Cryptocurrency Wallet Guide: A Step-By-Step Tutorial

Use this straightforward guide to learn what a cryptocurrency wallet is, how they work and discover which one’s are the best on the market. If you are looking for something a bit more in detail about cryptocurrencies.

What is a Cryptocurrency Wallet?

A cryptocurrency wallet is a software program that stores private and public keys and interacts with various blockchain to enable users to send and receive digital currency and monitor their balance. If you want to use Bitcoin or any other cryptocurrency, you will need to have a digital wallet.

How Do They Work?

Millions of people use cryptocurrency wallets, but there is a considerable misunderstanding about how they work. Unlike traditional ‘pocket’ wallets, digital wallets don’t store currency. In fact, currencies don’t get stored in any single location or exist anywhere in any physical form. All that exists are records of transactions stored on the blockchain.

Cryptocurrency wallets are software programs that store your public and private keys and interface with various blockchains so users can monitor their balance, send money and conduct other operations. When a person sends you bitcoins or any other type of digital currency, they are essentially signing off ownership of the coins to your wallet’s address. To be able to spend those coins and unlock the funds, the private key stored in your wallet must match the public address the currency is assigned to. If the public and private keys match, the balance in your digital wallet will increase, and the senders will decrease accordingly. There is no actual exchange of real coins. The transaction is signified merely by a transaction record on the blockchain and a change in balance in your cryptocurrency wallet.

What are the different types of Cryptocurrency wallets?

There are several types of wallets that provide different ways to store and access your digital currency. Wallets can be broken down into three distinct categories – software, hardware, and paper. Software wallets can be a desktop, mobile or online.

• Desktop: wallets are downloaded and installed on a PC or laptop. They are only accessible from the single computer in which they are downloaded. Desktop wallets offer one of the highest levels of security however if your computer is hacked or gets a virus there is the possibility that you may lose all your funds.
• Online: wallets run on the cloud and are accessible from any computing device in any location. While they are more convenient to access, online wallets store your private keys online and are controlled by a third party which makes them more vulnerable to hacking attacks and theft.
• Mobile: wallets run on an app on your phone and are useful because they can be used anywhere including retail stores. Mobile wallets are usually much smaller and simpler than desktop wallets because of the limited space available on mobile.
• Hardware: wallets differ from software wallets in that they store a user’s private keys on a hardware device like a USB. Although hardware wallets make transactions online, they are stored offline which delivers increased security. Hardware wallets can be compatible with several web interfaces and can support different currencies; it just depends on which one you decide to use. What’s more, making a transaction is easy. Users simply plug in their device to any internet-enabled computer or device, enter a pin, send currency and confirm. Hardware wallets make it possible to easily transact while also keeping your money offline and away from danger.
• Paper: wallets are easy to use and provide a very high level of security. While the term paper wallet can simply refer to a physical copy or printout of your public and private keys, it can also refer to a piece of software that is used to securely generate a pair of keys which are then printed. Using a paper wallet is relatively straightforward. Transferring Bitcoin or any other currency to your paper wallet is accomplished by the transfer of funds from your software wallet to the public address shown on your paper wallet. Alternatively, if you want to withdraw or spend currency, all you need to do is transfer funds from your paper wallet to your software wallet. This process, often referred to as ‘sweeping,’ can either be done manually by entering your private keys or by scanning the QR code on the paper wallet.

Are Cryptocurrency wallets secure?

Wallets are secure to varying degrees. The level of security depends on the type of wallet you use (desktop, mobile, online, paper, hardware) and the service provider. A web server is an intrinsically riskier environment to keep your currency compared to offline. Online wallets can expose users to possible vulnerabilities in the wallet platform which can be exploited by hackers to steal your funds. Offline wallets, on the other hand, cannot be hacked because they simply aren’t connected to an online network and don’t rely on a third party for security.

Although online wallets have proven the most vulnerable and prone to hacking attacks, diligent security precautions need to be implemented and followed when using any wallet. Remember that no matter which wallet you use, losing your private keys will lead you to lose your money. Similarly, if your wallet gets hacked, or you send money to a scammer, there is no way to reclaim lost currency or reverse the transaction. You must take precautions and be very careful!

