If you’re just getting started with cryptocurrency, there are a few key technical terms you may want to understand to make sure your storage and transactions are secure. As always, cryptocurrencies have their risks.
You may have heard about cryptocurrencies being stolen or lost in recent years, such as the $450 million theft of 850,000 bitcoins from Japanese crypto exchange Mt. Gox in 2014. These vulnerabilities are part of the cryptocurrency ecosystem, more on that below, but you can avoid losing your cryptos if you know how to properly secure them using a wallet.
Cryptocurrency wallets come in a few different forms. By learning about the different types of cryptocurrencies and wallets, deciding how much you want to put into cryptocurrencies and how you plan to use them, you can decide which type of wallet is best for you.
A Recap of Cryptocurrency
Cryptocurrencies, such as Bitcoin and Litecoin, are digital currencies that are created and secured using cryptography. When secured properly in wallets they are difficult to counterfeit or steal.
Many of the most popular cryptocurrencies are built using blockchain technology. A blockchain is an unchangeable ledger of transactions. One challenge of using blockchain technology is making sure the ledger is accurate and up to date. Various methods have been invented to solve this problem.
The Bitcoin blockchain, for example, utilizes miners who solve complex mathematical algorithms to prove the validity of the blockchain.
As a reward for keeping the Bitcoin network running, the miners receive newly released Bitcoins as well as transactional fees.
One of the biggest draws to using cryptocurrencies is their decentralized nature. No single person, company, or government controls the Bitcoin supply or network. Bitcoins are released to the network over time, and there will only ever be 21 million of them in circulation.
Recommended: What Is Cryptocurrency? What You Should Know
Buying and Selling Cryptocurrencies
In order to understand what a cryptocurrency wallet is, it’s crucial to know a bit about how cryptocurrencies are created and used.
One common argument against cryptocurrencies is that they aren’t backed by anything or don’t have intrinsic value. The reality is, the money you transact with when you use your credit card or hand someone a $5 bill is only backed by people’s faith in the solvency of the US government.
All money is simply a representation of value which can be exchanged between people for goods and services, and it only has value if everyone using it agrees that it does. Metal coins and gold bricks have intrinsic value because they can be used for industrial purposes.
Until 1971 , the U.S. dollar was backed by Gold, meaning that in theory the Federal Reserve held an equal amount of Gold in storage to the amount of paper money and coins in circulation. Since that time, paper money has been printed in response to supply and demand needs, and the amount in circulation isn’t backed by a physical asset such as Gold.
Like any digital money, Bitcoin and other cryptocurrencies aren’t actually physical objects or even images or digital files. A crypto network is simply a ledger of amounts and transactions, similar to what you see when you log into your online bank account. Public and private addresses are used to view your holdings, send, and receive cryptos.
Your public wallet address is what you give to someone when you want them to send you cryptocurrency, and anyone can look up that address and see how much you hold and your past transactions.
However, the address is simply a string of numbers and letters, so unless someone knows it belongs to you, your holdings and transactions are anonymous. This transparency combined with anonymity is part of what appeals to many people about cryptocurrencies.
Your private address should never be published or given out to anyone – like your email password. The private key is what’s used to sign off on transactions, and if someone has access to both your public and private keys they now have control over your holdings.
It may seem as though a hacker could start matching up possible public and private keys and hack into people’s wallets, but the chances of doing this successfully are the same as your chances of winning the Powerball , 9 times in a row. Needless to say, this is extremely unlikely.
There are dozens of online exchanges where you can purchase and sell cryptocurrencies. Many of these allow you to directly link your bank account so you can easily transfer between U.S. dollars and crypto.
You can also directly transact with individuals using wallet applications or paper wallets. QR codes are commonly used as a quick way to sell or send cryptos, or you can send out your full public address.
Note: Depending on which cryptocurrency you are using, it can take up to an hour for your transaction to complete. Don’t panic if your funds don’t transfer immediately.
What is a Cryptocurrency Wallet?
Cryptocurrency wallets are used to store your private keys. These hexadecimal keys must be matched with your public keys in order to move crypto from one wallet to another. Some wallets can be used to store multiple types of cryptocurrency, while others can only store one type.
There are a few different types of wallets. Some wallets are convenient to use to quickly buy and sell cryptos, but other types may be more secure.
Types of Wallets
The two main categories of crypto wallets are hardware and software wallets, otherwise known as cold and hot storage.
Hot Storage and Software Wallets
Hot storage wallets can be accessed on the internet or your computer device by logging into exchanges or wallet service providers.
Some popular hot storage exchanges include Coinbase and Gemini. These exchanges hold your private keys, so even though they implement the best security they can, they are still vulnerable to hacks.
