Choosing the right form of cryptocurrency storage is vital if you want to keep your digital assets safe. So far, we have enough reasons not to keep cryptocurrency even on very secure bitcoin exchanges . However, for newcomers to the industry, selecting a wallet can be a bit of a confusing concept. There are all kinds of different storages out there and they all have trade-offs between convenience and security. Ultimately, different wallets are more appropriate for different uses. There’s nothing wrong with using more than one wallet either!
In this short introduction to cryptocurrency wallets, we’ll be looking at the differences between two broad categories of digital asset storage solutions. By the end, you should know exactly which use cases lend themselves to which wallets. Let’s begin.
What is a Cryptocurrency Wallet?
Before we start talking about the differences between online and offline cryptocurrency wallets, we should clarify what’s meant by the term wallet. Obviously, this is some kind of storage. At the same time, we understand that since cryptocurrency doesn’t exist in a physical form, it needs some specific form of wallet. A cryptocurrency wallet is a combination of two (or more) cryptographic keys.
The first one, named public key, is a bit like your email address. Just as you can share your email address around freely if you want to receive emails, you can share your public key if you want people to send you cryptocurrency. As the name suggests, there is no danger of wallet compromise by sharing your public key.
The second key is known as the private key. This is a really important one. It controls your ability to use the cryptocurrency associated with your key pair. Anyone in possession of the private key can send cryptocurrency associated with it to another public key. Therefore, you should never reveal your private key to anyone. If you will take only one thing from this article let it be the importance of protecting your private key.
Given that the private key essentially grants permission to its holder to use the cryptocurrency associated with it, it’s vital that you back it up securely. The first thing you should do when you set up any storage solution is to make a non-digital copy of the private key and keep it somewhere safe. If you lose access to your wallet for any reason, you can retrieve your cryptocurrency using the private key alone.
Remember that fire, water, and prying eyes are all threats to your private key. Therefore, consider a waterproof and fireproof safe with a solid locking mechanism to store backups. You can also store copies of your private key in multiple geographical locations to reduce the risk of a natural disaster leaving you unable to access your funds.
Online vs Offline Wallets
When considering different types of cryptocurrency storage, they all fall into one of two categories: online and offline. Online wallets generally offer greater convenience but are more vulnerable to a security compromise. Meanwhile, offline wallets offer almost impenetrable security but can be more inconvenient for day-to-day spending.
An online wallet is a wallet that had its private key generated on a device connected to the internet or that stores its private keys on such a device constantly. Basically, if your private key has ever been near a live internet connection, you should understand that your storage has some of the security flaws of a fully online wallet.
There are two main types of online wallets: custodial and non-custodial. The former is by far the least secure of all digital currency wallets.
This is because a custodial wallet never reveals its private key to you. Instead, the provider of the service (wallet, exchange, peer-to-peer marketplace, etc.) keeps the private key for you. This removes one of the most ground-breaking features of cryptocurrency – permissionless transfers. Essentially, if you need a third party to authorize a transaction, they can also sensor a transaction.
Benefits of a custodial online wallet:
● Allows you to access services. If you’re trading at a centralized exchange, you’ll have to use their custodial wallet a lot.
Disadvantages of a custodial online wallet:
● The platform with custody of your funds can block your transactions.
● In case if the platform falls victim to a security compromise, you may lose funds. This has happened many times before.
A much better form of online cryptocurrency storage is a non-custodial wallet. The two main types of non-custodial online wallets are desktop wallets and mobile wallets. They’re pretty much the same apart from the device you use to interact with the wallet.
The important thing to look out for when choosing a non-custodial online wallet is that it’s open-source. This means that you (and other people if you’re not technically capable) can check the code that the wallet uses. You’ll be able to know for sure that there is no malicious code that could jeopardize your funds.
Benefits of a non-custodial online wallet:
● Convenient. It is right on your computer or mobile means you can quickly send funds from it at any time. You can also use QR codes to make it even easier.
● The user possesses their private keys.
Disadvantages of a non-custodial online wallet:
● Non-custodial online wallets are constantly connected to a live internet connection means that you could fall victim to digital attacks. Beware of phishing attempts or malware that could steal wallet data from you.
If an online wallet is all about convenience, an offline one is all about security. Offline wallets generate their private keys away from a live internet connection. They’re incredibly secure but take a bit more effort to access your funds.
There are two main forms of offline storage: paper wallets and hardware wallets.
With a paper wallet, it is possible to use either some random number generator or an open-source tool to create the private keys. They actually represent the most robust form of cryptocurrency security. However, the problem is that they’re incredibly difficult to set up correctly. Even gifted computer scientists, like Bitcoin evangelist Andreas Antonopoulos, doubt their ability to safely generate a paper wallet. They, therefore, do not recommend such storages to beginners.
The second variety of offline wallet is called a hardware wallet. These gadgets aren’t free but they do offer great protection for cryptocurrencies.
When you buy a hardware wallet, you receive a small device. Inside the device are an offline component and an online one. The offline component creates your private keys and signs transactions and the online one communicates the data to the cryptocurrency network. This affords a good balance of convenience and security.
Advantages of Offline Wallets
● User controls their private keys.
● Private keys never online so not at risk of digital compromise.
Disadvantages of Offline Wallets
● Less convenient for spending than online wallets.
● Either not free or require a high level of skill and knowledge to set up safely.
Cryptocurrency Storage Options: Different Users, Different Wallets
Now you should have a much clearer idea about the different wallets available to cryptocurrency users. As with most things in life, optimizing for one quality means a reduction in some other quality. In the case of cryptocurrency wallets, making them more convenient means making them less secure.
For this reason, it is wise to consider multiple storage options. Use a hardware wallet to keep any larger amounts of cryptocurrencies you might hold as an investment and a desktop or mobile one to keep the funds you would like to use for day-to-day spending.
If your desktop wallet runs dry, you can always send a bit more to it from your offline storage. This two-tier approach will give you a great balance of security for your larger holdings and convenience in spending your cryptocurrency on whatever it is you might be buying.