• Backup your wallet. Store only small amounts of currency for everyday use online, on your computer or mobile, keeping the vast majority of your funds in a high-security environment. Cold or offline storage options for backup like Ledger Nano X or paper or USB will protect you against computer failures and allow you to recover your wallet should it be lost or stolen. It will not, however, protect you against eager hackers. The reality is, if you choose to use an online wallet there are inherent risks that can’t always be protected against.
• Update software. Keep your software up to date so that you have the latest security enhancements available. You should regularly update not only your wallet software but also the software on your computer or mobile.
• Add extra security layers. The more layers of security, the better. Setting long and complex passwords and ensuring any withdrawal of funds requires a password is a start. Use wallets that have a good reputation and provide extra security layers like two-factor authentication and additional pin code requirements every time a wallet application gets opened. You may also want to consider a wallet that offers multisig transactions like Armory or Copay. A multisig or multi-signature wallet requires the permission of another user or users before a transaction can be made.

The Role of Private Keys in Securing Your Digital Currencies

Private keys play a vital role in securing your digital currencies within a cryptocurrency wallet. They serve as an authentication mechanism that proves ownership and enables access to your funds.

Think of private keys as a metaphorical keychain that unlocks the door to your crypto assets. Just like how you wouldn’t hand out copies of your house keys randomly, it’s crucial not to share or expose your private keys unnecessarily. By keeping them confidential and protected, you maintain control over your cryptocurrencies.

Moreover, losing or misplacing your private key can have dire consequences. If you no longer have access to your private key, you may permanently lose access to your digital currencies. Therefore, it is essential to back up and securely store your private keys in multiple locations, such as offline hardware wallets or encrypted cloud storage.

Multi-currency or single-use?

Although Bitcoin is by far the most well-known and popular digital currency, hundreds of new cryptocurrencies (referred to as altcoins) have emerged, each with distinctive ecosystems and infrastructure. If you’re interested in using a variety of cryptocurrencies, the good news is, you don’t need to set up a separate wallet for each currency. Instead of using a cryptocurrency wallet that supports a single currency, it may be more convenient to set up a multi-currency wallet which enables you to use several currencies from the same wallet.

Are there any transaction fees?

There is no straightforward answer here.

In general, transaction fees are a tiny fraction of traditional bank fees. Sometimes fees need to be paid for certain types of transactions to network miners as a processing fee, while some transactions don’t have any fee at all. It’s also possible to set your own fee. As a guide, the median transaction size of 226 bytes would result in a fee of 18,080 satoshis or $0.12. In some cases, if you choose to set a low fee, your transaction may get low priority, and you might have to wait hours or even days for the transaction to get confirmed. If you need your transaction completed and confirmed promptly, then you might need to increase the amount you’re willing to pay. Whatever wallet you end up using, transaction fees are not something you should worry about. You will either pay minuscule transaction fees, choose your own fees or pay no fees at all. A definite improvement from the past!

Are cryptocurrency wallets anonymous?

Kind of, but not really. Wallets are pseudonymous. While wallets aren’t tied to the actual identity of a user, all transactions are stored publicly and permanently on the blockchain. Your name or personal street address won’t be there, but data like your wallet address could be traced to your identity in a number of ways. While there are efforts underway to make anonymity and privacy easier to achieve, there are obvious downsides to full anonymity. Check out the DarkWallet project that is looking to beef up privacy and anonymity through stealth addresses and coin mixing.

Evaluating Wallet Types: Custodial vs. Non-Custodial

Differentiate: Ownership Control over Private Keys

Custodial and non-custodial wallets differ in terms of ownership control over private keys. In a custodial wallet, the private keys are held by a third-party service provider, such as an exchange or wallet platform. This means that the user does not have direct control over their private keys. On the other hand, non-custodial wallets give users full control and ownership of their private keys.

Explore Advantages and Disadvantages

Both custodial and non-custodial wallets come with their own set of advantages and disadvantages.

Custodial Wallets:

Advantages:

• Convenient: Custodial wallets offer a user-friendly experience, making it easy for beginners to store and manage their cryptocurrencies.

• Customer Support: Most custodial wallet providers offer customer support services to assist users with any issues they may encounter.