In general, it’s best to not store large amounts of crypto in online exchanges. You can move it into the exchange when you want to send or sell it, but otherwise keep it in cold storage.
There are also software wallets which you download onto your computer, such as Electrum and Exodus, as well as phone apps like Mycelium. These are somewhat more secure, since they often give you access to your private keys, and are stored directly on your computer.
However, if your computer or phone breaks or gets lost, your cryptos may be lost along with it. In the unfortunate event that this does happen, if you have written down both your public and private keys, you will likely be able to recover your funds. If given the option, it’s always a good idea to keep a second copy of your address written down in a safe place.
Cold Storage and Hardware Wallets
Cold storage hardware wallets are offline, and may be in the form of a physical hardware device or a piece of paper. Yes, you can simply write down your public and private address on a piece of paper and use that to recover your funds.
Although vulnerable to loss, fire, or flood, a paper wallet is arguably the most secure type of wallet, since it doesn’t connect to any device, software, or network which could be broken or compromised. You can even create a print out of a QR code for your wallet to make it easier to use.
Paper wallets can be generated from reputable sources such as Bitcoinpaperwallet and BitAddress. If you do use one of these services, make sure you go through the steps to disconnect from the internet as you create the wallet. Once your wallet has been created, you may want to laminate it or seal it in a plastic bag in a safe.
Popular hardware wallets include the Trezor and Ledger devices. These are physical devices which plug into your computer, and keep your private keys stored in them.
This way, your private keys are never online, but you can still conveniently buy and sell cryptos without having to upload an address from a piece of paper. Both Trezor and Ledger support multiple cryptos.
You can also purchase physical coins, such as physical Bitcoins, which come preloaded with a certain amount of the cryptocurrency. These are generally created with a tamper proof seal to hide the private key. These can be useful for offline trading and are a fun collector’s item as well.
A further delineation of hardware wallets are hardware security modules, or HSMs. These devices only handle the keys and signing of data, but not the signing of complete transactions.
Other Uses for Wallets
Although the main way that cryptocurrency wallets get used is to store and transact with cryptocurrencies, there are also other uses for this technology. Tokens or digital information stored in a blockchain could represent anything from goods in a supply chain to a plane ticket.
Blockchains can also store personal information such as your identity, tax history, medical information, voting information, and more. In the future we may find ourselves using blockchain based wallets in many facets of our lives.
Before you purchase cryptocurrencies, think about how you plan to use and access them. If you’re planning to purchase cryptos and hold them long term, a secure cold storage wallet is probably your best option.
If you want to access them from your phone, you may want to download an app from a particular exchange or wallet provider.
Also, think about which cryptocurrencies you want to hold and look into the options available for each coin. Doing your due diligence on both the coin and the wallet may keep you from getting scammed. In the past, some exchanges have been hacked, stolen people’s money, or shut down completely. That being said, there are plenty of reputable options to choose from.
Note that some countries have banned Bitcoin and other cryptocurrencies, so you could get into trouble for having a wallet if you are from them or live in them. These countries include Bolivia, Cambodia, Pakistan, Nepal, Algeria, and Ecuador.
Storing and Securing Your Wallet
The most important part of choosing your wallet type and using your wallet is making sure your storage and transactions are secure. Many of the most popular exchanges store your private keys for you and don’t give you access to them.
Although it can be convenient to hold cryptos in exchanges, not having access to your private keys makes you vulnerable to hackers and even scams. You may decide to store your cryptos in cold storage and only move as much as you plan to send or sell into hot storage at any given time.
Making sure you’re keeping your information secure might include being wary of any emails coming from exchanges or wallet apps, checking the email address to make sure it’s legitimate, and never sending your private keys over email (or at all).
You may want to consider double checking your transactions before sending checking the website address when you visit an exchange or online wallet. Fake emails and websites can look very similar to the real ones.
Getting Professional Insights and a New Cryptocurrency Wallet
Cryptocurrencies are still new, volatile, and risky. For this reason, you may not be ready to start trading them.
Or, you may be excited about jumping in early while the industry is young. Either way, gaining professional insights into your investment strategy and using state-of-the-art tools can help you to build a strong and diversified portfolio.
Figuring out what your goals are and starting early is a great way to start creating a long-term portfolio growth strategy. One excellent resource and toolset is the SoFi app. SoFi offers free consultations with financial planners, and a wealth of knowledge about online investing and financial planning at your fingertips.
On SoFi Invest®, investors can trade their first cryptocurrency with as little as $10. Doing so will get them a bonus of $10 in Bitcoin. Unlike the stock market, investors can also trade cryptocurrencies like Bitcoin, Litecoin and Ethereum 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors' crypto holdings secure.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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