What is a Wallet and How to Pick the Best Crypto Storage
A crypto wallet is your ticket to owning, trading and transacting in crypto. You can be your own bank. The main features of a crypto wallet are:
- Give access to your coins safely through unbreakable cryptography;
- Connects to the blockchain to update your balance after every transaction;
- Visualizes your balance or crypto portfolio, including fiat price data;
- Calculates the optimal transaction fees when sending payments;
- Makes all your transactions a part of the blockchain history;
- Some wallets include built-in features for buying or swapping crypto assets.
A wallet resembles most payment apps, and will present an intuitive pricing information in dollars or another major fiat currency. Depending on the features, a wallet may be basic, allowing only transactions for spending, or include trading features or portfolio management. Some wallets are optimized to work with distributed apps, tokens, and decentralized projects on the Ethereum network.
How do wallets work?
Its important to note that the wallet does not store your coins or tokens, it is merely an interface that allows you to access them. Your coins are stored on the blockchain (ie online). This has several important consequences:
- When you setup a wallet you typically are given a seed phrase (e.g. 20 words to note down) which associates the wallet with you
- The wallet then creates addresses for your coins that can only be controlled from your wallet
- You can restore the wallet or create it on another device if you have the original seed phrase
- Unlike a bank, there is no support or help, so you need to be careful not to lose your wallet or seed phrase
Lets look at an example where you install a wallet on your phone:
- If you lose your phone and hence your wallet then you havent lost your coins, but you have lost access to them
- If someone can get into your phone (hopefully its password protected) and get into your wallet (also requiring a password) then they can control your coins, and send the balances to their wallet and they are gone forever
- If you have your seed phrase you can setup the same wallet on another device (another phone, computer etc) and the seed phrase will give you access again to those coins again
- If you dont have the seed phrase then there is no way to restore the wallet so your coins are lost forever to you or to anyone else, although they do still exist
Its estimated that as much as 20% of bitcoin is lost already
The Path to Holding Crypto Coins in a Wallet
The first time you acquire crypto coins, you will usually need a "fiat on-ramp", ie a way to exchange your local currency (pounds, dollars, euros) for crypto assets like Bitcoin and Ethereum. Making a purchase, those assets will appear as a balance in whatever exchange or brokerage you chose.
You can keep those assets sitting inside the exchange wallet. This is somewhat risky as you are trusting the exchange to be secure and to always allow you access to the coins, but on the positive side in normal circumstances, the coins are immediately available to trade back into fiat. A good moment to trade may take months or longer, and keeping those coins waiting on the exchange exposes them to risk.
If you want your assets to be safer, it is best to send them to a wallet that you fully control. For this task, a mobile wallet will work, as well as one of the desktop wallet apps such as Exodus. Such wallets are less threatened by theft, and also agile enough to play around with crypto assets in the short term.
Suppose you want to save up BTC for a number of years, even as inheritance for your children or grandchildren. Then, you will might want to consider a form of secure cold storage where the wallet is "offline" and not connected to the internet and theoretically exposed to hackers or trojans. There are several cold storage options such as printing onto paper, a hardware wallet, or another form of storing the private key or seed phrase, including having it physically engraved in metal (sounds extreme but if there is a fire and your seed is on paper...)
Wallets store your private key and this is typically secure and only accessible once someone has access to the app. Hence wallet apps are password protected. Unlike most passwords you choose, this password is essentially the only barrier between anyone who gets access to your device and your money! So choosing a strong complex password will help you sleep better at night
If your device is stolen or compromised, your password could be brute-forced. Having a strong password may make this much more difficult.
The first thing to remember is that wallets such as Exodus do not save a backup of your password for recovery. For that reason, the best way is to use a secure password manager.
Then, make your password unique, not reusing another login. Also, make the password random and long, at least 16 characters and preferably up to 64 characters. Random characters serve better than words that can be guessed, and you can also add special chatacters and random capitalization.
The Exodus team advices to avoid reusing the same or similar password as your Google credentials. Gaining access to Chrome password manager, a hacker could access all your passwords and compromise any weakly protected crypto wallets.
Types of Wallets
The principle types of wallets to choose from include:
- Paper wallets
- Hardware wallets
- Mobile wallets
- Exchange-based custody
- Online wallets
- Desktop, online or offline wallets
- Mnemonic wallets
Among those types of wallets, many brands and variations exist. Over the years, a few brands established themselves as leaders, while other wallets discontinued their service. It’s important to note that whenever a user has generated a private key or a seed phrase, it can be exported to a new type of wallet, to view the balance and access the coins.