• Backup and Recovery: Some custodial wallets provide backup and recovery options in case the user loses access to their account or forgets their password.

Disadvantages:

• Lack of Control: Since the service provider holds the private keys, users rely on them to secure their funds. This introduces an element of trust in the custodian’s security measures.

• Security Risks: If the custodian’s security is compromised, there is a risk of losing funds. It is crucial to choose a reputable and trustworthy custodial wallet provider.

• Limited Privacy: Custodial wallets often require users to provide personal information for verification purposes, which can compromise privacy.

Non-Custodial Wallets:

Advantages:

• Full Control: With non-custodial wallets, users have complete ownership and control over their private keys, ensuring maximum security.

• Enhanced Privacy: Non-custodial wallets typically do not require personal information for registration, preserving user privacy.

• Decentralization Principles: Non-custodial wallets align with the decentralized nature of cryptocurrencies, allowing users to be in control of their own funds.

Disadvantages:

• Complexity: Non-custodial wallets may have a steeper learning curve for beginners, as they require users to manage their own private keys and understand security measures.

• Responsibility: Users are solely responsible for safeguarding their private keys. Losing or forgetting them can result in permanent loss of funds.

• Lack of Customer Support: Unlike custodial wallets, non-custodial wallet providers may not offer dedicated customer support services.

Consider Factors When Choosing

When choosing between custodial and non-custodial wallets, it is essential to consider factors such as convenience, trustworthiness, and personal preferences.

The Role of Public and Private Keys

Public Keys: Receiving Funds

Public keys play a crucial role in cryptocurrency wallets as they serve as wallet addresses used for receiving funds. Think of public keys as your unique identifier in the world of cryptocurrencies. When you want to receive funds from someone, you provide them with your public key, which they can use to send the desired amount to your wallet.

Your public key is derived from your wallet’s address, a string of alphanumeric characters that represents your digital identity within the cryptocurrency network. It is important to note that while public keys are visible to everyone on the blockchain, they do not reveal any personal information about you. They simply serve as an open door for others to send funds into your wallet securely.

Private Keys: Secure Access and Management

On the other hand, private keys hold significant importance. While public keys allow others to send funds to you, private keys grant you full control over those funds. They act as a digital signature that proves ownership and authorizes transactions on the blockchain.

Private keys are essentially long strings of randomly generated numbers and letters. They should be kept confidential at all times since anyone who gains access to your private key can take control of your assets. Therefore, it is crucial to store them securely and avoid sharing them with anyone else.

To ensure the confidentiality and integrity of private keys, cryptographic algorithms come into play. These algorithms employ complex mathematical calculations that make it extremely difficult for malicious parties to guess or derive private keys from their corresponding public keys. This cryptographic layer adds an extra level of security to protect against unauthorized access or theft.

It’s worth noting that there are different types of wallets available in the market today, each with its own approach to storing private keys securely. Some wallets store private keys on a physical medium like a hardware device or paper printout, while others use software-based encryption methods. Choosing the right wallet type is crucial to safeguarding your private keys effectively.

Hot Wallets and Cold Wallets Compared

Compare hot wallets, which are connected to the internet, with cold wallets that remain offline.

Hot wallets and cold wallets are two types of cryptocurrency wallets that offer different levels of accessibility and security. A hot wallet is connected to the internet, allowing for easy access to your cryptocurrencies. On the other hand, a cold wallet remains offline, providing an extra layer of protection against potential cyber threats.

Hot wallets are like digital wallets that you can access through your computer or smartphone. They are convenient for frequent transactions and quick access to your funds. With a hot wallet, you can easily send and receive cryptocurrencies whenever you need them. However, being connected to the internet makes them more vulnerable to hacking attempts or malware attacks compared to their cold counterparts.

Cold wallets, also known as cold storage, prioritize security over accessibility. These wallets store your private keys offline on a physical device such as a hardware wallet or a paper wallet. By keeping your private keys offline, they are safeguarded from online threats like hacking or phishing attacks. This makes cold wallets an ideal choice for long-term storage of large amounts of cryptocurrencies.

Understand the trade-offs between accessibility and security when choosing between hot and cold wallets.

