdjHpaBzcgPHpA4xw
ETH: 0xFF3CDF7B7c1dBBE238161Def57AaCD72B1000BB3
LTC: LbtAtRFagVZe2A4ynBpKiTEL4wAToMD9eY
Doge: DUHhAWxpzFQj9mT5TtEETUivQ7Cf5PQpci
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