Once you understand cryptocurrency and all its intricacies, you will probably want to start investing your fiat in this powerful technology.
Or even start paying with cryptocurrency for goods and in online shops.
What you need first, though, is a cryptocurrency wallet that acts in a similar way to a traditional online bank account. Except, it doesn’t store your crypto money but keeps a record of your transactions.
Use this guide to show you step by step how to create a cryptocurrency wallet and which platforms are the best ones to use.
What Is A Cryptocurrency Wallet
Before we move on to set up an account, let’s look deeper at what a cryptocurrency wallet actually is.
For a starter, it’s nothing like the physical wallet you have in your pocket.
It’s a software program that enables you to interact with blockchain technology. Digital wallets allow users to send and receive digital currency, as well as to monitor their balance.
Bitcoin is the most popular digital currency, hence there are dozens of wallets that offer services just for this currency. However, with the rise or altcoins, a majority of modern wallets will allow you to store multiple currencies.
How Do Cryptocurrency Wallets Work
There is a considerable amount of people who are confused about the technology behind cryptocurrency wallets, even though they’re using them on an everyday basis.
Unlike traditional wallets, digital wallets don’t store the currency. And it comes down to the fact that digital currencies are not stored anywhere. They don’t exist in a physical form and they don’t have a location like traditional money, stored in bank vaults.
Virtual money exists in a form of transactions’ records, which are registered on the blockchain.
Since you want to start investing in cryptocurrency, you must know that to make cryptocurrency transactions, you need both public and private cryptographic keys. These keys are extremely important in providing security for your virtual money.
The public key gives you an address (a long number combination) and is visible to all members of the peer-to-peer network. This is a number that other members will use to identify you and which you would have to provide if you want to receive a transfer from another user.
The private key is what you have to keep secret at all times. The combination of both keys is required as a signature on a message that is attached to your transaction.
If you lose your private key, you will also lose your money and you won’t be able to get them back!
To be able to unlock a transaction, both private and public key have to match each other.
It’s important to remember there isn’t a physical exchange of coins – the balances of the wallets either increase or decrease.
Cryptocurrency wallets are often misunderstood to be entirely anonymous, but with the current technology, there are ways of tracking it back to your real identity.
Your account and the keys won’t require any of your personal details, the address will be your pseudonym. But an advanced technology can track back your IP address.
Are there any extra or hidden fees?
Not in a straightforward way.
The transaction will be broadcasted to miners, who are rewarded for solving a dexterous mathematical formula. They get rewarded with digital currency for maintaining the blockchain.
For Bitcoin, the norm is $0.12 or 18,080 satoshis, but if you want your transaction to be processed quickly, you might have to pay a bit more.
The good news is that you choose whether you want to pay for a transaction, and if yes, you choose the amount.
What Are Different Types Of Cryptocurrency Wallets
There are several types of cryptocurrency wallets that you can create. You can use them on your mobile, desktop or online. They can be broken into three distinctive categories:
- Software (online)
Types of cryptocurrency wallets:
These wallets are downloaded and installed on a PC or laptop in a form of an application. And they’re accessible only from the desktop they’ve been installed on.
Desktop wallets offer one of the highest security levels as you don’t have to use your browser. However, if your computer gets hacked, gets a virus or the wallet file is corrupted, there’s a possibility you will lose all your funds.
If you’re planning to go for a desktop version, you will have to back up the wallet regularly to avoid the risk of losing the file completely.
Online wallets are stored in a cloud and they’re easily accessible from any location, as long as you have an internet connection, which makes it extremely convenient.
But you have to remember that they’re controlled by a third party, hence they’re not entirely private.
Remember, apart from your funds, you also have to store there your private key. This makes online wallets more prone to hacking attacks and theft.
They are installed on your mobile as an application and you will need a good 3G connection or wi-fi to be able to access them and make transactions.
They’re usually a simplified version of the desktop app but have the same features.
You have to be careful while using them, especially in open spaces or with the use of public wi-fi, as they make you more vulnerable to hacking attacks.
The difference between hardware and software wallet is the method of storing the keys. With a hardware wallet, you will have to store your keys on a particular device, e.g. a USB stick.
You can still make your transactions online in exactly the same way as you would with all the other wallets, but your funds are stored offline which increases security. They’re still easy to track and they’re portable but away from an online danger.
To make a transaction, you have to plug your device into a computer with internet connection, enter a pin, send currency and confirm.
These wallets are perhaps the least common, especially that one of the perks of virtual currency is the lack of paper money.
The paper wallet is simply a printout of your public and private keys. The printout existence of the wallet significantly decreases the security level and you’re also risking losing the paper.
To be able to do transactions with a paper wallet, you still need a software wallet to transfer funds. You have to enter your public address, shown on your paper wallet, to the software wallet and funds will be automatically transferred.
If you want to withdraw your money, you have to transfer funds from paper wallet to your software wallet.
The process of transferring funds between a software and paper wallet is often called ‘sweeping’ and can be either done manually by entering your private keys or by scanning the QR code on the paper wallet.
Are Cryptocurrency Wallets Secure
The level of security depends on the type of wallet you decide to use and how careful you are while handling the keys.
Online wallets carry a higher risk of being hacked or intruded by a third party, especially if you’re using a cloud. This when hardware wallets prove to be more secure and they’re often used by people with a significant amount of funds.
