Cryptocurrencies only exist in digital format. There are no physical cryptocurrencies. Instead, public and private keys are used to successfully complete a crypto transaction.
These keys need to be securely stored to maintain the integrity of your cryptocurrencies. Without your private keys and the recipient’s public keys, a crypto transaction is impossible.
Thankfully, crypto wallets can be used to prevent your keys from being lost or stolen. There are several different types of crypto wallets available. Let’s examine the most popular wallets. For the purpose of this conversation, we will discuss Bitcoin wallets. However, all crypto wallets are basically the same.
A paper wallet is a physical document that contains a public address and a private key. The public address is needed for receiving Bitcoin. The private key is needed for sending Bitcoin.
The most common paper wallet exists in the form of a QR code. This type of arrangement allows the wallet owner to scan the QR code, add the keys to a software wallet, and conduct a transaction.
There are many different services available in the crypto universe which allow users to create a random BTC address with its own private key. The generated keys can simply be printed on a piece of paper for future use.
Advantages of Paper Wallets
Without question, the main advantage of a paper wallet is that the keys can be stored offline, thus preventing a hacker attack. These days, the most popular attack among hackers is keylogging. A keylogger is a type of spyware that can record and steal the keystroke activity that users enter on a device. Using a paper wallet eliminates a keylogger attack.
Disadvantages of Paper Wallets
The biggest disadvantage of a paper wallet is misplacing or losing the document containing the private keys. Another major concern is the theft of the paper wallet. It is highly recommended that paper wallet users store the document in a sealed plastic bag to prevent water damage.
One of the most common mistakes among paper wallet owners is using a “smart” printer to print their private keys. These types of printers are connected to a network of computers and other electronic devices. Some of the more advanced printers have internal storage and hard drives that record and preserve copies of all printouts.
By using a smart printer, you are vulnerable to the theft of your private keys by someone who has access to the printer. Additionally, it’s not uncommon for smart printers to be hacked. It’s also critically important to properly dispose of all printing devices rather than just throwing them in the trash. Hackers and thieves have been known to capture sensitive information from printers thrown into the garbage.
As you can see, paper wallets have advantages and disadvantages. There is no such thing as a perfect crypto wallet. However, using common sense will go a long way in preventing the theft of your private keys when using a paper wallet.
Do you actively use Bitcoin daily? For example, do you pay for goods and services with Bitcoin? Do you frequently buy and sell BTC?
If so, a mobile wallet is a necessary tool. This type of wallet is connected to a mobile device through an app. The mobile device is usually a smartphone. The app provides direct access to the wallet owner’s Bitcoin, allowing the owner to use the BTC for daily purchases. Additionally, the majority of these crypto apps allow users to actively trade BTC.
When mobile wallets first appeared on the scene, they were not very user-friendly because the apps required several gigabytes of storage based on the fact that the entire Bitcoin blockchain was stored on the user’s mobile device. The blockchain was growing daily, which constantly required additional storage space.
During the past few years, several companies have introduced mobile wallets that take advantage of simplified payment verification technology. This technology does not require users to store the entire blockchain on their devices, thus eliminating the need for increased storage capacity. As a result, mobile wallets have become substantially more popular in recent times.
Are mobile wallets safe? That’s a difficult question to answer. It depends on how well the user protects her/his device. The most common theft of Bitcoin from a mobile wallet occurs when the wallet owner misplaces the device or allows other people to use the device.
If the wallet owner constantly maintains possession of her/his mobile phone, the chance of theft will decline substantially. Hackers can use malware if the owner accidentally installs a corrupt program or responds to a malicious email. The best way to prevent the theft of Bitcoin on a mobile device is to always remain vigilant.
With the exception of mobile wallets, web wallets are the most popular form of Bitcoin wallets. This type of wallet stores your private keys on a server, which is constantly connected to the internet. Web wallets are similar to mobile wallets based on the fact that users have direct access to their Bitcoin.
The wallet can be linked to any device such as desktop, laptop, tablet and mobile phone. In fact, a web wallet can be linked to any device with an internet connection.
Users need to be aware of the fact that web wallets are controlled by a third party. This has the potential to be a major security threat. The third party has control of your private keys and can have complete access to your Bitcoin.
