💰🔑 Wallets & Keys: The Beginner's Guide to Storing Cryptocurrency
So you've just purchased your first Bitcoin (big congrats 🎉), but you've briefly heard something about how leaving it in the exchange wallet might not be a good idea.
Your exchange account could get hacked! 😳
You know it's not really your Bitcoin if it's on an exchange, right? 😱
We've got your back. It's why we've put together the ultimate beginner's guide to crypto wallets, keys, and the best practices for storing your cryptocurrencies.
First up, what is a crypto wallet?
A cryptocurrency wallet is basically an address where your cryptocurrency is 'stored'.
Because Bitcoin isn't actually a physical coin (which is why you can't steal Bitcoin from a Bitcoin ATM, surprise!), storing Bitcoin means that the transaction records point ownership of the Bitcoin to your address. 👈
When a person or an exchange sends you Bitcoin or any other cryptocurrency, they are signing off ownership of the coins to your wallet's address.
Simple enough. Why then are some wallets better than others?
Very important question. It's also the reason you might have heard some advice on not storing your crypto in your exchange wallet, for example.
This is where keys come in. Let's first talk about what keys are.
Every cryptocurrency wallet is made up of two parts:
(1) Public key
(2) Private key
🔒 Public key
A securely generated version of the public key makes your wallet address. This is the public address where your cryptocurrency is stored. If someone wanted to send you some crypto, you would share this public address with them – sort of like your bank account number. They typically look like this:
Bitcoin public address:
Ethereum public address:
I know we say key, but think of the public address as a 🔒lock. Anyone who's at your front door can see your lock, and that's usually not a problem.
🔑 Private key
This is a private string of numbers and letters that is like a 'password' to your public key. If your public key was your bank account number, the private key would be the password to your bank account. You don't share this with anyone, ever.
Think of the private key as the actual 🔑 key to your 🔒 lock. Anyone who has this key can access your lock, open your vault, and steal your crypto. 😱
Hence when we talk about crypto wallets, we really mean an interface that gives you access to these keys. Now that we've established their importance and what they do, we can discuss wallets and why some wallets might be better for you than others.
Types of crypto wallets
There are crypto wallets that give you access to both the public and private keys, and crypto wallets that only give you the public key.
Although you can typically send and receive crypto on all types of cryptocurrency wallets, some wallets only give you access to the public key. You'll still need to set up a password to access your wallet, but the private keys will not be available to you through these wallets. These are mostly called hot wallets.
Hot wallets: features and when to use them
No access to private keys usually
Some hot wallets do give you access to private keys. Check if there is a way to extract the private keys by looking at their support pages or by contacting customer support.
Needs internet connection to access
Since you'll access the wallet by logging in with your username/email and password, it needs to be verified online.
👍 Pros of hot wallets
- Extremely beginner-friendly
You'll just have to sign up, usually using your email and by creating a password.
- Easy access to your wallet and funds
All you have to do is log in! Even if you lose your password, you can easily reset it.
- Most are backed by multiple security features
Two-factor authentication, email verification, and login notifications are some common security features that make your hot wallet secure.
- Free to use
For most of them, at least!
👎 Cons of hot wallets
- Not as secure as a cold wallet
Although they are packed with security features, hot wallets are connected to the internet. This increases the risk of being hacked.
- Don't have full control of your cryptocurrencies
Some hot wallets, such as those provided by exchanges, don’t give you access to your private keys. This means that you never have full control of your funds, and you are at the mercy of the hot wallet provider if your wallet balance doesn't tally, for example.
Should I still use a hot wallet?
For its convenience and for storing small amounts of cryptocurrencies (small enough that you won't be too fussed losing them), absolutely!
Some services also require you to use their hot wallets, for example, if you are trading on an exchange or spending your cryptocurrencies daily using the TenX Card.
At TenX, we recommend that you store just enough crypto in your TenX Wallet for a week's worth of expenditure on the TenX Card. You can top up your wallet any time it is running low, as there are no fees involved with depositing your Bitcoin and Ether.
Cold wallets: features and when to use them
Access to both public and private keys
The private keys may be stored in hardware, in the form of a Mnemonic phrase, a keystore file, or the actual private keys.
Not connected to the internet
Cold wallets are offline. As you can imagine, there are a lot of different types of cold wallets - from physical hardware to pieces of paper with the keys written on it.
👍 Pros of cold wallets
- Security from being offline
Cold wallets are the most secure cryptocurrency wallets on the market today, mainly because they are not connected to the internet and cannot be hacked online.
- Security from owning the private key
As you own the private key to your wallet, you are the sole owner of your cryptocurrencies. You are in charge of your funds.
- You are the sole manager of your cryptocurrency
When you use a hot wallet, you are at the mercy of its provider. If their service goes down, so does your crypto. With a cold wallet, you have complete responsibility for your crypto and are not tied to any business or third-party service.
👎 Cons of cold wallets
- No backups or password resets for loss of private key
With great power comes great responsibility. Since you're the only person who knows the private key, the onus is on you to not lose it. If you lose the private key, it's most likely that your funds become lost forever. Don't be this guy.
- They can cost money
Recommended hardware wallets such as Ledgers and Trezors cost money. There are free cold wallets on the market of course, but they are often too complicated for beginners to use easily.
- Susceptible to physical damage
Some wallets, such as paper wallets, can get torn, burnt or damaged by water. Like hardware wallets, they also have a high likelihood of getting lost.
Should I still use a cold wallet?
Without a doubt!
Exchanges get hacked so regularly in 2019 that they often don't make the front page news anymore. Phishing and scams are rampant enough to justify the trouble or cost of using a cold wallet to store your cryptocurrency - especially if you're planning on having a lot of it! 😉
Even if you're using your TenX Card to spend your crypto, we recommend that you store most of your crypto holdings or savings in a cold wallet. 👍
So, what are the best practices for storing cryptocurrency?
- Store most of your crypto holdings in a cold wallet. Back up your private keys and never share them with anyone else!
- Store only amounts you're willing to lose in hot wallets such as your spending wallet (i.e. TenX Card) or trading wallet (i.e. exchange). Where possible, only move your cryptos to an exchange when you are planning to trade or sell them.
Just follow these two rules, and you'll be much safer than most of the crypto holders today.
Finally, if there's just one thing you take away from the guide, remember this:
Not your keys, not your crypto.
Have questions about wallets and keys? Leave us a comment!