However, it’s hard for me to imagine storing a virtual currency offline when there are hardly any moments in my life when I would do anything offline. It also adds another hurdle of having to set up a software account anyway.
You must take precautions and be very careful! If you lose your funds, any of the keys or you become a victim of a cybercrime, you won’t be able to get them back!
If you decide to go for an online wallet, it’s important to implement the correct diligent security procedures:
#1 Back Up Your Wallet
One of the best advice I came across is to combine a hardware and online wallet together. On your online wallet, you can store small amounts that you would like to use regularly and for small payments. While your hardware wallet can keep the majority of your funds in a highly secure environment.
What you have to keep in mind is backing up your wallet regularly, especially if it’s kept on a USB stick or the desktop.
One of the best platforms that offer an online and hardware wallet is a Ledger Wallet – upon signing up you will receive an access the online platform as well as a secure USB stick.
#2 Update Your Software
How many time did you hear about a malicious malware or hackers, who accessed your computer just because you didn’t upgrade to the latest version of the operating system?
I guess, quite a lot.
If you’re planning to invest in cryptocurrency than you can no longer ignore any of those annoying notifications. It’s crucial to provide as much security as possible.
#3 Pay Extra Attention To Your Passwords
This might sound like a cliche, but we all know how easy it is to create a password that is easy to remember.
There is a reason why traditional banks provide complicated PIN codes, tokens and endless password you have to input. They know how much hackers are waiting for one mistake and being able to access all your funds.
The same goes for cryptocurrency wallets – you have to protect your password and cryptographic keys. Use wallets that have a good reputation and provide extra security layers.
The best wallets out there have a two-factor authentication system and additional PIN code that you have enter every time you try to open the application.
Another additional security level is a multisig transaction – it’s a multi-signature wallet that requires a permit from another user (or users) before a transaction can be made. For instance, Copay gives a choice between having a single or multiple signatures.
What Are The Best and Most Secure Cryptocurrency Wallets
You have to be patient in choosing the right wallet for you. There’s a vast ocean of them out there, and not all of them are secure and not all of them will suit your needs.
Below you will find a roundup of the most popular and reputable wallets:
Coinbase has established a dedicated cryptocurrency exchange, a Bitcoin and Ethereum wallet, and is supported in more than 30 countries. Coinbase has handled more than $6 billion in cryptocurrency exchanges and is an industry leader for cryptocurrency exchange.
Pros: Great for beginners, easy to use, relatively low fees, multiple payment methods
Cons: Lack of privacy and total control over your Bitcoins
Exodus has a built-in ShapeShift exchange that allows a rapid conversion between cryptocurrencies and altcoins, without leaving the wallet. It’s also a multi-asset wallet, with an ability to store all your keys in one place. However, it’s only available on the desktop.
Pros: Good privacy & security, beginner friendly, intuitive, easy to use, in-wallet trading, supports multiple currencies, open source software, free
Cons: No web interface or mobile app
The Ledger Nano S is a cryptocurrency multi-asset hardware wallet that looks like a small flash drive. It’s also one of the most secure cryptocurrency wallets. The Ledger Nano S is based on a smart card and connects via a USB cable and requires interaction with the device to confirm transactions. It weighs only 5.9g.
Pros: Multi-Currency support, 3rd-Party apps can run from device, U2F support, you can recover it from a seed without connecting it to a computer
Cons: No transaction labelling, no ability to create hidden account, no password manager, costs $65
It’s a cryptocurrency hardware wallet which allows for biometric authentication, one of the best protection for your hard-earned cryptocurrencies. The Case Wallet supports bitcoin transactions via a multi-factor authentication device and a requirement of 2-of-3 signatures in order to broadcast the transaction to the blockchain.
The three signatures are your fingerprint, the company’s signature, and a third signature that you can use in case your wallet becomes compromised or need to recover your key.
Pros: Multi-signature, offers a key recovery service
Cons: Costs $199
TREZOR is an industry-leading hardware multi-cryptocurrency wallet. It’s ideal for storing a lot of bitcoins and it has never been infected by malware. It also has a token that can help with the U2F authentication. However, to be able to send Bitcoins, you must have the device on you.
Pros: Good security & privacy, easy to use a web interface, inbuilt screen, open source software, beginner friendly
Cons: Costs $89, must have device to send bitcoins
Which Cryptocurrency Wallet Is The Best
The list of available wallets keeps on growing, and with the popularity of cryptocurrencies raising, there’s going to be even more.
Before you choose the one, you should consider what are you going to use it for.
Different levels of security are required depending on a number of funds. If you need a wallet for everyday purchases, you will need something portable and easy to use. But if you’re considering large investments, you have to look at the functions it offers, and the layer of security, to an even greater level.
You also have to ask yourself a question if you’re planning to use a single currency or several currencies. If your plan is to invest in Bitcoin or Ether only, you don’t need the fanciest software that will let you store all possible currencies.
One last thing you should consider is whether you’re planning to access your digital wallet just from home or if you need something portable and easy to access from anywhere you are.
Hardware and desktop wallets might offer a tighter security, but you have to bear in mind that you won’t be able to access it when you’re abroad or don’t have an access to your computer.
This guide should dispel your wonders on how to create a cryptocurrency wallet. You have to remember to thoroughly research the wallet’s properties and read other users opinions.
If you’re still not sure which wallet is for you, check our guide to the safest cryptocurrency wallets on the market.
Who knows, maybe you’re the next one to top up the Bitcoin Rich List?