A paper wallet prints out a code with the public key. It also has a part which should be kept secret, holding the private key. A paper wallet is as secure as the place it is kept, and can be lost or damaged. It is possible to print a wallet on more durable material for cold storage.
There are a number of risks with paper wallets however
- it could become damaged and unreadable
- You still need to find somewhere to store it safely otherwise someone in your house can take a photo of it and have all your money!
- You need to print it securely. In the image above - this maybe was generated with an online tool - how do you know the tool didnt copy the data - the internet is full of such scam sites that appear genuine and useful but really are up to no good
Hardware wallets offer a greater level of protection as they require verification of all transactions using a physical external device which resembles a USB drive but has a screen and buttons. They are used in conjunction with software wallets but cannot be compromised remotely as there is no way for an intruder to physically press the buttons on the device.
Mobile wallets, such as Mycelium, or other specialized wallets for altcoins, are a fast and easy choice for new users. The wallet does not download the history of the blockchain, working as a “light” application, while relying on a server to supply the data needed.
Exchanges aim to offer an intuitive, smooth wallet experience. Well-established brokerages like Kraken, or Binance, offer interfaces for all the assets they carry. The advantage of those wallets includes the immediate ability to exchange or trade the assets.
Exchange wallets differ in their ability to provide passive income. Binance, for instance, has ensured the distribution of passive income and rewards for holding certain types of coins and tokens.
Exchange wallets also may not support hard forks, as in the case of Bitcoin Cash. The decision to award BCH to BTC holders in 2017 was an act of goodwill, and there was no unified response. Hard forks of BTC and other coins do not happen so often in 2020, so holding coins on exchanges will not forfeit that type of income. On the other hand, the big advantage of exchange wallets is the possibility of holding fiat, and immediately acquiring new assets.
A drawback of exchange wallets is that some services may be down for maintenance. Also, there may be limits for withdrawing smaller amounts of crypto, so exchange wallets are not suitable for payments or spending. Also, if you need to move funds to another exchange, you will need to move them to their own wallet. Sending funds between exchange-based wallets may lead to losses.
Online wallets are light, agile technology specially adapted to tokens. Setting up either MyEtherWallet, or MetaMask, gives immediate access to the entire Ethereum ecosystem. The advantage of those wallets is relative ease of use. Their biggest disadvantage, however, is the possibility for phishing and fake login links.
Over the years there have been many instances of clone sites set up such as MyEtherWa11et to trick people into entering their credentials into fake sites setup purely to capture them. You may see the link in emails or on social media all with excellent design and copy and it would only be if you checked the browser address bar that you would realise you were on the wrong site.
Its good practice in all aspects of digital life not to click on links you dont 100% trust but for crypto management there is more at stake so good practice and a degree of paranoia is essential.
Desktop wallets are suitable for almost all users, offering anything from bare-bones to highly sophisticated interfaces. Such wallets can be used offline for extra safety. The Trezor and Ledger hardware wallets also have their extended desktop interfaces for ease of use. It is also possible to connect a desktop wallet with a hardware wallet. You can use Exodus to represent the balances on your Trezor.
Leading Brands of Wallets
Exodus is one of the most widely distributed desktop wallets. Its code is closed, but for now, it is a trusted source of both storage and swaps. Exodus is a multiple asset wallet, constantly adding to its list of supported crypto coins and tokens.
The wallet also displays a portfolio with the proportions of assets owned. Exodus also has limited swap functionalities, requiring a minimal limit to exchange some of the assets.
The Ledger Wallet is one of the leading alternatives for hardware storage. Ledger constantly expands its token and coin listings, but as of 2020, it carried 22 coins and roughly 1,200 tokens. The Ledger software allows for easy visualization for most assets, and serves as a desktop wallet.
Ledger Nano S, the basic series, retails as low as $51, while the X series is on offer for $118, with added features and similar hardware security.
The selection of coins and tokens is slightly different for hardware wallets. If you have a certain asset in mind, make sure it will be supported before you commit to a hardware wallet. A hardware wallet is usually chosen for its potential to safely hold BTC, but its appeal for altcoin owners is another key feature.
Created by Satoshi Labs, this hardware wallet contains a secure processing element, which will not easily divulge the private key. Trezor Model T, retailing at around $140, improves the usage experience, while also serving as a desktop multi-asset wallet.
The Trezor models include the One series and the Model T. Trezor also offers innovative bundles for backing up seed phrases, while also storing any assets in the safest possible electronic form.
Growing from a handful of assets, the Trezor wallet now visualizes and supports 1,633 assets, ranging from the most well-known to rather new types of coins and tokens.