When deciding between a hot wallet and a cold wallet, it’s important to consider the trade-offs between accessibility and security. Hot wallets provide instant access to your funds but come with higher risks due to their connection to the internet. Cold wallets prioritize security by keeping your private keys offline but may require additional steps for accessing your funds when needed.

If you frequently make transactions or need quick access to your cryptocurrencies for trading purposes, a hot wallet might be more suitable for you. It offers convenience and ease of use in managing your digital assets on-the-go. However, it’s crucial to ensure that you take necessary precautions such as using strong passwords and enabling two-factor authentication (2FA) to enhance the security of your hot wallet.

On the other hand, if you’re primarily focused on long-term storage and want to keep your cryptocurrencies safe from online threats, a cold wallet is the way to go. Cold wallets provide an extra layer of protection by keeping your private keys offline. Hardware wallets, for example, are specifically designed to securely store your private keys and require physical access to initiate transactions, making them highly secure against remote attacks.

Discover scenarios where each type of wallet is most suitable based on your usage patterns and risk tolerance.

The choice between a hot wallet and a cold wallet ultimately depends on your individual needs, usage patterns, and risk tolerance.

Setting Up Your Cryptocurrency Wallet

Step-by-step Guide to Set Up Your Own Cryptocurrency Wallet

Setting up a cryptocurrency wallet is an essential first step for anyone looking to enter the world of digital currencies. Here’s a step-by-step guide to help you get started:

1. Choose a Reliable Wallet Provider: Begin by selecting a trustworthy wallet provider that offers the features and security measures you require. Ensure compatibility with your preferred cryptocurrencies.

2. Create a New Wallet Address: Once you’ve chosen a wallet provider, follow their instructions to create a new wallet address. This address serves as your unique identifier on the blockchain network and allows others to send funds securely to your wallet.

3. Secure Your Private Key: Your private key is crucial for accessing and managing your funds securely. Make sure to store it in a safe place, such as an offline device or paper printout, away from prying eyes or potential hackers.

4. Explore the User Interface: Familiarize yourself with the user interface of your chosen wallet provider. Each provider may have different features and functionalities, so take some time to navigate through the various options available.

5. Deposit Funds into Your Wallet: To start using your cryptocurrency wallet, you’ll need to deposit funds into it. You can do this by purchasing cryptocurrencies through an exchange platform or receiving them from someone else’s wallet address.

6. Backup Your Wallet: It’s crucial to regularly backup your cryptocurrency wallet to protect against any potential loss of funds due to device failure or other unforeseen circumstances. Most wallets provide options for creating backups, which often involve saving a recovery phrase or seed.

7. Enable Two-Factor Authentication (2FA): Strengthen the security of your cryptocurrency wallet by enabling two-factor authentication whenever possible. This adds an extra layer of protection by requiring additional verification steps before granting access to your account.

8. Keep Software Updated: Stay vigilant about keeping your cryptocurrency wallet software up to date. Wallet providers often release updates that include important security patches and enhancements, so regularly check for any available updates.

9. Seek Customer Support if Needed: If you encounter any issues or have questions about your cryptocurrency wallet, don’t hesitate to reach out to the wallet provider’s customer support team. They can offer guidance and assistance in resolving any problems you may face.

By following these steps, you can set up your own cryptocurrency wallet and begin securely managing your digital assets.

Remember, it’s crucial to prioritize the security of your funds by implementing strong passwords, enabling additional security features like 2FA, and keeping backups of your wallet. Taking these precautions will help safeguard your investment and provide peace of mind as you navigate the world of cryptocurrencies.

Which Cryptocurrency wallet is the best?

There is an ever-growing list of options. Before picking a wallet, you should, however, consider how you intend to use it.

• Do you need a wallet for everyday purchases or just buying and holding the digital currency for an investment?
• Do you plan to use several currencies or one single currency?
• Do you require access to your digital wallet from anywhere or only from home?
• Take some time to assess your requirements and then choose the most suitable wallet for you.