It’s not uncommon for web wallet users to have their Bitcoin stolen by a third party. Without question, the most famous Bitcoin confiscation was the Mt Gox scandal, which resulted in the theft of 850,000 Bitcoin over the course of several months between mid-2013 and February 2014. Mt Gox ultimately declared bankruptcy. Most of the Bitcoin was never recovered.
Web wallets operate on crypto trading exchanges. If you have an account with a crypto exchange, most likely you have a web wallet linked to your account. The exchange serves as the intermediary between you and your crypto. It’s critically important for the customer to choose a trading exchange with a superior reputation.
Desktop Wallet (Software Wallet)
Desktop wallets are downloaded and installed to the hard drive of your computer. The majority of crypto experts agree that a desktop wallet is much safer than a web wallet because the private keys reside on the user’s hard drive. Additionally, desktop wallets don’t rely on third parties for data. Consequently, this alleviates the need of a third party to gain control of your private keys.
Are desktop wallets 100% secure from hackers and other online attackers? The answer is no because the wallet is connected to the internet. Any device that is connected to the internet has a chance of being hacked or exploited.
The best way to prevent the theft of Bitcoin through a desktop wallet is to always remain vigilant. Never allow others to share your desktop computer. Your computer should always be password protected. Hackers use malware so be cautious of malicious emails or downloading a suspicious attachment.
Desktop wallets are well suited for all types of Bitcoin traders and HODLers. However, they are probably most appropriate for those who trade small amounts of Bitcoin or for those who are considered long-term HODLers. If you are an aggressive trader, always on-the-go, a desktop wallet is probably not the best choice. Instead, a mobile wallet would probably be more compatible.
Hardware wallets have exploded in popularity during the past few years. This is probably attributed to the fact that this type of wallet is considered to be the safest way to store private keys within the crypto community. The wallet’s security hinges on the fact that the owner’s private keys are not linked or connected to the internet. With the exception of a paper wallet, the hard wallet is the only mechanism capable of storing private keys without the use of the internet. As an added bonus, hardware wallets are immune from computer viruses.
The Bitcoin community has witnessed a substantial rise in the number of new BTC traders and HODLers. Consequently, the surge in Bitcoin ownership has shone a light on the importance of safely securing private keys.
According to crypto security experts, there has never been a verifiable incident of funds being stolen from a hardware wallet. This is a remarkable achievement for the makers of hardware wallets. The most popular hardware wallets are Ledger and Trezor.
When Satoshi Nakamoto launched Bitcoin on 3 January 2009, he probably never envisioned that regulators would allow United States banks to act as custodians for Bitcoin. On 22 July, the Office of the Comptroller of the Currency (OCC) officially allowed US banks to offer BTC products and services to customers.
The Wall Street community is predicting that the large money center banks will enter the crypto business within the next 12 months. Most likely, banks will act as custodians for their customers’ Bitcoin. This service would include the safekeeping of private keys on behalf of their customers.
Historically, banks have a great track record of providing custody services. The safekeeping of private keys will be no different. It is widely believed within the financial services industry that banks will capture a dominant share of the crypto custody market when they begin offering crypto services.
Brief Summary of Crypto Wallets
- Crypto wallets are used to secure private keys.
- There are several different types of crypto wallets.
- A paper wallet is a document that contains a public address and a private key.
- The most common paper wallet exists in the form of a QR code.
- Mobile wallets are designed for those who actively use BTC on a daily basis.
- This type of wallet is connected to a mobile device through an app.
- Web wallets store your private keys on a server, which is connected to the internet.
- Web wallets provide users with direct access to their BTC.
- Users need to be aware of the fact that web wallets are controlled by a third party.
- Web wallets operate on crypto trading exchanges.
- Desktop wallets are downloaded and installed to the hard drive of your computer.
- Third parties do not have access to private keys for desktop wallets.
- Hardware wallets are the safest way to store private keys within the crypto community.
- The owner’s private keys are not linked or connected to the internet.
- Hardware wallets are immune from computer viruses.
- There has never been a verifiable incident of funds being stolen from a hardware wallet.
- The most popular hardware wallets are Ledger and Trezor.
- Most crypto experts agree that banks will soon offer crypto custody services.
- Therefore, they will store private keys on behalf of their customers.