MEW, as it is also known, is one of the most widely used online wallets. The wallet has full support of all new tokens on the Ethereum blockchain, though it may take a while to visualize the exact token.
The chief advantage of MEW is the possibility to explicitly choose the gas payment for all transactions. MEW is solely based on the Ethereum network, so it is only suitable for those interested in tokens and token-based projects, as well as ETH itself. The wallet cannot contain BTC.
Before using MEW, it is best to check the requirements for gas payments, and adjust accordingly or delay the transactions. MEW displays gas payments, or transaction fees, in dollar terms. A slider allows the user to pay more and possibly have their transaction processed sooner.
The biggest disadvantage of MEW is the possibility of phishing. It is best to always open the wallet using a bookmarked link, and avoid mails or chat messages asking for a login. The phishing sites often use links with slight alterations to the official wallet.
MetaMask is a browser plugin, always working in the background for multiple purposes. MetaMask is most often used to access distributed apps, use crypto collectibles, access decentralized finance projects, or generally for moving and trading ETH and Ethereum-based tokens.
MetaMask is best used for small-scale transactions. The wallet is always connected to the Internet, and protects its private key through encryption, along with the password. Stealing the password or otherwise unlocking the plugin may lead to loss of the funds within the wallet. The best advice is to load MetaMask with small amounts of ETH or tokens for the task at hand, and preferably not use this wallet for storing more significant balances.
The Electrum wallet is a simple interface software, used solely for BTC. The wallet itself is open-source, and has been copied for BTC forks and other similar blockchains. Using Electrum is suitable for almost all users, but there is also a warning.
The wallet comes in a standard and portable build for Windows users. But the portable version is more vulnerable to attacks, making it riskier for beginners and those less attentive.
“A portable version does not bring anything more in terms of security. It does not protect you from the computer you are using. In addition, portable builds encourage dangerous behaviour, because they make it very easy to use your wallet on third party computers that might be infected with viruses and keyloggers,” warned one Bitcointalk user.
Modified Electrum wallets should be used with ultimate caution, and only after some experience in verifying their versions. Malicious Electrum wallets have been discovered, managing to steal private seeds through an online connection.
Pros and Cons of Wallets
|Exodus||Multi-asset, swap functionalities||Not open source, limits for trading, limited asset choice|
|Trezor||Multi-asset, secure hardware storage||Not free, may be stolen or compromised|
|Ledger||Multi-asset and alternative to Trezor||Not free, vulnerabilities to theft and tampering|
|MetaMask||Ideal for daily interactions with Ethereum apps||Hot wallet, relatively insecure|
|MyEtherWallet||For Ethereum network, can control gas fees||Often subject to phishing attacks|
Deciding on the Best Wallet
Deciding on the best wallet should match your objectives in owning crypto assets. Are you going to move relatively large sums, or simply play with many small-scale deals? Do you plan to move your funds often, or buy and hold them?
For larger holdings and rare transfers, hardware storage is considered the best practice. If uncertain, custodial storage with a well-known exchange, such as Coinbase, is a possibility.
For mid-range crypto activity, a wallet such as Exodus can serve well, while having a limited support for tokens. If intending to invest in tokens and the Ethereum ecosystem, MetaMask can be the fastest tool for small-scale payments.
For coins and tokens intended to be speculative positions, holding some assets on an exchange and ready for trading is riskier. However, given the potential for network congestion, the risk of exchange wallets must be calculated against the risk of never actually being able to send coins on time for trading.
Best Practices to Secure Crypto Assets
For a brief summary, the best approach is to check off the following security points:
- Whenever possible, use a reputable hardware wallet;
- Do not expose or share private keys;
- Avoid storing large balances on exchanges, especially those of uncertain reputation;
- Use two factor authentication through a secure device;
- Check the URL of online wallets;
- Double-check receiver address, to avoid clipboard hijacking;
- Avoid using wallets through public WiFi;
- Always test transactions with a small sum, especially for newly generated wallets.
If you need to store funds on an exchange, first of all research the market operator. To be on the safe side, choose exchanges with a good track record and good social media presence. Make sure the exchange is compliant with all the latest laws in your jurisdiction, to avoid the sudden need to evacuate all funds, as it happened with some US traders on Binance before they setup BinanceUS. Make sure you can use international exchanges and are not limited to withdraw fiat funds.
Next, an exchange wallet should be protected with some form of two-factor authentication (2FA). The biggest risk for an exchange wallet is a general hijacking of passwords. Even with 2FA, SIM swapping is one of the points of failure, so where possible use other types of authentication such as Google Authenticator or Authy.