Atomic Wallet

Atomic Wallet is a new multi-asset custody-free solution for secure storage and management of BTC, ETH, XLM, XRP, LTC, and over 300 other coins and tokens. The crypto-assets and features are regularly updated. Private keys are securely encrypted on a user’s device, so one has full control over their funds. The desktop app is available for Windows, MacOS, Ubuntu, Debian and Fedora. Private alpha versions of Android and IOS mobile apps will be released in October, 2018. Atomic Wallet is a secure all-in-one, non-custodial cryptocurrency storage with a smooth and comprehensive interface. The wallet supports Atomic Swaps, a cutting-edge feature that helps users significantly save on fees. Atomic wallet also enables users to buy cryptocurrency with USD and EUR and exchange their assets at the best rates via Changelly or ShapeShift.

• Pros: Handy interface, Optimum privacy & security, Decentralized, Multi-currency, Custody-free, Built-in Exchange, Bank cards accepted, 24/7 instant support.
• Cons: Not all coins support Atomic swaps yet
  

Bread Wallet

Bread Wallet is a simple mobile Bitcoin digital wallet that makes sending bitcoins as easy as sending an email. The wallet can be downloaded from the App Store or Google Play. Bread Wallet offers a standalone client, so there is no server to use when sending or receiving bitcoins. That means users can access their money and are in full control of their funds at all times. Overall, Bread Wallet’s clean interface, lightweight design and commitment to continually improve security, make the application safe, fast and a pleasure to use for both beginners and experienced users alike.

• Pros: Good privacy & security, beginner-friendly, simple & clean, open-source software, free.
• Cons: No web or desktop interface, lacks features, hot wallet.

Mycelium

Advanced users searching for a bitcoin mobile digital wallet, should look no further than mycelium. The Mycelium mobile wallet allows iPhone and Android users to send and receive bitcoins and keep complete control over bitcoins. No third party can freeze or lose your funds! With enterprise-level security superior to most other apps and features like cold storage and encrypted PDF backups, an integrated QR-code scanner, a local trading marketplace and secure chat amongst others, you can understand why Mycelium has long been regarded as one of the best wallets on the market.

• Pros: Good privacy, advanced security, feature-rich, open-source software, free
• Cons: No web or desktop interface, hot wallet, not for beginners

Exodus

Exodus is a relatively new and unknown digital wallet that is currently only available on the desktop. It enables the storage and trading of Bitcoin, Ether, Litecoins, Dogecoins, and Dash through an incredibly easy to use, intuitive and beautiful interface. Exodus also offers a very simple guide to backup your wallet. One of the great things about Exodus is that it has a built-in shapeshift exchange that allows users to trade altcoins for bitcoins and vice versa without leaving the wallet.

• Pros: Good privacy & security, beginner-friendly, intuitive, easy to use, in-wallet trading, supports multiple currencies, open-source software, free.
• Cons: Hot wallet, no web interface or mobile app

Copay

Created by Bitpay, Copay is one of the best digital wallets on the market. If you’re looking for convenience, Copay is easily accessed through a user-friendly interface on desktop, mobile or online. One of the best things about Copay is that it’s a multi-signature wallet so friends or business partners can share funds. Overall, Copay has something for everyone. It’s simple enough for entry-level users but has plenty of additional geeky features that will impress more experienced players as well.

• Pros: Good privacy & security, multisig transactions, multiple platforms & devices, multiple wallet storage, beginner-friendly, open-source software, free
• Cons: Can be slow & unresponsive, limited user support

Armory

Armory is an open-source Bitcoin desktop wallet perfect for experienced users that place emphasis on security. Some of Armory’s features include cold storage, multi-signature transactions, one-time printable backups, multiple wallets interface, GPU-resistant wallet encryption, key importing, key sweeping and more. Although Armory takes a little while to understand and use to its full potential, it’s a great option for more tech-savvy bitcoiners looking to keep their funds safe and secure.

• Pros: Good privacy, great security features, multi-signature options, solid cold storage options, free.
• Cons: Only accessible via the desktop client, not for beginners.

