What you need to know before choosing your first cryptocurrency wallet

Welcome to Hard Fork Basics, a collection of tips, tricks, guides, and advice to keep you up to date in the cryptocurrency and blockchain world.

This might seem like an obvious one to a seasoned cryptocurrencyhodler, but if you’re new to the game there are a few basic things you should know when it comes to storing your cryptocurrency.

Technically, you don’t actually store your cryptocurrency, but rather the private key that allows you to access, send, and spend your cryptocurrency. But without that private key, you can’t access your coins, so for the most part storing your private key is effectively storing your coins.

There are three main ways of storing your cryptocurrency: custodial wallets, software wallets, and hardware wallets. Cryptocurrency storage can be either hot or cold. Hot storage is when your coins are stored online, and yep, you guessed it cold storage is when your coins are kept offline.

This article will take you through what each of these is and why you might or might not want to use them to store your cryptocurrency.

Custodial wallets

This might actually sound like the most complicated of the bunch, but it’s probably one of the first cryptocurrency wallets most people actually use. If you buy your cryptocurrency through exchanges like Coinbase or Abra, you might say you store your cryptocurrency on your Coinbase account. What you’re actually doing is storing it in a custodial wallet.

A custodial wallet is just a fancy way of saying that your private keys are being stored, and looked after for you by a third-party custodian. Custodial wallets are usually hot wallets.

In some cases this is good because all you have to remember is your login details to the platform, the custodian takes care of ensuring your coins are safe. Good custodians are often more diligent with security than careless individuals. That said, storing your coins in a custodial wallet doesn’t give you complete control over them. If you want to move them, you have to ask the custodian and hope that they comply with your request.

If a custodian controls a large number of wallets on behalf of its clients, it may also be abig target forattackers. It might be a quick and easy way to store your coins, but it might not be the safest.

Software wallets

Software wallets are one the most accessible forms of cryptocurrency storage available. As the name suggests, it’s simply a piece of software that runs on hardware you already own, like your laptop or smartphone. The software encrypts and protects your private keys. Like custodial wallets, software wallets are usually hot too.

Software wallets have few barriers to entry as they don’t cost anything to download, and all you have to do is set them up, generate an address, and start sending or receiving cryptocurrency. Most smartphone wallet apps have on screen guides that take you through the initial set up too, which can be very useful.

However, software wallets, particularly those on smartphones, aren’t always secure. The level of security in a smartphone-based software wallet varies depending on how the app makes use of the phone’s hardware to secure coins . You should also be aware that there are a lot of fake wallet apps that make off with your coins as soon as you put them into the app.

What’s more, as smartphones are usually always online, they are vulnerable to many more attack vectors,like phishing, than offline hardware-based storage.

Hardware wallets

Hardware wallets are one of the more secure ways of storing your cryptocurrency at the moment, as they store your cryptocurrency offline. A hardware wallet is an actual physical device responsible for protecting your cryptocurrency and private key. Most of them look like a USB flash drive, usually with a small screen, and some buttons on them.

You only ever need to connect a hardware wallet to the internet when you need to make a transaction, so if a hacker is going to try and target you over the web, they have a very small window of opportunity. However, the fact you need to keep them offline makes them a little more cumbersome than a software wallet which has all your funds ready to go at all times. If you’re constantly moving coins around, hardware wallets might become a headache, from a practical point-of-view.

As hardware wallets are cold storage they are quite safe from hackers, but they’re not immune. They can be infected with malware , which tricks a user into sending coins to scammers. Also, because you are buying a physical device, you have to be sure you’re buying a legitimate version; not one that’s been tampered with and might siphon your coins to someone else’s address as soon as you load your coins.

If you’re really keen about long term cryptocurrency storage, you could put all your coins on a hardware wallet and lock it away in a safe-deposit bank, almost as if it were gold bullion! But even sometimes, that isn’t totally safe .

Which should I choose?

There is no such thing as a perfect way to store cryptocurrency. If you want a fast way of moving coins around, you’ll likely have to sacrifice security, and vice-versa.

Generally speaking, it makes sense to choose a wallet type based on how you use cryptocurrency and how much of it you plan on storing in said wallet.

If you have a lot of coins, you’d be stupid not to try and pick the most secure form of storage. If you have small amounts, that you regularly trade and can realistically afford to lose custodial or software wallets should work just fine, but make sure you get a trustworthy one.

Published November 13, 2018 ― 12:43 UTC