Make sure not to send funds between exchange-based wallets, or else the coins will not be credited to your account.
For self-owned wallets, the best approach is to be careful and diligent about backing up the private keys. Using a form of hardware kit to write down the seed phrase is one possibility.
Make sure that generating the private seed is done safely, such as using a computer disconnected from the Internet. The best approach is to use a cold wallet for storing bigger sums, while sending out transactions to other hot wallets for trading, payment, or other riskier tasks.
Make sure you understand the type of addresses your wallet can generate, as well as the type of receiving addresses. For Ethereum-based assets, the worst mistake is to send funds to the address of a smart contract, which is an invalid transaction and makes the funds inaccessible immediately.
Case Study: Dusting Attack
A dusting attack is an event in which multiple addresses receive a very small amount of crypto coins. In theory, a dusting attack can draw a map of wallet connections, and potentially link addresses with user profiles on exchanges. If you preview your wallet and notice a small transaction you did not anticipate, it is best to move funds to a new wallet, as the older addresses may be tainted for tracking.
So far, the BTC network has gone through a couple of dust attacks, as well as the Litecoin network. It is unknown what role those transactions serve, but it is best to be on the safe side and move the funds to a newly generated wallet.
It is almost impossible to remain completely anonymous, especially with the growing scrutiny of the Bitcoin network. Multiple projects have already mapped out multiple wallets and addresses. But for short-term privacy, it is best not to reuse addresses or even abandon older wallets.
Warning on Using Anonymous Coins
Some types of crypto assets, such as ZCash, Monero, ZClassic and possibly Dash, offer the potential for anonymous transactions. However, using those wallets will still require de-anonymization for selling the coins on an exchange.
For BTC owners, some may be tempted to use wallets offering tools for anonymous usage. Those include the Samourai and Wasabi wallets. In the case of Wasabi, a user was blocked from Binance withdrawals. The reason was that his address was associated with the ConJoin coin mixer.
Samourai wallet uses the Whirlpool coin mixer, an option to also make it harder to track coins. Make sure that coin mixer usage is allowed in your jurisdiction. In general, coin mixing is not necessary for the regular BTC user, so make sure you understand the limitations and risks of this process.
Mixers may be problematic, making your coins and addresses “tainted” and inaccessible to exchanges. At this point, it is best to avoid the risk, as one Bitcointalk user commented:
“Mixers will do what they've always done---swap your coin's taint for another. that's why they exist. nobody will use a mixer that employs an AML process. Thus, exchanges are increasingly avoiding doing business with customers who transact with mixers, due to the potential money laundering implications.”
It is best to avoid anonymizing wallets, at least initially, to avoid problems with certain exchanges. In general, Asian market operators have decided to drop inherently anonymous coins due to the risk the coins are tainted with illegal deals.
Specialized Altcoin Wallets
Some wallets are created specifically for their unique types of assets. Those include the Trinity wallet for IOTA, and the Daedalus wallet for Cardano (ADA). The Nano (NANO) wallet, not to be mistaken with LedgerNano, is another task-specific wallet.
The unique features for those wallets are suited for one single asset. The Trinity wallet is optimized to communicate with the IOTA Tangle, and can both send out transactions and verify the transactions of other users. It also can work with Ledger wallets to create hardware level security
Daedalus is a mobile wallet native to the ADA asset, and the NANO coin also has a similar mobile version that communicates with other nodes.
The usage of those wallets invites caution, as users have reported missing coins and problematic synchronization. Make sure you understand the challenges of IOTA, ADA, and NANO wallets before choosing those assets.
Other Notable Wallet Brands and Storage Solutions
Samsung S10 became one of the few phones with a built-in hardware wallet. Despite the risk of loss or theft, this is a more secure option in comparison to app-based mobile wallets.
Ballet Wallet, created by notable crypto personality Bobby Lee, co-founder of BTC China, is another tool built for simplicity. The goal of the Ballet wallet is to avoid technical errors as much as possible.
Trust Wallet is another tool for using Ethereum and its related assets. The wallet is the official storage tool for the Binance exchange, after the market operator acquired it in 2018. Trust Wallet carries 14 blockchains and additional Ethereum-based tokens.
Abra is a mobile app combining the ability to purchase crypto assets with a debit card, while also holding the coins securely for you. Abra offers speedy transactions and trading capabilities, by storing the coins in a special escrow smart contract. Abra users can choose to withdraw their coins to another wallet at any time.
There is no limit to the number of wallets a single person can operate. Still, it is best to use the most suitable ones, to avoid unnecessary transaction fees, or incur losses due to technical errors.