Trezor

Trezor is a hardware bitcoin wallet that is ideal for storing large amounts of bitcoins. Trezor cannot be infected by malware and never exposes your private keys which make it as safe as holding traditional paper money. Trezor is open source and transparent, with all technical decisions benefiting from wider community consultation. It’s easy to use, has an intuitive interface and is Windows, OS X, and Linux friendly. One of the few downsides of the Trezor wallet is that it must be with you to send bitcoins. This, therefore, makes Trezor best for inactive savers, investors or people who want to keep large amounts of bitcoin highly secure.

• Pros: Good security & privacy, cold storage, easy to use a web interface, in-built screen, open-source software, beginner-friendly.
• Cons: Costs $99, a must-have device to send bitcoins

Ledger Nano

The Ledger Wallet NanoX is a new hierarchical deterministic multisig hardware wallet for bitcoin users that aims to eliminate a number of attack vectors through the use of a second security layer. This tech-heavy description does not mean much to the average consumer, though, which is why I am going to explain it in plain language, describing what makes the Ledger Wallet Nano tick. In terms of hardware, the Ledger Wallet Nano is a compact USB device based on a smart card. It is roughly the size of a small flash drive, measuring 39 x 13 x 4mm (1.53 x 0.51 x 0.16in) and weighing in at just 5.9g.

Pros:

• Screen/device protected by metal swivel cover

• Multi-Currency support

• 3rd-Party apps can run from the device

• U2F support

• When recovering a wallet from seed, the whole process can be done from the device without even connecting it to a computer!

• Fairly inexpensive (~$65 USD)

Cons:

• Not as advanced wallet software (no transaction labeling)

• No ability to create hidden accounts

• No password manager

Green Address

Green Address is a user-friendly Bitcoin wallet that’s an excellent choice for beginners. Green Address is accessible via desktop, online or mobile with apps available for Chrome, iOS, and Android. Features include multi-signature addresses & two-factor authentications for enhanced security, paper wallet backup, and instant transaction confirmation. A downside is that Green Address is required to approve all payments, so you do not have full control over your spending.

• Pros: Solid security, multi-platform & device, multi-sig, beginner-friendly, open-source software, free.
• Cons: Hot wallet, average privacy, the third party must approve payments.

Blockchain (dot) info

Blockchain is one of the most popular Bitcoin wallets. Accessing this wallet can be done from any browser or smartphone. Blockchain.info provides two different additional layers. For the browser version, users can enable two-factor authentication, while mobile users can activate a pin code requirement every time the wallet application is opened. Although your wallet will be stored online and all transactions will need to go through the company’s servers, Blockchain.info does not have access to your private keys. Overall, this is a well-established company that is trusted throughout the bitcoin community and makes for a solid wallet to keep your currency.

• Pros: Good security, easy to use web & mobile interface, well-known & trusted company, beginner friendly, free.
• Cons: Hot wallet, weak privacy, the third-party trust required, has experienced outages.

Frequently Asked Questions

What is a cryptocurrency wallet?

A cryptocurrency wallet is a software program or device that allows users to securely store and manage their digital assets. It stores the user’s private keys, which are necessary for accessing and transferring cryptocurrencies. Think of it as a virtual bank account for your digital currencies.

How do cryptocurrency wallets work?

Cryptocurrency wallets work by generating and storing pairs of cryptographic keys: public keys, which are used for receiving funds, and private keys, which are needed to access and send funds. When you want to make a transaction, the wallet signs it with your private key, ensuring the security and integrity of the transfer.

Are all cryptocurrency wallets the same?

No, there are different types of cryptocurrency wallets available. The main categories include hardware wallets (physical devices), software wallets (applications installed on computers or smartphones), and online/web-based wallets. Each type has its own advantages and considerations in terms of security, accessibility, and convenience.

How do I choose the right cryptocurrency wallet for me?

Choosing the right cryptocurrency wallet depends on your specific needs and preferences. Factors to consider include security features, ease of use, compatibility with your preferred cryptocurrencies, backup options, customer support, and whether you prioritize mobility or offline storage. Researching different options can help you find one that suits you best.

Can I have multiple cryptocurrency wallets?

Yes! In fact, having multiple cryptocurrency wallets can provide added flexibility and security. You might use different wallets for different purposes—for example, a hardware wallet for long-term storage of large amounts of crypto and a mobile wallet for everyday transactions. Just ensure you keep track of your various wallet addresses and backup informatio